The financial technology (fintech) sector remains one of the most popular segments globally for another year despite the challenges every economy has encountered. According to global startup and venture capital intelligence platform Dealroom.co, fintech startups worldwide raised USD 20.5 billion in the second quarter (Q2) of 2022. While the figure was high, it showed a funding slowdown compared to the peak figures of 2021, and these lower numbers match the current fintech trends in Southeast Asia.
Fintech funding is down 32% year-on-year (YOY), and the value of exits has also been reduced. It is possible to attribute much of the slowdown in investments to the volatile state of the global economy. Trade disruptions due to international sanctions, COVID-19 restrictions, geopolitical battles in various regions, supply chain issues for many countries, high-interest rates, and rising energy costs have created an unfavourable business climate, reducing investor appetites.
Safdar Khan from Mastercard details the future of payments in Southeast Asia
Moreover, these challenges have not shown signs of dissipating, with countries doubling down on their respective economic and energy policies—good or bad. As such, the markets and currencies have been fluctuating, making it difficult for local and foreign investors to fully engage in their business of finding worthy startups to support financially. Many fintech startups in Southeast Asia have had to change their operational models to navigate the lean funding period.
State of the fintech sector in Southeast Asia
According to Statista Research, the total transaction value of the Digital Payments segment in Southeast Asia will be USD 195.80 billion in 2022, with users growing to 490.59 million by 2027. The sector has grown since the start of the recent global pandemic and its variants. The outbreak hastened digitalisation, encouraging Southeast Asians to transact online and enjoy other features and rewards from the new fintech platforms.
The nascent sector faces many challenges, including adoption, understanding how it works, regulatory challenges, competition from traditional financial institutions, inadequate resources, and insufficient funding.
Furthermore, CNBC reported that tech companies in Southeast Asia were laying off workers by the hundreds in response to the global economic slowdown. Fintech companies were well-represented, with digital currency exchange Crypto.com laying off 5% of its workforce, digital wealth management firm StashAway dropping 14% of its employees, and other firms following suit. Experts predicted there would be more mass firings in the coming months in many sectors because high-interest rates would increase the cost of borrowing and doing business.
Despite the issues, venture capital (VC) firms have raised money for their investment funds and are now focusing on deploying the money toward startups with good fundamentals and corporate governance. Sequoia Southeast Asia managing director Abheek Anand told CNBC that every technology metric was growing and would continue to do so in the long term. The fintech sector gets much attention from investors because its solutions can be integrated with other industries.
Reasons fintech will continue thriving
Despite the many issues and challenges, there are several reasons why the fintech sector is doing well. First is the digital transformation approach in the Association of Southeast Asian Nations (ASEAN). According to the eConomy SEA report by Google, Temasek, and Bain & Company, merchants accelerated their digitalisation in response to the pandemic. Fintech solutions have become vital for consumers to pay for goods and services. The positive results throughout the region ensured that usage of digital payments would continue and the fintech infrastructure would continue developing and evolving.
Second, the sector has benefited from fintech innovation and integration with legacy financial systems and traditional financial institutions. Citizens can use digital payment options and wealth management tools, as well as lending, alternative financing, cryptocurrency, and other services. Banks have also transitioned away from legacy systems to incorporate fintech into their offerings.
Third, many Southeast Asians are either underbanked or unbanked, which means they are not well-served or do not have access to financial services. Fintech solutions help to bridge that gap and increase financial inclusiveness.
A fourth mitigating factor is the development of eWallets in the region, which has also benefited the underbanked and unbanked by providing an alternative digital payment option. According to Boku’s 2021 Mobile Wallets report, app-based mobile wallets and mobile money are bringing new consumers into the digital economy. 5G technology is ensuring faster and safer payment processing.
Finally, technological advances, for example, blockchain and cryptocurrency, are boosting the fintech sector and opening novel avenues for people to trade and invest. Crypto firms have become the latest types of fintech startups Southeast Asia is minting.
The current fintech trends in Southeast Asia show no limit to how far fintech can grow as technology evolves. While challenges abound in the region—politically, socially, and economically—opportunities remain to innovate through new technologies like blockchain or integration with traditional systems. ASEAN has survived the global economic slowdown, and the fintech sector can now look forward to thriving in 2023.