In this article, we explore a key theme in Southeast Asia innovation today: embedded finance and its implications for startups in the region.

While the past decade of Southeast Asia’s digital economy was driven by this concept of the “marketplace”, the next decade will arguably be driven by digital finance.

Whereas before, it was all about a meeting of offline supply and demand orchestrated online, moving forward, it will be about ensuring the continued cash flow underlying this supply and demand movement.

How will suppliers be able to keep up with demand for their products, given the speed of digital transactions? How will demand continue to be retained (i.e., their wallets/accounts) on various platforms and continue to be engaged in these consumer experiences?

Fintech revenues, funding on the rise, and embedded finance at the heart of it

Already, we see that venture funding in the last six to eight quarters (post-pandemic), save one, saw finance taking on more funding than commerce or consumer verticals.

But when it comes to revenues, globally, fintechs represent less than two per cent of annual financial services.

This is rapidly changing, however, with revenues projected to grow more than sixfold from 2021 to 2030 to reach US$1.5 trillion. The growth will be concentrated in North America and APAC, with the latter projected to grow 8.5X in revenues. At the heart of it are B2B and B2B2X fintechs, projected to grow 11x and 7.5x to 440B and 285B revenues, respectively.

Also Read: Bridging the gender gap and boosting women entrepreneurship with embedded finance

In Southeast Asia alone, fintechs facilitate over US$320B in transaction value (digital payments, digital capital raising, neobanking) and generate over US$6B in revenue. This aligns with Indonesia seeing fintech growth going from 51 in 2011 to 334 in 2022. Even amidst the funding winter in 2022, VC investments in Singaporean fintech startups reached a peak of US$2.31 billion, up 13 per cent from a year ago.

Open finance and financing innovation: Democratising data and infrastructure

Over the past decade in Southeast Asia, fintechs were developed in response to specific needs, especially around payments (from the customer’s POV) and monetisation (from the fintech’s POV). This eventually expanded to what is called the “unbundling of the bank”.

While this grew the fintech industry in the region, fintechs have remained largely fragmented across markets, applications, and customer journeys. These products have also largely been standalone or plugged into other platforms as separate.

But in recent years, there have been two key developments shifting the way fintechs are being built and approach growth.

First is the emergence of open finance and API/infrastructure adoption across all types of businesses, from SMEs to banks and FIs.

There are companies like open finance pioneer Brankas that have been democratising aggregated API solutions and financial infrastructure access. This enables financial services to be embedded in customer journeys like transportation and healthcare. It also enables more secure and transparent data access and sharing for banks and FIs as they offer new products or partner with other companies to do so.

Regional fintech group Fazz has also been making financial services more accessible to businesses, enabling a wide range of capabilities from linkages to Singapore’s payment system and the issuance of Visa cards for customers to payments with digital assets.

What makes Fazz’s approach more interesting is the group also offers products around business operations management for Indonesian clients, which strengthens their financial service propositions around invoice and purchase order financing.

This marriage of business operations management with financial services leads to the second key development: new forms of data workflows powering financial services.

This is most applicable in business financing, where you have fintechs developing novel approaches to underwriting un-collateralised loans. AwanTunai in Indonesia uses supply chain data through their proprietary ERP system, powering their customer’s backend operations.

First Circle in the Philippines has used revolving invoice financing to make capital more accessible to businesses across different ARR segments (with corresponding lending limits).

Impact of embedded finance on startups in Southeast Asia

The confluence of key data and infrastructure access being developed by fintechs like the ones we’ve mentioned above has meant that the barriers to consolidating fintech use cases and plugging them into digital experiences have gone significantly lower.

For example, Verihubs has tallied around 70 per cent cost reduction on average when it comes to their AI-powered verification solutions, which have largely served financial institutions and fintechs in their KYC processes.

This will impact the way startups (not just fintechs) are built in three ways:

Lower cost to build owned financial services integrated into customer journeys from day one

We’ve seen this with the likes of Carro, with Genie Finance being one of the earliest auxiliary businesses set up. The used car platform’s financing and insurance businesses tie into their AI/ML capabilities as well, for example, through distance-based and behavioural-based insurance premiums.

Also Read: Mergers and acquisitions: Key to building an embedded finance ecosystem

Proptech Pinhome has done this to great effect as well, as CEO Dayu Dara Permata describes on our latest podcast with them:

“Mortgage entry points that are attached to the brokerage home-search journey are right there in the listing…Agent invoice financing is attached to the home transaction that the agent is facilitating. And last but not least, primary project financing is also attached to the developer onboarding journey.”

For Pinhome, in particular, the nature of its ecosystem has allowed it to leverage financial services to retain partners on the supply and intermediary sides of the business.

Clearer pathways to rebuilding the banking stack for personal finance

In a podcast last year, Ajaib CEO Anderson Sumarli talked about how the lines between saving and investing have been blurring. Embedded finance is not only enabling fintech services to be embedded into commerce transactions but also into other fintech services as well. Ajaib’s platform, for example, enables investing in several different asset classes.

Flip’s money transfer platform in Indonesia, especially for small businesses, enables payments for a single business to all its stakeholders: suppliers, employees, and customers. As Flip COO Gita Prihanto shares on our podcast: “Micropreneurs are people who either have home businesses or small businesses as their core income or have another business on the side. And they like to use Flip to make payments to their suppliers and to their employees. Sometimes, they ask their customers to send money through Flip.”

Tonik, on the other hand, has recently launched an insurance product tied to its loans in partnership with Sun Life Grepa Financial.

The Philippine digital bank has also developed ways to “embed” repayments for loans in different channels, as CEO Greg Krasnov describes on our podcast:

“We’re currently working on an additional way for the customers to top up their account and repay the loans specifically, which is Tonik as a biller…We also have a product, our Flex Loan, which makes it super easy for the customer. If they have a salary account, all they have to do is just activate their debit card with us, and we’ll just charge the debit card monthly for them. And then they don’t even have to think; it’s just automatic.”

More fintechs for industry enablers to partner with for financing

This is especially applicable to agriculture, fisheries, and aquaculture.

Indonesian upstream agritech Elevarm provides on-farm facilities for their farmers to access affordable insurance and financing through a pay-later system.

For fisheries startup FishLog, financing has been instrumental in enabling local fish manufacturers to export their goods globally, for example, to the US (the biggest importer from Indonesia) by accessing invoice financing through fintech partnerships. As CEO Bayu Anggara shares on our podcast:

“We help the fishermen to get financing from third-party financing partners that we have. Last year, we disbursed almost US$3 million in financing to the fishermen, connecting them directly with third-party financing partners, including those through our platform…”

What’s the catch of embedded finance?

From products embedded throughout customer journeys to the fintech products embedded within fintech ecosystems and greater access to financial services through embedded partnerships, fintech is indeed increasingly becoming everywhere.

But it is not without risk. A key question moving forward is, what are the risks with embedded finance’s rapid development and roll-up of financial services into all kinds of applications?

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