Although the financial technology (fintech) sector has been one of the leading digital industries in the Association of Southeast Asian Nations (ASEAN) for several years, there is now a reason to be concerned. According to a report by the Singapore-based analytical centre Robocash Group, South and Southeast Asian countries saw a year-on-year (YOY) decline of 83% in new fintech companies last year, recording only 349 startups.

While forecasts show 2023 is likely to have more newly formed businesses than last year at 425—representing a 21.6% increase—this number falls short of previous years from as far back as a decade ago. Despite fewer fintechs emerging, the funding scene in Southeast Asia and South Asia still managed to deliver considerable financial support to the startups, raising USD 153 million in different financing rounds from investors and venture capital (VC) firms.

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VC trends in Southeast Asia show that firms are holding off from investing due to fears of an impending recession. Robocash Group analysts say investors are adopting less risky strategies and that the market is cleansing itself so that only sustainable fintech startups will thrive.

Funding winter for ASEAN startups

According to the Robocash Group report, the decline in new fintech startups in South Asia and ASEAN exceeded the low funding volumes that companies attracted. New businesses could only raise USD 12.7 billion last year, a 38.6% dip from 2021.  

The Digital Payments and Transfers sector had the most significant number of startups in South and Southeast Asia at 72, representing 20.6% of the total. However, the highest concentration of companies was in India. The Blockchain & Crypto and Exchange-traded assets minted 47 businesses each, primarily based in Singapore, representing 13.5% of the total. Finally, the Alternative Lending segment had 38 startups, representing 10.9% of the total.

Signs of a decline in investments were noted in DealStreetAsia’s report on the fourth quarter (Q4) of 2022, stating that company funding hit a two-year low. VC-backed businesses raised USD 2.88 billion in Q4, and 191 deals were closed in the quarter, representing the lowest number of 2022. Total private funding for the year dropped by 32% to USD 15.8 billion, compared to 2021’s record highs.

DealStreet Asia’s DATA VANTAGE report also found that fintech startups accounted for 22% of the deal volume in 2022, down from 31% in 2021, getting 233 deals and a value of USD 5.01 billion.

These downward funding VC trends in Southeast Asia will likely continue, as TechCollectiveSEA discussed in 2022. Investors are withholding their funds because of the deteriorating global economy and the need to manage funds carefully. Other factors affecting investments include geopolitical battles, climate change concerns, supply chain disruptions, high-interest rates, China’s prolonged lockdown over COVID-19, and more.

Optimism for the future

Vishal Harnal, the managing partner of global VC firm 500 Global, is optimistic that VC firms will find investment opportunities, despite the drop in funding. Speaking to CNBC’s Squawk Box Asia, he said he doesn’t believe there is a funding winter. He added that the cheap capital available in the past contributed to the wrong approach of founders pursuing growth over profitability and other less beneficial behaviours.  

Now, VC firms are adopting a new way of doing business and investing in the right way. There is USD 15 billion available for the funding scene in Southeast Asia, and VC firms are confident in investing long-term in tech companies.

Analysts in the Robocash Group report forecasted that if previous investment growth trends continued—despite a dip in 2020 due to the COVID-19 pandemic—then 2023 would achieve a slight increase in financial backing from last year, rising to USD 13.2 billion from USD 12.7 billion.

Furthermore, they predict that by 2050, the number of Southeast Asian fintech users in digital payments, investment, assets, banking, and alternative lending industries will increase from 426.5 million—representing 63% of the population in ASEAN—to 76%. Since this group will represent an ageing population, it opens up the possibility of fintech advancing in industries such as insurance and healthcare.

ASEAN is making swift progress in catching up with Singapore, which is the benchmark in the region for establishing sound fintech regulations. The Philippines ranks second and has surpassed Singapore in some areas, such as eMoney regulation. Only Laos and Myanmar have meagre scores in fintech regulation, but they are all progressing. A well-established fintech regulatory landscape will enhance the region’s trade, transactions, security, investment, and development.

The final step is ensuring that fintech startups play a role in sustainability by innovating financial solutions that combat pollution and provide seamless money-transfer opportunities to invest in protecting the environment.

While the current investment climate is challenging for startups, the fintech sector has sound fundamentals that will enable it to reemerge and thrive.