In the last 5 years, billions of dollars of funding has been raised for fintech startups. After Hong Kong launched a licensing regime for virtual banks, Singapore and others followed with licensing regimes of their own. At the same time, many banks have launched digital transformation projects, often in combination with an investment arm to take stakes in fintechs directly. Governments have actively promoted digital financial services with digital bank licenses and infrastructure investment. It appears fintech is humming along nicely.
When the severity of the Covid-19 crisis materialized, Southeast Asian countries entered various forms of lockdown. This posed a real test of the veracity of the cumulative investment in digital financial services in Southeast Asia and a litmus test for the fintech market. We have observed 4 major trends, some of which we had not expected.
Structural market inefficiencies become glaringly apparent
For digital financial services to take off, a set of minimum market infrastructure requirements must be met. This includes at least 1) implementation of portable digital identity and data residency, coupled with digital KYC and user authentication and 2) affordable, ubiquitous, and interoperable real-time payment systems that include complex, standardized messaging, low or zero fees, and real-time settlement. Those markets that have implemented this fully or to a large extent (Singapore and Thailand) have seen less disruption. Covid-19 has exposed infrastructural gaps in other markets, leading to freezing of certain market segments as human connections remained part of most financial transactions. Regulators like BSP in the Philippines and BI in Indonesia will now accelerate adoption of a true Open Banking agenda, which will greatly benefit all market participants.
It remains a challenge for most banks to service clients digitally (fully)
Under lockdown, many banks seem to have been unable to provide very basic banking services. Some banks are rumoured to stop providing account opening altogether, and existing retail as well as wholesale clients are requested to visit branches despite health warnings against doing so to deliver physical signatures. Digital onboarding turns out to be, well, not that digital. There remain one or more points of necessary human involvement in almost every bank or insurer product offering. There are a few banks that shine in this environment, but they represent a minority of the overall market. Part of it is explained by a lack of market infrastructure. The majority is explained by a lack of investment in technology on behalf of the market participants. It will be interesting to see if bank and insurer boards will now take a sticky tape approach, or embark on full transformation (we see both in all markets).
Demand for digital enablers skyrockets
One of the biggest barriers to technology adoption is to change human behaviour. Especially for larger enterprise deployments, this can often present unsurmountable barriers. Covid-19 has done what billions of dollars of fintech funding struggled to achieve: immediately and irreversibly change human behaviour across all market participants. Bar a few exceptions, lockdowns have led to impressive growth in volumes, engagement, and revenues at many of our portfolio companies, and many B2B fintechs globally. Bankers would not like to admit this, but it turns out its totally possible to do an IPO 100% digitally. We believe that this tailwind will carry many fintechs for years to come, and will open up entirely new market segments.
Liquidity for venture investment will dry up?
As lockdowns pushed economies into recessions, our belief was that liquidity for funding could all but disappear for the foreseeable future, and many start-ups would not make it out the other end, despite the tailwind described above. With that in mind, we, and most other investors, tried to help our companies prepare for winter for at least 18-24 months. But as of today, that liquidity crunch has not yet appeared. The public policy response has been overwhelming, and equity markets have bounced back to all-time highs. There is still risk capital in the market, and good companies continue to get funded. Whilst we are cautiously optimistic, we recognize this is a fragile balance, and we continue to focus on getting our companies to breakeven and on to profitability.
Going in to Covid-19, we had a number of companies that were about to raise or in the process of raising a new round of funding. We commend the teams at Spark, Neat, Flow, Envelop, and Advance for their resilience and their recently completed funding rounds and look forward to supporting them in their journey to digitize financial services.
Written by Christiaan Kaptein, Partner at Integra Partners.