How to duly comprehend and engage with Asian Fintechs & Startups
Throughout this article I explain how the world has turned more Asia centric due to its unprecedented economic growth and tech progress, the magnitude of the Asian startups ecosystem, Asia´s leading role on the global financial services revolution, the road taken by LATAM in order to engage with Asian fintechs & startups and how Latin American firms may eventually land in the Asian markets.
The Asian Century has just begun
Disruptive Highlights of Current and Upcoming Asia:
- Holds 60% of the global population, which stands for 4.6 billion people;
- Based upon the IMF projections for 2023, Asia will move up to 45% of the world economy based on PPP and to 35% of the world on an exchange rated basis;
- Will surpass 50% of the world economy in PPP around 2028;
- On an exchange rated basis, Asia will represent 50% of the world economy in 2040;
- 210 of the Fortune Global 500 largest companies are Asian;
- 45% of the Top 5000 companies by revenue are Asian (900 are Chinese);
- 6 out of the global top 10 unicorns are Asian;
- Asia accounts for 50% of the global internet users at 2.3 billion;
- Currently has 54% share of the world's middle class;
- By 2030 Asia will have 65% of the global middle class;
- Shall represent more than half of global consumption growth by 2030.
Magnitude of the Asian Startups Ecosystem
Asia's startup scene has been led by China, home of 6 out of the world's top 10 most valuable startups. The first 4 have expressed their intention to IPO such as fintech's Ant Group (will become the largest IPO ever on November 5th), ByteDance (owner of Tik Tok), Didi Chuxing (ride sharing) and Lufax (online lending platform).
Currently China holds 227 unicorns (39% of global share), India 24 (3%), South Korea 11, Indonesia 6, Japan 4, Singapore 5, Philippines 1 and Vietnam 1.
Beijing is listed as the world's "unicorn capital," with a leading number of 93 unicorns, representing 41% of China´s total and 12.5% of the world´s total.
With India, Southeast Asia and elsewhere in Asia catching up with China in developing their homegrown startups, there will be more Asian unicorns. Some existing unicorns are near an IPO, such as Indonesian e-commerce platform Tokopedia, which recently expressed desire for a dual listing in local and overseas exchanges, it also recorded the biggest deal during H12020 in the South East Asia (SEA) region after securing US$ 500 million from Singapore state investment firm Temasek Holdings.
Five of Southeast Asia unicorns belong to the ecommerce sector which reflects that online purchasing will certainly boost the development of logistics, mobile payment, and fintech in the region.
Singapore and Indonesia also have their first-mover advantage through their own innovation capabilities and population size, respectively. As for the Philippines and Vietnam, both have a population of around 100 million, and each of them owns a unicorn.
There were only 13 Asian companies that reached the US$1 billion threshold to join the unicorn club in 2020, a considerable drop from 23 last year and 42 in 2018.
Asian Fintechs are redefining financial services
Some of the world’s largest Fintech firms are from Asia. China is home to many large Fintechs including Ant Group, Tencent, JD Digits, Du Xiaoman Financial, Dianrong, Lufax, Pingan Technology, Tiger Brokers, OneConnect, and ZhongAn Insurance.
Fintech adoption in China remains strong due to the increased use of AI, digital wallets, WealthTech, and Robo-advisory services by businesses.
Chinese fintech companies have been successful in promoting financial inclusion and integration in their home country. The rapid development of the Chinese fintech industry can be attributed to various factors, including a high degree of technological savvy among Chinese consumers, underdeveloped banking systems, a fintech-friendly regulatory environment, and China’s improving scientific and technological progress.
Chinese tech enterprises are also successfully exporting their programs to Southeast Asia, where many markets have a comparable base for new financial technologies. Geographic proximity as well as ethnic and cultural connections between China and Southeast Asia are also major facilitators that can help Chinese fintech companies succeed in the region.
Major Indian Fintechs include Paytm, PolicyBazaar, Lendingkart, PaySense, Razorpay, and Namaste Credit, among many others. Approximately US$1.47 billion was invested into businesses operating in the Fintech sector in India between January to June 2020, according to the MEDICI Report covering Indian financial technology markets. The amount invested into India’s Fintech industry during H1 2020 was 60% greater than the capital allocated to businesses in the sector during H1 2019. There were 68 financial technology-related deals that were finalized between March and June 2020, according to the Global Fintech Festival Report from July 2020. But many of these deals may have been completed before March 2020 (which is when the COVID-19 pandemic began).
Japan most relevant fintechs include BitFlyer, Folio, Freee, Origami, LinePay, MoneyTree. In 2018 it was launched a regulatory sandbox regime to allow fintechs and financial companies to test innovative products.
South Korea government initiatives enabled a favorable innovation environment that counts on hot fintech companies such as AIM, Bithumb, Dayli Financial Group, Dunamu, HonestFund, Terra and Viva Republica (Toss app).
- Singapore is home to some of the world’s most established Fintech firms including Grab, PolicyPal, InstaRem, Bluzelle, Singapore Life, among others.
- Indonesia is also emerging as a prominent Fintech hub with major players such as Akulaku, Cashlez, Cermati, Payfazz, Pundi X and KoinWorks.
- The upward trajectory for Southeast Asian financial services growth is clear, particularly with COVID-19 accelerates the adoption of digital finance. The supply of finance is growing, with more local equities and venture capital entering the market. Demand for finance is also rising, driven by a high and stable growth rate (averaging 5% per year) and positive demographics (40% of SE Asia’s 640m population are under the age of 25).
- Three quarters of SE Asian adults have inadequate access to financial services. Digital readiness in ASEAN - SE Asia spends more time on mobile internet than any other region globally. Indonesia, the Philippines and Vietnam will be three of the top 15 largest Smartphone markets by 2020. ASEAN has the highest concentration of regulatory sandboxes globally – though the effectiveness of these initiatives is unclear.
- FinTech firms are also relatively well distributed across the region, with 40% of the 1,220 firms in Singapore, 20% in Indonesia, 15% in Malaysia, 10% in Thailand and the Philippines, and 6% in Vietnam.
Fintech funding in Asia was led by Southeast Asia which received US$455 million during Q2 2020. Fintech investments in Asia were primarily driven by India in Q1, but investors appeared shifted their attention to Southeast Asia.
There were around 100-110 Fintech deals that were finalized during Q1 and around the same number during Q2 2020. Digital wallets attracted many new investors with the top two e-wallets (PayMaya in the Philippines and Wave Money from Myanmar) securing about 30% of investments in Southeast Asia’s payments sector.
Startups and Fintech Landscape in Latin America
LATAM is home to a considerable number of unicorns as it is reflected on the image. It is worth pointing out that listed companies were also included to provide an overall scene on the startups ecosystem in the region. Mexico's Kavak has recently joined the unicorn club as well.
The increasing numbers of smartphone ownership (415 million), internet penetration which currently is over 66% (53% is world average), infrastructure development, e-commerce adoption, and dissatisfaction with bank´s high fees have been big drivers for the development of the fintech ecosystem.
Brazil as the heavyweight of the region holds over 800 fintech companies, Mexico has 600 firms while Argentina is home of 260 and Colombia holds 250.
A total of 1,075 Fintech companies from Brazil, Mexico, Argentina, Colombia and Chile were raised with US$8 billion in funds by 2020, according to KoreFusion. From there, three main categories stand out concentrating 95% of fintech investment in the region: Payments (50.5%) followed by Lending (24.5%) and Digital Banks with 21.6%. Brazil is the country that accounts for most of the investment, representing almost 77% (US$6.2 billion) of the total. It is followed by Mexico with 16% (US$1.3 billion), followed by Argentina with 3.6% (US$295.9 million), Colombia with 3.5% (US$284.5 million) and Chile with 0.1% (US$11.8 million).
As regards to what actually took place in 2020, during the first semester the top 10 deals represented 77% of the US$ 525 million raised (US$ 249,3M in equity and US$ 275,7M in debt). There were a total of 74 funding deals in such period, over 72% of all the deals have a financing ticket of less than US$ 10 million and 84% of the total funding was concentrated in payments, lending and financial tools for SMEs.
How does LATAM engage with Asian investors?
Fintech startups in LATAM might be following the steps of Southeast Asia which is a similar region in terms of demographics and challenges as well as a major funding recipient from Chinese and Japanese investors.
For instance Didi Chuxing, China’s rideshare app, acquired Brazil local counterpart, 99, for US$1 billion in 2018. Cainiao, Alibaba´s logistic arm and one of the top 10 unicorns in the world, has just announced will invest in the region since parcels purchased online from China shall be delivered to LATAM within 3 days.
On top of that Chinese and Japanese investors poured in over US$3 billion in 2019. Tencent invested heavily in neobanks such as Argentine Ualá (upcoming unicorn that just expanded to Mexico) and Brazilian Nubank. SoftBank also made strategic investments into Ualá, Mexico’s AlphaCredit, Kavak, Konfio and Clip, Colombia’s Rappi and Brazil’s Gympass, VTEX, Creditas, Petlove, Cortex and iClinic.
In previous years Asian funding in LATAM was as follows:
The fintech markets in Asia-Pacific and Latin America are witnessing a rapid boom, as the financial sector shifts to a new age of technology and transparency propelled by innovation and financial inclusion.
Fintech has already revolutionized how we raise money for business projects, how we transfer money abroad, and how we manage and plan our finances. The emergence of innovative solutions such as next-generation payments, peer-to-peer (P2P) lending, security and biometrics, blockchain, and artificial intelligence (AI) have helped automate and streamline processes, and enabled financial inclusion with faster, cheaper, more convenient and secure delivery of financial services.
If used wisely, fintech could potentially provide the glue needed to get finance and the real economy to work efficiently to catalyze sustainable development.
Asia is driving fintech worldwide. Over the past two years, fintech financing in its region has more than doubled from US$5.2 billion to US$11.2 billion, contributing nearly 43% of the US$23.2 billion in global fintech investment.
Latin American startups that manage to scale beyond their countries, often with the support of Asian capital, will likely become household names across the region. At the same time Southeast Asia ecosystem is in such a growing stage and granting so many business opportunities that a due diligence is worth conducting in order to analyze in depth the possibility of finding a niche that could be of benefit.
LATAM firms willing to land at the Asian markets need to bear in mind that particularly in that region, returns (economic profit), which is the profit left after you pay the cost of capital, is a big obstacle to achieve growth. That´s not because margins are falling but it´s actually due to the capital intensity that is increasing so rapidly that balance sheets are growing faster than revenues. It is go big or go home, reallocate resources particularly at talent recruitment, reinvent your business model, design a strategy for where you need to be in 2025 or 2030 and focus on the metrics and KPIs you shall use to assess progress.
Asia is currently trading more within its region than with the rest of the world, meaning that those Latin American fintechs or startups who are capable of having presence in those markets shall count on a substantial advantage over competitors who decide to sit on their home or regional comfort zone.
More companies that are already global will realize they need to truly take local approaches, more than ever before, if they want to drive international growth. After all, global is really just the sum of many locals.