Fintech: VCs spurring fintech start-ups’ next stage of growth

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on November 20, 2017 - November 26, 2017.
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The Southeast Asian market is saturated with financial technology (fintech) start-ups, many of which offer the same services and are at the same stage of growth. This presents an opportunity for fintech-focused venture capitalists to come in and kick-start their growth while meeting the high demand for such services from consumers, says Igor Pesin, partner and investment director of global fintech venture capital fund Life.SREDA.

“The industry is growing, but not as fast as before because the market is saturated. Nevertheless, the demand is here, especially in Asia, where there is high demand from small and medium businesses, those who are underserved by banks or those who do not have access to any kind of financial products or services,” Pesin tells Personal Wealth on the sidelines of the recent SCxSC Digital Finance Conference 2017, where he was a panel speaker.

“We can see in China or India, where in only two or three years, you can significantly change the whole industry. People who used cash before are now using apps, technologies, to get financial services.”

According to a recent KPMG report on global fintech trends, fintech investment in Asia grew more than US$1 billion for the first time in the third quarter of this year, with investments from venture capitalists taking the lead. Life.SREDA, originally based in Russia, moved to Singapore in 2015 after recognising this trend. The earlier funds mainly invested in start-ups from developed countries because the technology and development of fintech products originated from those countries, which Pesin calls the first wave of fintech.

“In 2013 and 2014, we realised that the highest demand and potential for fintech would not be in developed countries, where you create some technologies just to improve what already exists. We saw this trend that companies are now focusing on markets where banking systems don’t exist or are very poor. So, we decided our next focus will be emerging markets,” he says.

According to Pesin’s observations from earlier this year, there were more than 500 fintech start-ups in Southeast Asia and even more accelerator programmes in various countries. This means there will be many new players out there eager for capital.

“From 2016, the fintech industry in Southeast Asia has been quite saturated with small and young companies. We have many companies at the seed stage — six months or one year old — but we don’t have enough sustainable, mature companies. So, that is the challenge for the whole industry in Southeast Asia — how to jump from this young stage of development to a mature industry, where companies are sustainable in the long run,” says Pesin.

It is important for fintech start-ups to be able to scale and prove their sustainability because many bigger institutions are eager to acquire their technologies. For instance, some banks in Europe and the US have attempted incubating fintech in-house but realised that it did not work well after a few years, says Pesin.

“Usually, when you talk about fintech, it is not only about the technology itself. Technology is quite simple. Generally, it is available in the market. Fintech is a different business that has been adapted to the new digital era. So, it has a different culture, a different approach to the market, to customer support. It is much more flexible. It is analysing a lot of what is happening in the market. It is quite difficult [to see this] when you are in a bank, inside a bureaucratic system.”

One way venture capitalists can tap into the opportunities is by facilitating mergers and acquisitions (M&A). For instance, many start-ups offering the same product but in different countries could merge to cut costs and become more visible in the market.

“Many strategic buyers don’t want to work with small companies. They don’t look at small or local companies. They need some bigger players to work with. It can be investments, acquisitions or product partnership. To satisfy this kind of demand, we think these kinds of mergers between different fintech start-ups will be a solution,” says Pesin.

The M&A trend could also occur between fintech start-ups that want to expand, he adds. “Some companies will raise money not for organic growth, but for inorganic growth through M&A. If the company wants to go into a new vertical or launch a new product, it will understand that it is easier to find a company in the market with this product, acquire it and just integrate the product into its line-up.”

Instead of investing in young companies, the fund is looking for the next stage of evolution where companies merge and combine, says Pesin. So, instead of offering only one product, the companies will provide several products such as payments, lending and personal finance management.

In Southeast Asia, fintech start-ups in the payments vertical are already quite saturated, Pesin points out. The next wave of fintech disruption — which has already occurred, but still has space to grow — is in lending, such as crowdfunding and peer-to-peer. In the future, fintech start-ups will offer services that make use of the tons of user data collected from payments and lending platforms.

“Big data is quite an emergent industry because fintech generates a lot of data on clients, what they buy and how they behave. Many people in the emerging markets of Southeast Asia do not have any credit history or credit score, so they do not have access to credit services. And access to this kind of big data from these companies will generate a lot of information on these customers,” says Pesin.

Life.SREDA currently has two funds and has invested in more than 20 start-ups, including digital or neobanks such as Simple, Moven and SumUp. The Life.SREDA I fund raised US$40 million and has seen seven successful exits from 13 investments. The Life.SREDA II Asia fund, which has already invested in eight start-ups, focuses on Asian fintech firms and those considering expansion in the region.

Another fund, targeting Malaysian investors, is awaiting approval from the regulators. Pesin hopes this can be finalised by the first quarter of next year.

“We will be looking for new companies [for the new fund] from Southeast Asia or companies from developed markets that want to enter the Asean market because we are positioning ourselves as some kind of gateway into this market,” he says. The fund will be open to accredited investors.