Despite the impact of Covid-19 on the global economy, the constant pivot to digital financial services has helped fintech and the overall financial services industry to emerge from the pandemic relatively unscathed. During the past few years of low interest rate environment (Figure 1), fintech valuations increased dramatically across almost all market segments, especially in certain areas like crypto.
But in 2022, geopolitical uncertainty, rising inflation and general macroeconomic uncertainty changed the calculus for many on the future of the fintech industry, especially in emerging markets. Higher interest rates and inflation (Figure 2) slow down fundraising and growth. As one VC technician described it: “An entire industry got in front of its skis.”
The changed inflation and interest rates have drastically affected fundraising.
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 financing, business models and supporting infrastructure in the form of regulations and education that must form the basis for this growth. And their continued growth is critical, especially for the underserved 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 remain resilient. The insights shared by the attendees were invaluable and provide a unique insight into what some of the best VCs, startups and educators do to succeed 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 resulting cheap money, venture capital investment more than doubled year-on-year in 2021, hitting $621 billion globally, dramatically surpassing the previous year’s record of $294 billion. Fintech was no exception, with over USD 140 billion invested globally in the sector in 2021 alone (Figure 4).
Venture funding continues to decline as we move into 2023 and has dramatically changed the nature of … (+)
In 2022, the situation changed rapidly. As interest rates and inflation began to rise across the globe, the venture capital industry went into “risk off” mode. As a result, global venture capital investment fell nearly 60% from its peak of $178 billion. USD in the 4th quarter of 2021 to 75 billion USD in Q3 2022. Valuations also suffered a bit, with companies like Stripe and Klarna seeing their valuations drop by 28% and 85%, respectively, in 2022.
While the go-go era of the fintech sector may be coming to an end, there is reason to be optimistic about this new chapter for the industry. “In a low interest rate environment, all sorts of sins have been committed. In the next five years, that will not happen,” said Jinesh Patel, Managing Partner at Integra Partners and panelist at the Singapore FinTech Festival. “The sustainability component of building a business was largely lost in the last few years due to a lack of capital. That adjustment is what will create value.”
Basically, the panel illustrated that the fundamentals of what VCs are looking for haven’t changed: sustainability, product, team, capital and strategy. It certainly has to be put in the context of a more challenging macroeconomic environment with geopolitical and economic uncertainty, causing VCs to think through investments more and focus on these fundamentals.
Consumer and SME financial education and literacy
Despite progress in closing the financial inclusion gap, a significant portion of Asia’s population remains without access to traditional financial services. In a country like Singapore, almost the entire population, including incidentally migrant workers, has banks, but the challenge is a bit more significant in the neighboring emerging markets. According to the latest data from the World Bank’s Findex database, almost half of the population in Indonesia and the Philippines is still underbanked.
In many studies, education has been found to be a major stumbling block in the adoption of DFS solutions. In the 2022 report “Moving the Needle” by Kapronasia and Grab, trust was the number one issue cited by both SMEs and consumers as the main reason for choosing a financial services provider. (Figure 5).
Trust is a key element in any digital financial transaction.
The latest 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 to teach them how to be able to digitize themselves Given that COVID has really made it difficult for SMEs, especially brick and mortar ones, their ability to run their business on the web is essential.”
For many SMEs in Singapore and across the region, digitization was a massive challenge. For larger organizations such as 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 must also 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 must go hand in hand,” said panelist Nicole Valentine, FinTech Director at the Milken Institute.
Future prospects
Growth markets remain a defining element of the fintech story in Asia as the combination of technology and the financial industry has 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 raise their offerings.
In the coming years and decades, fintech will continue to shape the evolution of the financial services industry. Across the region, agile startups are leveraging technology to redefine the customer experience. It is happening at the most basic level, as for example with India’s UPI retail payment rail, which has brought more people into the financial system in less 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 payment system.
Certainly, this journey will have bumps in the road where VC funding is no longer as readily available and geopolitical and economic challenges manifest. Fintechs will need to go back to basics and focus on building solutions that solve key friction points for customers, rather than relying on fancy but junk technology.
The name of the game will be resilience in the face of adversity, both innovative and sustaining. Some fintechs will simply survive, while others will thrive, depending on how well they can achieve this equilibrium.
For more of our insights into growth markets and the future, you can download Kapronasia‘s The Future of FinTech in Growth Markets – A report in collaboration with Elevandi detailed report on the subject.