How a Profitable Fintech Unicorn in Southeast Asia Plans to Accelerate Growth

Despite declining digital game sales, Coda Payments co-founded Neil Davidson sees oversized returns by increasing market shares through new products, expansion.

CAs a result of 2021’s global funding highs, Singapore’s Coda Payments earlier this year raised $690 million from big-league backers, including the city-state’s sovereign wealth fund GIC and America’s Insight Partners and Smash Capital. That investment — the highest ever, tipping the value of the online game-buying payment platform at $2.5 billion — rewarded an elusive benchmark among Southeast Asia’s unicorns: profitability.

The VC funding environment has since turned gloomy amid rising inflation and interest rates and increased risks of a global recession. But that doesn’t worry Neil Davidson, co-founder and executive chairman of Coda Payments. The funding round, a secondary share sale, provided some returns to early investors including the firm’s founders, but there was no need to raise new capital, he said in a video call from his Los Angeles office. The company already had sufficient cash flow, which quadrupled to $68 million in the year ended September 2021, according to regulatory filings in Singapore. That has enabled it to keep its eye on the prize and grow bigger.

“Coda Payments has a track record of historical performance that is very credible,” he notes. “We can grow a lot over the next few years by making relatively modest gains in our market share.” (Davidson and co-founder Paul Leishman remain significant shareholders in the company, but declined to disclose their current holdings.)

As home users turned to online gaming and other digital entertainment during the pandemic, Coda Payments’ revenue nearly quadrupled to $310 million in 2021 from $81 million in 2019, while earnings before interest and taxes quadrupled to $43 million in the same period. , the registration shows. The software processes payments for some of the world’s biggest websites, including Activision Blizzard, Riot Games, Sea Group’s Garena, Netease, Tencent and Tinder. Coda handles over 1 million transactions a day, and on each one it takes a 15% cut when users pay for things like game accessories and refills. Its main competitors are Apple and Google, but the company’s competitive advantage is that it charges half of what its larger rivals do for a similar service.

“Coda Payments has a track record of historical performance that is very credible.”

Davidson is chasing new growth outside Southeast Asia, its biggest market, with an aggressive global push across Europe, Asia, Latin America and the US. The expansion will include cross-border payments for games and other products as well as more app stores.

Since moving back to his hometown in California in 2019 and setting up Coda’s Los Angeles office the following year, Davidson has been working on deals with new and existing clients, which he hopes to close in the next twelve months. “We are starting from a very small position in these new markets,” says the 41-year-old. “If we are able to have an impact in these countries, even grow to a relatively small market share, [that] will actually generate quite a large return for Coda.”

Davidson and Leishman, who is the CEO of Coda Payments, first targeted e-commerce firms as potential customers when they launched the company 10 years ago. Inspired by the rapid adoption of M-Pesa in Kenya – a mobile money transfer service launched there in 2007 – they hoped to replicate the model first in Indonesia and then across the region’s fragmented e-tail landscape. “We saw enormous potential in Southeast Asia,” Leishman, 39, says by email. “The region had a large and growing population that was increasingly interested in purchasing digital content.” The Canadian entrepreneur, who holds a business economics degree from the Ivey Business School at Western University in Ontario, recently moved back to his hometown of Toronto from Hong Kong to build partnerships with Western digital content publishers.

Coda Payments’ first products offered an alternative to using a credit card to pay for online purchases, such as phone bill billing (where payments are charged to a user’s mobile phone bill) and e-wallets. The co-founders were based in Jakarta where about 70% of payments were still made in cash. “A significant portion of consumers who were online for the first time did not have Visa or Mastercard, which at the time was what people needed to participate in the Internet economy,” says Davidson, an MBA graduate from Harvard University. “We felt there was an opportunity to connect local alternative payment methods that would help unlock a lot of spending online.”

The duo had met in 2009 at the GSM Association (GSMA), a London-based alliance of over 750 mobile operators from around the world, where they supported mobile payment services for the unbanked in Asia, Africa and Latin America. When we chose telcos in Southeast Asia as Coda Payments’ first customers, “we were able to draw on everything we learned at GSMA,” says Davidson. “Some of the relationships we’ve built while at the GSMA helped us get Coda off the ground.”

They quickly transitioned to online game publishers who had a clear need for their payment software. “If you’re selling a digital product, obviously you can’t use cash on delivery because there’s no physical delivery,” says Davidson. Within a few years, they had offices in Singapore (moving their headquarters there in mid-2014), Malaysia and California.

Coda Payments initially integrated its digital payment services on publishers’ websites, but saw a gap with new mobile game creators, who typically distribute their products on apps. In November 2014, the startup launched Codashop, which distributes accessories and credits for both PC-based and mobile games, and today draws over 50 million visitors every month across 65 markets. Its Codapay enables game publishers to accept over 300 payment methods on their own websites.

While trends such as a deeper fragmentation of payment methods benefit the firm, global spending on digital games has slowed. After rising 30% to a pandemic high of $197 billion in 2020, sales growth slowed to 20% last year and is likely to slow to 6.5% in 2022, according to Statista. Still, the company expects the impact to be minimal, even as the tech sector, including payments giants Stripe and PayPal, responds to the broader economic downturn with layoffs. “While we have adopted a more disciplined approach to hiring in the current climate, we are at the beginning of pursuing a massive global opportunity and therefore continue to invest in building out our footprint and capabilities,” says Davidson by email, and declines to provide specific investment plans or revenue forecasts for this year.

That’s largely because Coda Payments’ key market is expected to hold despite the turmoil. Digital media consumption in Southeast Asia – including games and video streaming – is projected to triple to $43 billion by 2025 from $14 billion in 2019, according to a study published by Bain, Google and Temasek in October. “Southeast Asia is benefiting from secular trends such as its young population and rising prosperity across the region,” said Florian Hoppe, Singapore-based partner at consulting firm Bain & Co.

Pending further growth, Coda Payments’ Singapore-based backer Golden Gate Ventures – whose investment of more than $1 million was valued at over $100 million as of April, generating a blended IRR of over 100X – will retain the firm in its portfolio . “Coda is an incredibly strong company, a rare profitable unicorn,” said Vinnie Lauria, a Ho Chi Minh City-based managing partner at Golden Gate Ventures. It sold some shares in Coda Payments in April, but aims to hold on to its remaining stake of less than 5% (currently valued at $75 million) to get “outsized returns” when the company launches an IPO.

While Davidson is also confident that Coda Payments will continue to gain momentum post-pandemic, the company is in no rush to go public. “We think we can be more effective at building long-term value by remaining private,” he says. The timing will also depend on the market sentiment improving. “People now have other options to spend their discretionary income on things other than digital entertainment,” he notes. “While it will likely dampen our growth somewhat in the short term, we are very confident in the long-term growth potential of digital entertainment.”

The gaming industry also has to contend with regulations, most recently in India. The country banned Garena’s mobile game Free fire in February and launched an investigation six months later into potential anti-money laundering violations at payment companies, including Coda Payments’ Indian subsidiary. In September, the Enforcement Directorate searched the firm’s Bangalore office and froze accounts totaling 685 million rupees ($8.4 million). “These claims are unsubstantiated and stem from a misunderstanding of Coda’s business model,” Coda spokesperson Nikolay Sushkov said in an email. “Coda is cooperating with the relevant authorities in this investigation.” The investigation is still ongoing.

“We believe we can be more effective in building long-term value by remaining private,”

Such oversight is necessary as digital gaming and related payments become mainstream, said Darren Yong, Singapore-based head of technology, media and telecommunications research in Asia Pacific at KPMG. “Regulation needs to evolve and catch up with technology and protect consumers,” he adds.

Collecting payments across borders is a major stumbling block for digital game publishers given the regulatory costs, says Davidson. With the company working with locally regulated payment service providers, Coda plays a key role in helping digital content providers expand across multiple jurisdictions, increasing the company’s market share in new markets around the world, he adds.