Fintech’s role in growth markets

Despite Covid-19’s impact on the global economy, the steady pivot to digital financial services has helped fintech and the general financial industry emerge from the pandemic relatively unscathed. In fact, during the low interest rate environment of the last few years (Figure 1), fintech values ​​increased dramatically across almost all market segments, especially in certain areas such as crypto.

In 2022, however, geopolitical uncertainty, rising inflation and general macroeconomic uncertainty changed the calculus for many about the future of the fintech industry, especially in emerging markets. Higher interest rates and inflation (figure 2) draw in funds and growth. As one VC technical manager described it, “An entire industry got ahead of their skis.”

Looking ahead, it will be important to understand how fintech can continue to grow and innovate in the future, especially in emerging or “emerging” markets. It is a combination of financing, business models and supporting infrastructure in the form of regulations and education that will lay the foundation 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 stay resilient. The insights shared by the attendees were invaluable and provide an unparalleled view of what some of the top VCs, startups and educators are doing 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, reaching US$621 billion globally, dramatically surpassing the previous year’s record of US$294 billion. Fintech was no exception with over USD 140 billion invested globally in the sector alone in 2021 (figure 4).

In 2022, the situation changed rapidly. As interest rates and inflation began to rise worldwide, the venture capital industry went into “risk off” mode. As a result, global venture capital investment fell nearly 60% from a peak of $178 billion in Q4 2021 to $75 billion in Q3 2022. Valuations also suffered, with companies like Stripe and Klarna seeing their values ​​drop 28% and 85%, respectively, in 2022.

While the fintech sector’s go-go era may be over, there is cause for optimism about this new chapter for the industry. “In a low interest rate environment, all kinds of sins have been committed. In the next five years, that won’t 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 largely lost in the last couple of years, given the lack of capital. That adjustment is what is going to create value.”

Fundamentally, the panel illustrated that the fundamentals of what VCs look for have not changed: sustainability, product, team, capital and strategy. To be sure, it must 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.

Financial education and literacy for consumers and SMEs

Despite progress in addressing 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 migrant workers, are banks, but the challenge is a little stronger in the nearby emerging markets. According to the latest data from the World Bank’s Findex database, almost half of the population in Indonesia and the Philippines remains underbanked.

In many studies, education has been shown to be a key stumbling block in the use of DFS solutions. In the 2022 report “Moving the Needle” by Kapronasia and Grab, trust was the number one reason given by both SMEs and consumers as the most important reason for choosing a financial service provider. (Figure 5).

The latest rapid digitization affects both consumers and small and medium-sized businesses. 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 learning them how to be able to digitize themselves. Given that COVID has really made it difficult for small and medium-sized businesses, especially brick-and-mortar ones, the ability for them to run their business online is critical.”

For many SMEs in Singapore and across the region, digitization was a huge challenge. For larger organizations such as large retailers, the shift was less dramatic, as many already had online platforms to leverage, but for others, particularly micro-SMBs, the challenge was significant.

Financial education is also important, especially understanding the underlying risks of the products. “When you put access to capital in the hands of those who need it, there also needs 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 must go hand in hand,” said panelist Nicole Valentine, FinTech Director at the Milken Institute.

Future goals

Emerging markets remain a crucial element in 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 people who are usually already banked. More importantly, they also bring with them an element of competition that pushes traditional suppliers to raise their offerings.

In the years and decades ahead, fintech will continue to shape the development of the financial industry. Across the region, nimble start-ups are leveraging technology to redefine the customer experience. It’s happening at the most basic level, for example with India’s UPI retail payment pathway, 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.

To be sure, this journey will have bumps in the road, with VC funding no longer as readily available and geopolitical and economic challenges manifesting. Fintechs need to get 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 just survive, while others will thrive, depending on how well they can achieve this equilibrium.

For more of our insights into emerging markets and the future, download Kapronasia‘s The Future of FinTech in Growth Markets – A Report in Collaboration with Elevandi detailed report on the topic.