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US venture capital firms keep their faith in Asia-Pacific's fintech sector

U.S. investors, led by venture capitalists, remained the most active backers of Asia-Pacific financial technology companies in the second quarter, even as overall funding activity slowed.

U.S. investors funded 135 Asia-Pacific fintech deals in the June quarter, down from 169 deals in the prior-year period, S&P Global Market Intelligence data showed.

The factors behind the slowdown include the looming recession, geopolitical turmoil in Asia and record-high inflation, said Babar Khan Javed, director of public affairs at Z2C Ltd., a venture capital firm that focuses on payments and media.

"As the [Federal Reserve] increased interest rates, the value of cryptocurrencies worldwide fell drastically, hurting the potential funding that startups can use in the Web3 space and for digital asset organizations," Javed said. "Furthermore, nearly every fintech that was burning [venture capital] money to subsidize demand has struggled to raise funding due to lacking a plan to show a demand for value-based pricing among customers."

Such factors are not only affecting deal numbers, but also valuations, and they could take well over a year to fully recover, said Richard Gardner, CEO of financial software company Modulus.

"In that time, I think you'll see fewer startups raising money, just for the practical reason that they wouldn't want to show a down round, with a lower valuation than they had previously," Gardner said. "We're at the beginning of a funding winter."

Many U.S. investors see Asia-Pacific as a growth-oriented region due to strong GDP growth in its emerging market and developing economies, a younger population and faster digital adoption. Led by China, Asia-Pacific is the world's leading region for fintech adoption, catching up with North America as the world's number one producer of unicorns, or start-up businesses valued at more than $1 billion, according to a report released in July by KPMG and HSBC.

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Hot destinations

Investors from India sealed more fintech deals in the June quarter, compared with the prior-year quarter, bucking the trend among all other active investors. The most notable decline in deal activity in the quarter came from investors based in the U.S. In addition to India, Singapore was one of the biggest fintech funding destinations for investors in the second quarter. Of the 61 deals struck in the investment and capital markets technology sector, 16 took place in Singapore and 21 in India.

By total transaction value, Singapore's fintechs in the payments sector received the most funding, with a total value of $720 million.

Singapore, seeking to position itself as the tech hub of Southeast Asia, continues to attract venture capitalists despite macro drivers such as rising interest rates and inflation hitting investor sentiment. Singapore's government and the Monetary Authority of Singapore, the country's financial regulator, launched a series of initiatives and piloted use cases around sustainable finance and technology under Project Greenprint. In July, the project attracted global tech company Google LLC's Google Cloud to partner with the Monetary Authority of Singapore to launch the world's first open-source cloud platform dedicated to climate finance.

Meanwhile, India's digital lending startups saw $567 million flow in, accounting for about 79% of the total transaction value of fintech companies in the digital lending sector in the second quarter. Digital lending in India received more than $9 billion in investments over the last five years, and the market is expected to grow to $515 billion in book size by 2030, according to an Aug. 8 report from Chiratae Ventures and EY.

India's insurance technology sector is also getting more investor attention, seeing an increasing number of late-stage funding rounds valued at over $10 million. The sector is expected to hit $88 billion in size by 2030, according to the Chiratae Ventures-EY report.

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Fintechs in the financial media and data solutions category saw the fewest funding deals in the second quarter.

"Fintechs should brace themselves for a harsher funding climate in the second half of the year, as declining deal activity and growing layoffs signal a weaker financing outlook," Celeste Goh, an analyst at S&P Global Market Intelligence, wrote in a July 21 report.

Top investors

Top investors in the second quarter included Sequoia Capital India Advisors Pvt. Ltd. and Tiger Global Management LLC, which carried out nine and six fintech transactions, respectively.

Sequoia Capital provided funding to Indonesia-based insurtech platform Qoala, payment and money transfer firm PT FLIP, and India-based payment fintech PayGlocal Technologies Pvt. Ltd., while Tiger Global Management participated in the funding rounds of India-based banking platform Open Financial Technologies Pvt. Ltd. and Singapore-based digital payment firms Moon Pay Pte. Ltd. and HitPay Payment Solutions Pte. Ltd.

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