Travel Diaries: Singapore

Our week of targeted meetings has driven a handful of key insights that we intend to leverage as we enter the Southeast Asia region. The first wave of FinTech has driven meaningful results to modernise payments, provide consumers with access to digital banking products and enable businesses for growth particularly around e-commerce. However 72% of the 500m people across Indonesia, Philippines, Vietnam and Thailand remain unbanked. It feels like the second wave of FinTech is targeting specific segments which will broaden financial access for both consumers and small business owners— for example— we met with an array of entrepreneurs focussed on revenue based financing, agricultural lending, auto financing, credit scoring and asset financing for technology devices.

Capital Markets Are Thin at Early Stages but Supported by Banks at Scale

‍While early-stage capital markets in Asia are relatively underdeveloped, as companies grow, they tend to secure substantial backing from banks.

• Local lenders primarily focus on venture-debt-like instruments, with limited access to off-balance sheet financing. This is largely due to concerns over the enforceability of bankruptcy-remote structures, often leading to protracted bankruptcy proceedings. Securitisation remains rare and is typically reserved for the largest fintech companies. The on-balance sheet model is typically restricted to a debt:equity ratio of 2-5X which helps to maintain quality underwriting standards but restricts capacity and growth.
• However, the largest players can eventually transition to bank funding at a low cost of capital. For example, Atome has completed over $200 million in securitisations with HSBC, demonstrating the potential for fintechs to access institutional capital once they reach scale.

Regulatory Environment: Fintechs Pushed Towards P2P Lending

The regulatory landscape in the region, particularly in Indonesia, has evolved to favour peer-to-peer (P2P) lending as the most prevalent model for fintech lenders.There are four primary licence types for fintech companies:

• P2P Licence: The most common - over 100 licences had been issued by mid 2023, with are two underlying funding structures:
  - Execution Model: Where fintechs facilitate wholesale debt through structured transactions.
  - Channelling Model: Direct lending to borrowers, with fintechs acting as intermediaries.

• Multi-Finance Company (MFC) License: A traditional non-bank financial institution (NBFI) license with stringent regulatory guardrails.
• Full Bank License: Offers full banking capabilities.
• Light-Touch Banking License: Functions similarly to regional cooperatives, allowing for limited deposit-taking abilities.

Workarounds for Regulatory and Capital Constraints

‍Companies in the region have developed innovative strategies to overcome regulatory and capital access limitations:

• Heavy Collaboration with Banks: Many fintechs partner with banks, particularly using the channelling model to facilitate lending.
• Early Acquisition of Banking Licences: Some companies seek to purchase banking licences earlier in their development to bypass restrictive regulatory hurdles.
• Limited Securitisation: When securitisation occurs, it is typically structured as forward flow agreements, allowing fintechs to access capital markets under specific conditions.

Major Fintechs as Extensions of Technology Giants

Many of the region’s largest fintech firms are offshoots of larger technology companies, leveraging their existing platforms and customer bases to scale financial services rapidly. GXS (Grab’s financial arm) and Shopee (which holds a $2.5 billion loan book) highlight this trend

Venture Capital Deepening as Funds Mature

Venture Capital in Asia is maturing, with many funds now on their 4th or 5th iterations, allowing for more substantial capital to be deployed into Series A and B rounds. For example, Insignia Venture Partners raised a $516 million early-stage fund, East Ventures raised a $550 million growth fund, Vertex raised $500 million in 2022 and Jungle added a new $600 million fund for Southeast Asia and India.

Exits remain a challenge relative to other regions. There is a feeling that Asia needs a Nubank or MercadoLibre style exit to build confidence around IPO potential. It also remains unclear how M&A will develop— large corporations such as VISA and Citi are investing which gives them optionally longer term to acquire bigger stakes. And historically Ant Financial was very aggressive making 9 acquisitions and 150+ investments.

Vietnam: A Bullish Market Outlook

Local and international investors are increasingly bullish on Vietnam due to its strong educational system and economic potential, particularly as global manufacturing shifts away from China. Vietnam’s youthful, education-driven workforce and emerging tech ecosystem are driving significant interest, with the country seen as a strategic beneficiary of broader manufacturing realignments in Asia.

• Vietnam boasts a 95% literacy rate, one of the highest in Southeast Asia.
• Vietnam allocates around 20% of its total government expenditure to education, which is significantly higher than the global average.
• Vietnam boasts the largest number of outbound students moving abroad to pursue higher education with 132,000 per year, which is 2x Indonesia and Malaysia

However the political system in Vietnam is still considered to be a headwind and many international investors are still wary. In country presence is deemed essential to build momentum and a prerequisite for meaningful execution.