Fintech is Southeast Asia (SEA)’s largest in terms of VC investments, with US$1.6 billion being poured into the sector last year, compared with just US$200 million five years ago, reveals a combined study by MDI ventures, Finch Capital, and startup data provider Dealroom.co.
Much of the increased investment was driven by foreign investors, which grew 7x since 2015.
As per this study, titled The Future of Fintech in Southeast Asia 2020, the combined value of all the fintech startups in the region has reached US$108 billion in 2020.
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The report is based on a data study on the internet and fintech economy, a deep-dive into specific countries like Indonesia, Singapore and Vietnam and an overview of VC investment and exit landscape in the region.
As per these findings, Indonesia and Singapore are the most valuable ecosystems, which are worth US$60 billion and US$35 billion, respectively. The two countries are also home to nine unicorn startups each.
There is at least US$10 billion of unrealised value in VC-backed startups in Southeast Asia. Strategic M&As with local tech companies have been the most common startup exits in the region so far, with payments and wealth management startups being the main acquisition targets. However, new targets emerged in insurtech and enterprise software in 2020.
Indonesia, Singapore and Vietnam are the most attractive fintech hubs. In Indonesia, the internet economy more than quadrupled to over US$40 billion in 2019 and is well on track to reach US$130 billion by 2025. The large number of unbanked and underbanked population make it ripe for digital penetration.
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While cash is still the primary means of transactions in the region (about 70 per cent of SME merchants accept only cash in 2019), the COVID-19 outbreak has drastically accelerated the region’s shift to a cashless world, with unprecedented growth in the number of e-payment transactions amid a sharp decrease in cash withdrawals and deposits.
Alternative lending startups in Indonesia attract the most funding and secured the highest number of deals of any fintech segments, says the report. In 2019, lending startups raised 76 per cent of the total fintech investment compared to 16 per cent two years ago.
Since 2016, Artificial Intelligence and blockchain-enabled fintech firms in Singapore have gained significant traction. The number of such startups receiving VC investment has doubled between 2016 and 2019. The limited number of such fintech startups make them even more attractive to investors.
Almost 90 per cent of Vietnamese consumers opt to pay cash on delivery for their online purchases, a much higher proportion than other regional markets. However, digital payments technology is evolving rapidly. Payments through mobile banking services surged 144 per cent per year over the past five years.
Aldi Adrian Hartanto, VP of Investments of MDI Ventures, said: “Despite the rise of the fintech industry in SEA that have managed to produce multiple Centaur-level startups including some of our portfolios such as PayFazz, FinAccel and Nium in a relatively short period of time, we firmly believe that we are still just getting started.”
“In this report, we try to deeply dive into the next phase of the industry, understanding the future business model by learning from multiple countries in SEA development which Indonesia is leading the way with such a massive opportunity given our material gap in access to financial products for mass consumers and businesses along with the successful shift of nature from disruption to collaboration between fintech, financial institution, and other stakeholders. Hence, COVID-19 also has played an incremental role to accelerate this phase in the mid-term regardless of the cyclical impact in the short term,” he added.
Hans de Back, Managing Partner at Finch Capital, commented: “Indonesia has all the ingredients in place to play a pivotal role in the adoption of financial technology in Southeast Asia. The combination of favourable demographics, collaborative financial institutions, active local and foreign investors and digital savvy customer base, drives significant opportunities for entrepreneurs throughout the region.”
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“The exit market is maturing and sees a growing number of M&A deals in the FinTech space. Time to exit is significantly shorter compared to other regions, making early-stage investments around seed/pre-Series A particularly attractive for investors. Big tech companies in the region (Sea, Grab, gojek and others) also play an important role towards exits as they have the war-chest to make strategic acquisitions to consolidate the market,” Back shared.
Fintech in Southeast Asia is still in its early days, with current startups concentration still around traditional fintech applications e.g. payment and lending.
Wealth management, insurtech, and proptech are predicted to be the next wave along with the applications of fintech in the non-financial sector or embedded fintech.
Successful shifts from disruption to collaboration between fintechs and financial institutions are largely driven by the use of complementary business models (B2B2C) — enabling faster product market-fit and scalability across multiple channels.
As per the study, 100-plus fintech exits are expected to take place in the region between 2020 and 2023, to be largely driven by consolidation play around the payment space and later wealth management, with local tech companies to be the main acquirers.
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