Despite Covid-19’s impact on the global economy, the steady pivot to digital financial services has helped fintech and the overall financial services industry emerge from the pandemic relatively unscathed. Indeed, during the low-interest rate environment of the past few years (Figure 1), fintech valuations increased dramatically across nearly every market segment, especially in certain areas like crypto.
However, in 2022, geopolitical insecurity, rising inflation, and general macroeconomic uncertainty altered the calculus for many on the future of the fintech industry, especially in growth markets. Higher interest rates and inflation (Figure 2) are dragging on fund-raising and growth. As one VC tech exec described it, “An entire industry got ahead of its skis.”
Looking ahead, it will be essential to understand how fintechs can continue to grow and innovate in the future, especially in emerging or “growth” markets. It is a combination of funding, business models, and supporting infrastructure in the form of regulations and education, that will provide the basis for this growth. And their continued growth is critical, especially for the under-served segment of the market.
The International Growth Markets track at the 2022 Singapore FinTech Festival looked at how regulators, VCs, development organizations, and fintechs themselves could approach the market to continue to innovate and stay resilient. The insights shared by the participants were invaluable and provide an unparalleled view into what some of the top VCs, start-ups, and educators are doing to be successful in the industry.
Fintech Venture Capital And The New Normal
VC funding over the past decade has been unprecedented. Driven by low interest rates and the resultant cheap money, venture capital investments more than doubled year-on-year in 2021, hitting US$621 billion globally and dramatically surpassing the previous year’s record of US$294 billion. Fintech was no exception with over US$140 billion invested globally in the sector alone in 2021 (Figure 4).
In 2022, the situation changed rapidly. As interest rates and inflation started to rise across the globe, the venture capital industry went into “risk off” mode. As a result, global venture capital investment dropped nearly 60% from its peak of US$178 billion in Q4 2021 to US$75 billion in Q3 2022. Valuations also suffered, with companies like Stripe and Klarna seeing their valuations drop 28% and 85%, respectively, in 2022.
While the fintech sector’s go-go era may be ending, there is cause for optimism about this new chapter for the industry. “In a low interest rate environment, all manner of sins have been committed. In the next five years, that will not happen,” said Jinesh Patel, Managing Partner at Integra Partners and a panelist at the Singapore FinTech Festival. “The sustainability component of building a business was pretty much lost in the last couple of years, given the dearth of capital. That adjustment is what’s going to drive value.”
Fundamentally, the panel illustrated that the basics of what VCs are looking for have not changed: sustainability, product, team, capital, and strategy. To be sure, that must be put in the context of a more challenging macroeconomic environment with geopolitical and economic uncertainty, making VCs think through investments more and focus on those fundamentals.
Consumer And SME Financial Education & Literacy
Despite advances in addressing the financial inclusion gap, a significant portion of Asia’s population is still without access to traditional financial services. In a country like Singapore, nearly the entire population, including, incidentally, migrant workers, are banked, but the challenge is a bit starker in neighboring emerging markets. According to the latest data from the World Bank Findex database, nearly half the population in Indonesia and the Philippines is still underbanked.
In many studies, education has proven to be a key stumbling block in the adoption of DFS solutions. In the 2022 report “Moving the Needle” from Kapronasia and Grab, trust was the number one issue stated by both SMEs and consumers as the most important reason for selecting a financial services provider. (Figure 5).
The recent rapid digitization affects both consumers and SMEs. As Lawrence Loh, Managing Director and Head of Group Business Banking for Singapore’s United Overseas Bank (UOB) explained, “For SMEs today, we really look at it not just in terms of pure financial literacy but also in terms of teaching them how to be able to digitize themselves. Given that COVID has really made it difficult for SMEs, especially those operating brick and mortar, the ability for them to operate their business in the online space is critical.”
For many SMEs in Singapore and across the region, digitization was a massive challenge. For larger organizations like large retail stores, the shift was less dramatic, as many already had online platforms to leverage, but for others, particularly micro-SMEs, the challenge was significant.
Financial education is also paramount, especially understanding the underlying risk of the products. “When you put access to capital in the hands of those who need it, there also has to be an understanding of how to manage the risk of that capital, how to invest that capital, how to move forward with it. Financial education and access to capital have to go hand in hand,” said panelist Nicole Valentine, FinTech Director at the Milken Institute.
Growth markets remain a crucial element of the fintech story in Asia as the combination of technology, and the financial industry have created new solutions for both financially included and excluded individuals and businesses. In developed markets, new solutions bring convenience to typically already-banked individuals. More importantly, they also bring an element of competition that pushes traditional providers to up-level their offerings.
In the years and decades ahead, fintech will continue to shape the evolution of the financial services industry. Across the region, agile start-ups are leveraging technology to redefine the customer experience. It is happening at the most basic level, such as with India’s UPI retail payments rail, which has brought more people into the financial system in a shorter time than any other initiative in modern history. It is also occurring in rich countries such as Singapore, where digital wealth managers allow investors to move money more easily using the PayNow real-time payments system.
To be sure, this journey will have bumps in the road, with VC funding no longer as readily available and geopolitical and economic challenges manifest. Fintechs will have to go back to basics, focusing on building solutions that solve key friction points for customers, rather than relying on fancy but frivolous technology.
The name of the game will be resilience in the face of adversity, both innovating and sustaining. Some fintechs will merely survive, while others will thrive, depending on how well they can reach this equilibrium.
For more of our insight into growth markets and the future, please download Kapronasia’s The Future of FinTech in Growth Markets – A Report in Collaboration with Elevandi detailed report on the topic.