Southeast Asia and India’s first wave of fintechs was characterised by B2C products that provide consumers with easy access to financial services. While demographic and macro factors favoured fintech adoption, a large part of this was also driven by venture funding. Rewards and incentives, rather than the products alone, spurred end-user adoption.

Last year’s market correction became a forcing mechanism for fintechs to prove their long-term value. With tighter capital, fintechs and embedded finance companies are now forced to rely on a differentiated product or service to attract demand.

The necessity to differentiate has in turn created a new opportunity: Finance-as-a-service startups that abstract complexity at the infrastructure layer, enabling end-customer-facing companies to build better products and solutions faster than ever.

(Re)Building infrastructure

Instead of building for the last mile, finance-as-a-service startups provide the infrastructure needed for emerging companies to build an end-customer solution on top. By building the baseline tech stack, solving for regulatory compliance, and forming partnerships with banks, they help accelerate the pace of development of other fintechs and embedded finance startups.

For traditional banks, working with infrastructure companies can help them grow their digital distribution channels. As an example, M2P Fintech is partnering with traditional banks to offer an integrated tech stack for lending.

Finance-as-a-service does not just help new startups starting from scratch. Existing companies can leverage this to improve the quality of the tech stack or reduce the time for expanding into new product lines or geographies.

Also Read: Revolutionising fintech in Southeast Asia: AI and ML empower businesses with data

An embedded finance player expanding from Singapore to Indonesia will have to rebuild its own integrations and bank partnerships, a process which would take at least half a year without an infrastructure partner.

Finance-as-a-service

Banking-as-a-service

An end-to-end model that allows third parties to connect with the banks’ systems directly through APIs to build banking offerings on top of the providers’ regulated infrastructure. BaaS is different from Open Banking, which is the framework that makes BaaS possible by providing rules around how third parties can access financial data (i.e., BaaS is a subset of Open Banking).

Bank-connections-as-a-service 

Their APIs provide third-party access to financial data from banks. Use cases include enabling users to have a consolidated view of their finances across platforms or enabling bank transfers as a payment method on checkout forms.

Point solutions in as-a-service

Models that focus specifically on enabling one type of financial service, instead of the full banking proposition with bank accounts, cards, loans etc. Examples here include Marqeta, Card91, and FinBox for cards issuing-as-a-service, and Calyx and Finastra for lending-as-a-service. Point Solutions provide a focused product set for companies who do not necessarily want to become banks and can also help traditional banks extend their services digitally.

How they generate revenue

• Interchange: BaaS companies primarily make revenue on the interchange split based on card usage, adopting a rev share model with partner banks.
• Subscription/SaaS fees: Startups may also charge a subscription fee for platform usage. Some place a higher importance on this as a revenue stream.
• Monthly per account/per customer fees: This is usually charged in addition to subscription fees to account for variable costs as a startup scale.
• Credit/lending offerings: Interest rates, account fees etc., which will typically be a revenue share with banking partners.

The opportunity in APAC

In APAC, embedded finance is projected to grow at a CAGR of 24.4 per cent from 2022 to 2029, reaching a total revenue size of US$358 billion. The large and fast-growing market aside, a few underlying characteristics make finance-as-a-service a unique opportunity in the region

Real-Time Payment Systems (RTPS) at the forefront

RTPS is already prominent in countries such as India (UPI), Singapore (PayNow), and Thailand (PromptPay), with others like Indonesia (BIFast) catching up fast. While governments and bank consortiums have focused on the infrastructure, there is much more to do to wrap products around these rails.

Also Read: How voice AI is revolutionising the fintech scene

Emerging companies in the region can differentiate themselves from global brands by delivering products that capitalise on or help to enhance, RTPS. For example, by leveraging RTPS to facilitate instant pay-outs from platforms to freelancers, startups can help platforms circumvent the high costs of instant pay-outs in an automated manner.

Supporting, and not replacing, traditional banks

Many banks in the region operate on legacy core banking platforms with data siloes and APIs that are not suitable for the next generation. Instead of only partnering with banks, finance-as-a-service startups can make banks a lucrative revenue stream by providing them with modern infrastructure for digital offerings.

M2P Fintech recognised this and is expecting their lending infrastructure product to traditional companies to account for 25 per cent of revenue. Hyperface.io, a cards-issuing-focused fintech in India, is primarily helping banks improve their card programs.

In addition to being a revenue stream, this approach can help startups de-risk regulatory restrictions that protect traditional banks.

Constantly evolving local regulatory landscapes

In multiple countries (e.g., the introduction of the Account Aggregator framework in India, and consumer protection rules by OJK in Indonesia) means that companies need to put in substantial effort to stay up to date with compliance and regulatory changes.

For those that plan to scale regionally or globally, this becomes even harder to manage. Instead of managing regulatory complexities on their own, having the right partners will free up their capacity to focus on building products.

Looking for the next best thing rather than having brand loyalty

Case in point: the average number of cards per user in Singapore is close to 5, and a user in Malaysia owns an average of two e-wallets. Startups facing end customers want to spend most of their time on product and service differentiation, and thus have less time to focus on building out a reliable and secure infrastructure layer.

Regional plays over domestic-only play

The fact that many fintechs and embedded finance startups aspire to win in the APAC region, and not just in domestic markets, gives finance-as-a-service a unique opportunity. Aside from providing the required technology and partnerships, emerging companies that can support cross-border money movement or multi-currency accounts will stand out.

Despite the potential, the thesis will take time to play out in APAC

• Building close to the metal is a long game that takes years.
• The buy vs build question will continue to be top of mind for many startups. The largest traditional banks and embedded finance companies today have been around since the startup boom and have existing resources (e.g., finances, existing partnerships, and a talent brand) to tap on. In some markets, they can even buy their own bank (e.g., FinAccel’s acquisition of Bank Bisnis, BharatPe with Unity SFB). Given the nascency of financial infrastructure startups in the market today, it may just become a race on who can build faster.
• Regulations and partnerships in the region are highly local. And with the region lacking an intragovernmental regulatory framework, this makes regional expansion for infrastructure startups themselves difficult to scale.
• Finance-as-a-service startups work with a wide spectrum of partners and suppliers including card networks, sponsor banks, and other core APIs that they white label. This makes supply-side integrations extremely critical to longer-term profitability, and part of the unit economics of these businesses is the delicate balancing act across third parties. In addition, risks of regulations that limit the upside, such as interchange caps, could mean even tighter margins.

Parting thoughts

While challenging, the heterogeneity of the region and active regulatory landscape means that there will always be lots of complexity and complexity means opportunity. Those who survive need to be highly focused on what matters most to the companies they are selling to and maintain a moat from being commoditised.

Are they selling a stellar tech stack? A solid network of bank partnerships? How sticky is their offering? The startups that can navigate these questions and articulate their value will be worthy of investment.

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