Financial technology (fintech) companies target market inefficiencies and have disrupted operating and business models of incumbents by elevating customer experience and expectations. Over last ten years, the entry of fintech companies can be categorised into three broad phases. Initially, the financial industry witnessed an influx of innovative business-toconsumer (B2C) fintech disruptors competing with traditional players. This was followed by increased ecosystem partnerships among fintechs and institutions to meet customer needs. Now the industry is witnessing the emergence of more business-tobusiness (B2B) fintech companies that enable the technology capabilities of businesses.
Pandemic accelerated digitisation
The global pandemic rapidly changed customer behaviour, some that will last post pandemic, and is reshaping how consumers interact with financial services providers. It accelerated the adoption of ecommerce transactions and online financial services. Customers readily shifted towards real-time cashless and contactless payments. There is greater adoption of instant payments, QR based payments, ‘request to pay’ and faster cross-border payments. All these provide new growth opportunities to payment companies.
The pandemic pushed the financial services industry to increase cloud adoption. Companies leverage data and advanced analytics to differentiate services while artificial intelligence (AI) finds new applications in improving and personalising customer experience and enhancing risk management. Moreover, ethical and explainable AI modelling is now catching the attention of the industry.
On the other hand, peer-to-peer lending companies face challenges with reduced investor appetite and renewals as well as a rise in default. The slowdown in the global economy could potentially increase the micro and small and medium enterprises (MSME) financing gap.
Moreover, risk has increased, with a rise in cybersecurity and data breach incidents during the pandemic. This is forcing fintech companies to strengthen their cyber resilience and security measures.
Open ecosystem and industry collaboration
One of the primary focus of financial players today is to enhance customer experience by better anticipating and meeting needs. This is driving strategic change towards greater ecosystem collaboration and partnerships among institutions. Banks are adopting open banking frameworks and application
programming interface (APIs) to enable partnership with fintech companies and other financial players. For instance, DBS Bank has plugged into 400 partners through its API platform while ICICI Bank has launched API banking portal with 250 APIs.
Over few years several banks have set up innovation labs that facilitate the identification of right fintech partners, co-creation of solutions as well as building an innovation culture. Some banks have also earmarked venture funds to actively invest in promising fintech companies.
Alex Manson, head of SC Ventures at Standard Chartered Bank, shared that the bank has a $100 million investment fund that it can commit to relatively early stage companies. It invests only in partners to help them scale.
Ecosystem partnership forms the bedrock for growth of super apps in the region such as Alipay, Grab and Go-Jek as they expand their product and market reach. These companies also facilitate access to financial services for the unbanked and underfinanced population in Asia. World Bank states that 29% of the adult population in East Asia and 30% in South Asia have no access to formal banking services.
For instance, Grab is making a foray into the micro investment, consumer loans and pay later products while expanding its insurance services (following its acquisition of Bento) to strengthen its reach in Southeast Asia. Its market reach through GrabPay allows it to onboard customers whom it then introduce other financial services products to. “We have more than 60 partnerships with global and regional financial institutions (FIs) in Southeast Asia which allow us to drive our scale, augment our technology and go to market a lot quicker”, said Reuben Lai, senior managing director at Grab Financial Group. He shared that the company has now issued 13 million insurance policies on micro-insurance and close to 400,000 loans and financing solutions across drivers and merchant partners.
Fintech sustainability gains focus
Rapid expansion to gain market share has meant heavy investments and, in many cases, losses for most fintech companies. And fintech models are getting tested this year. There is now an increasing focus on the viability and long-term sustainable of business models as companies strive to balance operating costs and expansive growth.
“What we can see now is that people are going back and sometimes back to the drawing table as well, and rethinking the business model, and also rethinking what is really worth doing and what is not worth doing”, explained Eduard Fabian, vice president and chief technology officer at Razer Fintech.
Growth of digital banks in Asia
With a technology first approach, digital banks focus on customer experience through innovative but low-cost digital model. They facilitate financial inclusion as well as differentiate services through better data insights.
Asia has witnessed a spurt in growth in digital banks over the last few years. In China, Tencent has WeBank that offers lending services. In South Korea, Kakaobank has witnessed good traction. Several banks have launched digital arms like DBS Digibank, SBI Yono, UOB TMRW, and BTPN Jenius to name a few.
Recently, Hong Kong issued eight digital banking licences while Singapore and Malaysia are currently in the process of evaluating contenders for their digital banking licence applications. However, these new banks will not only need the right operating model to meet customer needs but also a viable business model. For instance, neobanks in UK have rapidly increased their market reach across millions of customers but still struggle to reach profitability.
Fintech funding reduced in 2020
Fintechs face numerous challenges during the pandemic. They have had to grapple with remote operations of their workforce, and the drop in customer demand resulting from the shutdown of the economy. This has further impacted investor appetite and limited funding to the sector, and many smaller fintechs struggle to stay afloat.
There has been a significant drop in VC led fintech funding deals in 2020 The pandemic has taken a toll on fintech funding globally. According to the market intelligence company CB Insights, the total number of deals to fintech companies dropped by 30% in the second quarter as compared to first quarter this year. Global fintech funding was $10.63 billion in the third quarter, a 4% increase on the previous quarter. Deal activity continued to decline, down 24% since third quarter 2019. Investors focused more on late stage fintechs through greater number of bigger funding deals this year.
In Asia, fintech funding likewise witnessed a slide. According to S&P Market Research, in the first three quarters of 2020, fintechs in Asia Pacific raised a combined $3.9 billion, down 46% as compared to the same period last year, while deal volume fell by 20.5%. However, after hitting a trough in June fintech funding seems to be witnessing a recovery.
Within Asia, Southeast Asia had the highest number of fintech funding deals in the third quarter this year. This region is becoming a hotbed for fintech growth as new companies emerge, while some of the leading fintech scaled to expand their reach across countries.
The pandemic not only revealed the urgent need for digital transformation of companies but also highlighted the existing digital gaps in the industry