After raking in cash in 2021, APAC fintechs face investor test in 2022

Introduction

After a year of record investments in APAC-based financial technology firms, venture capital could become more restrained in 2022. But startups with strong market positions will likely have no trouble attracting venture capital investors as accelerated digital trends set them up for an enhanced role as financial intermediaries.

The case for technology-driven business models further strengthened in most of the APAC region in 2021, driven by an accelerated consumer shift toward mobile channels and favorable regulatory frameworks in banking, insurance and payments.

But the space for consumer fintechs is getting crowded in many fintech segments due to growing competition from banks and technology conglomerates. As looming rate hikes may raise the costs of capital, venture capitalists will likely gravitate toward fintechs with slower cash burn rates.

Volatile stock markets could deter late-stage financial technology startups from pursuing IPOs. VC investors may exercise more prudence and lean toward fintechs with a viable path to profitability. Business-to-business, or B2B, fintechs are likely to gain more VC investor attention due to their superior unit economics relative to their business-to-consumer peers.

Some consumer fintechs that are struggling to gain traction may pivot toward technology vendor models to reduce their cash burn rates. Others may seek acquisitions and could fuel a wave of consolidation. B2B fintechs with positive cash flows or approaching a breakeven point could eye deals for inorganic growth.

Venture capitalists may place greater demands on startups but will remain invested in the sector as the pandemic has strengthened the case for financial technology. The proliferation of digital payments and embedded finance products has created a massive opportunity for technology firms to either build direct-to-consumer brands or provide digital plumbing for banks and other consumer-facing companies.

Below are four significant trends in 2021 that could either repeat or even amplify in 2022.

Fintechs in India, Southeast Asia attract top dollar

Capital that private fintechs in Asia-Pacific raised more than doubled to $15.69 billion in 2021 from $5.87 billion in 2020.

Geographically, India extended its lead in fintech investments with $5.94 billion raised across 236 deals in 2021. Southeast Asia-based fintechs were close behind, netting $4.70 billion across 217 transactions.

Investor interest in mainland Chinese fintechs, on the other hand, has waned amid heightened regulatory scrutiny of the technology sector and overseas listings. Fintechs in mainland China saw only 73 fundraising deals. But investors remain open to funding mature fintechs while being more cautious of early-stage startups.

Among the six fintech categories tracked by S&P Global Market Intelligence, payment companies drew in the largest sum, accounting for 45% of the aggregate transaction value in 2021.

Big Techs, central banks promote noncard payment rails

The Asia-Pacific region is turning cashless at breakneck speed, driven by the popularity of noncard payment methods. Across the region, fintech arms of large digital conglomerates are increasingly taking market share.

In India, payment apps either owned or backed by U.S.-based companies are piggybacking on the national real-time payments infrastructure to move money between bank accounts. Walmart Inc.-owned PhonePe and Alphabet Inc.'s Google Pay held market shares of 44% and 35%, respectively, in the first six months of 2021.

Tech giants in the rest of the region use the electronic money framework available for nonbanks to facilitate payments, offering stored-value wallets to consumers.

In China, Ant Group Co. Ltd.'s Alipay and Tencent Holdings Ltd.'s WeChat Pay saw adoption rates of 94% and 93% among the respondents of the 2021 edition of the Asia Consumer Insights survey from Kagan, a media research group within S&P Global Market Intelligence.

Central bank-promoted real-time payment schemes are helping banks stay relevant to consumers in a variety of payment scenarios in several markets. Thailand has arguably seen greater success than most large markets in terms of promoting digital payment usage as well as helping banks regain market share in payments.

Collaboration between banks and fintechs

The growing availability of noncard payment methods spells bad news for large credit card issuers and could carve away millions in fee income. While technology companies may be responsible for the rise of non-card alternatives, they remain banks' best bets in driving the retail business.

Technology companies expanding financial footprint are cultivating strategic relations with financial institutions, especially in markets where banking licenses are in short supply.

In India, BharatPe teamed up with Centrum Financial Services Ltd. to acquire Punjab & Maharashtra Co-operative Bank Ltd. when the lender was subjected to an open bidding process initiated by the Reserve Bank of India. In Indonesia, ride-hailing and e-commerce operators including GoTo Group, Grab Holdings Ltd., Sea Ltd. and PT Bukalapak.com Tbk, as well as fintech lender WeLab Bank Ltd., are among the tech firms that have acquired stakes in small Indonesian banks.

Large incumbents, on the other hand, have over years turned up on the other side of the table, picking up stakes in technology firms. Major banks took part in 44 fintech equity rounds in 2020, just two fewer than in the prior year. The figure includes investments in technology platforms with embedded financial services.

Notably, major lenders have acquired strategic stakes in Southeast Asia-based ride-hailing apps and e-commerce firms. with a view to support their forays into financial services by offering e-wallets and have since expanded into adjacencies like lending. Japanese banks are among the most active investors among major banks in the region. The three mega Japanese banking groups — MUFG, SMFG and Mizuho Financial Group — made the largest number of investments in companies within the investment and capital market technology sector.

B2B models gain prominence

Venture capitalists are increasingly gravitating toward fintechs with B2B models as they burn significantly less cash than their consumer-facing brethren. For example, PineLabs, RazorPay and BharatPe collectively drew in nearly $1.89 billion of venture capital between 2020 and 2021.

The appeal of B2B models among investors extends to other fintech segments in the Asia-Pacific region.

In the insurance technology space, the shift toward B2B models has become more prominent in mainland China, where competition in the online intermediation space has nudged companies to assist incumbents in customer onboarding, claims processing and other internal functions.

Large digital lenders in mainland China are diversifying into the tech vendor model as consumer lending comes under regulatory scrutiny. Providing infrastructure services to other financial institutions could be a way for lenders to reduce regulatory risks and generate recurring software revenue.

Further, several digital banks are venturing into banking-as-a-service, or BaaS, to grow their deposit base. By opening their application programming interfaces for popular consumer-facing brands, digital banks can grow their deposit base swiftly while minimizing customer acquisition costs. This model is particularly viable with the proliferation of embedded finance, a trend in which nonbanks integrate financial services to foster customer loyalty.

^{This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.}