Regional fintechs positive on growth prospects

Funding, talent and government support are key to ensuring sustainable expansion

AS customers grow more receptive towards technological innovations, financial technology (fintech) firms in South-East Asia are correspondingly looking at expansion opportunities around as well as beyond the region.

According to the recent Asean FinTech Census 2018 study by EY, 87% of fintechs in the Asean region are planning to expand their footprint beyond their current markets. And despite the challenges faced by the startup industry, fintechs in Asean are quite upbeat about the outlook and their ability to compete with established players.

Outside of South-East Asia, the preferred destinations for growth and expansion are the US, UK and China.

In Malaysia, 73% of the fintechs polled by the study are also eyeing expansion opportunities.

The study surveyed 170 SouthEast Asia-headquartered fintechs across 16 key sub-sectors, including payments, blockchain, money transfer, data analytics and robo advisory.

In-line with their expansion plans, the census results indicated that fintechs are optimistic about

the future. About 41% of fintechs have registered average CAGR in revenues of greater than 30% in the last three years and 61% of fintechs in South-East Asia are planning to achieve revenue growth within the next 12 months as their immediate future goal.

To achieve this, about 64% of them plan to diversify into other services within fintech, and 54% are planning for an exit in the next five years.

The study also revealed that 33% of them have average revenue per month (rpm) of more than US$50,000.

Most players with average rpm exceeding US$50,000 belong to the payments, trading, regulatory technology and loan application/ financing subsectors. Meanwhile, majority players in emerging sub-sectors such as blockchain and robo-advisory are still operating at a small level with less than US$1,000 average rpm.

Fintechs that are currently generating profits, took approximately two years to break-even. In the case of unprofitable fintechs, 82% are expecting to take less than two years to break-even.

With fintech adoption on the rise, Asean as an engine of economic growth and prosperity has caught the eye of global investors. Investment in the region’s fintech sector has surged, jumping 45% year-over-year to US$366mill in 2017, according to Tracxn.

In a survey conducted in October 2017 of more than 125 institutional investors that are active in the Asean fintech sector, it was noted that there was greater than US$2bil in capital commitments available. On the flip side, a survey of over 230 fintechs showed that capital requirements were established at just greater than US$1bil.

However, funding remains an issue for the fintech firms surveyed.

In fact, 45% of the respondents rely on self-funding. While most (76%) of the respondents agreed that there are enough funding channels available, 52% still found it difficult to obtain funding on their own. Additionally, 68% have a runway of less than a year before their funding runs out.

Venture capital (VC) funding in South-East Asia is largely focused on seed and Series A stages. But as the sector grows, private equity players are getting involved to provide late-stage growth equity.

“There are many incubator and accelerator programmes, and even government channels that fintech firms can leverage for seed funding. They should also look to access the wider network of business opportunities and investors who can help them to scale and be a source of funding too,” says Shankar Kanabiran, partner and Malaysia financial services bank- ing & capital markets advisory leader at Ernst & Young Advisory Services Sdn Bhd.

In Malaysia, 19% of fintech firms believe there is high support from the government in terms of funding, while 50% say there is medium or moderate support, and 27% indicate low support. According to the respondents, the government should make funding more accessible (43%), come up with more assistance schemes (29%) and have a wider range of criteria (29%).

The study also revealed that fintechs find talent shortages an acute issue, with over half (60%) saying that there was a lack of startup or fintech talent in the markets they operate in. The skills gaps are in technology and software, product management, and sales and marketing.

In this respect, the government can do more to enable growth of the sector by increasing tax incentives for angel investors in early stage investment and introducing policy reforms to make it easier to hire employees.

“Locally, all the Malaysian FinTech firms surveyed say they have trouble hiring talent to meet the needs and growth of the industry. The top three areas of talent shortage for Malaysian fintechs are in technology and software (73%), sales (27%) and compliance (27%).

“Governments play a vital role in shaping a conducive fintech ecosystem that helps to attract and develop the right talent pool, and promotes innovation, collaboration and healthy competition,” Shankar adds.

South-East Asia offers an attractive play for fintech players and investors. Rapidly expanding economies, young, urban and digitally savvy populations, increasing mobile and Internet penetration, and largely under-served smalland medium-sized enterprises and consumer markets have led to the rapid adoption of fintech innovation in the region.

Key to the success of fintech firms are access to customers and technology, and understanding the regulatory and compliance requirements.

As such, it is important to help bridge the gaps between fintech firms, traditional financial services providers and regulators, by providing local knowledge on the market landscape, and the fundraising channels and government support schemes available.