Fintech: A year of ups and downs for fintech players

This article first appeared in Wealth, The Edge Malaysia Weekly, on December 27, 2021 - January 09, 2022.
Fintech: A year of ups and downs for fintech players
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For most fintech players, the difficulty of navigating 2021 was lessened by the experience that they had gained in the investment space the previous year. The “2020 playbook”, as they call it, has served them well. 

In fact, some of these players reached — or almost reached — the RM1 billion assets under management milestone. Others introduced new products or are lining up significant deals for 2022.

Of course, they were still hit by the pandemic and other events. Peer-to-peer (P2P) financing player Funding Societies, for instance, saw its performance vary alongside the implementation and lifting of Movement Control Orders. Digital investment manager (DIM) StashAway was impacted by China’s crackdown on tech companies, while equity crowdfunding (ECF) platforms saw some sophisticated investors tightening their purses.

They do not expect the risks to disappear anytime soon. But they are encouraged by investors’ interest for new, unique products, while the ongoing digitalisation trend bodes well for these fintech players.

A few things of note this year include the introduction of apps that have enabled users to invest in money market funds digitally. Versa, a digital cash management platform launched in partnership with Affin Hwang Asset Management, went live in January. Touch ’n Go launched GO+ in March, enabling its e-wallet users to invest via the app.

Meanwhile, MyTHEO launched the first environmental, social and governance (ESG) DIM portfolio in Malaysia, and MX Exchange became the newest digital asset exchange in August.

In November, micro-investing platform Raiz introduced Raiz Reward, a cashback programme that provides ­users with cash rewards when shopping with the start-up’s brand partners. The cash rewards would then be invested in the markets.

Wealth speaks to several of these players to get their thoughts.


P2P: Being more selective

Peer-to-peer (P2P) financing platform Funding Societies Malaysia started off 2021 with a strong quarter as businesses were reopening following the loosening of the Movement Control Order (MCO). But then, the Delta variant struck, and the company had to stay cautious for two quarters before coming back strongly in the fourth quarter when the strict measures were lifted.

Despite the ups and downs, co-founder and CEO Wong Kah Meng observes that it was still manageable compared with the year before.

“We had the playbook from 2020. That was probably the toughest year because nobody knew what was going to happen. We were able to move much quicker in 2021 to react to circumstances,” says Wong.

Since P2P players serve small and medium enterprises (SMEs), they are exposed to almost all economic sectors. The SME Association of Malaysia has warned that many SMEs, especially those in the retail and food and beverage sectors, are in dire straits due to the prolonged MCO. However, there have also been SMEs that have thrived.

“Some SMEs thrived because they dug into their entrepreneurial spirit and were resourceful in figuring out their customer distribution issues and pivoted accordingly,” says Wong.

But this meant that the P2P platform had to be more selective and identify the SMEs that would perform. Wong did this by working with partners such as Lazada and foodpanda, and changing Funding Societies’ credit underwriting model.

“The edge that we have from working with partners is that they would give us the most updated information on the performance of a particular retailer on their platform,” he says. 

Adjustments to the credit underwriting model, which began last year, have been targeted mainly at traditional SMEs without a digital footprint. “They provide us with information that is paper-based and outdated by a couple of months. For instance, financial statements are produced with a delay, and auditors are taking longer to complete the process because of lockdowns,” he says.

Basically, there is a lack of real-time information, which is important for the P2P player to conduct its due diligence. “We have had to make adjustments to how we think a business will generate cash flow going forward, how the industry will fare and what is their ultimate repayment capability,” says Wong.

Still generating returns 

Close to achieving RM1 billion in P2P financing disbursement in Malaysia, Wong hopes that Funding Societies can reach that milestone in the year ahead. Default rates have remained stable at around 3% and the returns have been in the mid-single-digit range. 

The number of notes funded through the platform rose by 48% as at November. These notes were tied to transaction-related activities for growth or bridging purposes.

“In terms of relief funding, we are trying to speak to the government and agencies to work with them to channel these funds towards SMEs. But that is still an ongoing conversation,” says Wong.

“We are doing this because a lot of SMEs that apply for financing from us don’t have business loans or an existing relationship with banks. So, the relief funding from the government (disbursed through banks) may not reach the underserved SMEs.”

On a side note, as more SMEs are pressured to go digital after the pandemic, P2P players will benefit because they can leverage digital information — such as an SME’s performance on an e-commerce platform — to provide financing, says Wong. The risk factors that they will have to watch out for next year is another wave of Covid-19 and the ending of banks’ loan moratorium to SMEs.


DIM: Covid-19 not the only risk

When 2021 rolled around, the economy was reopening, Covid-19 vaccines were around the corner and then US president Donald Trump was leaving office.

“We thought that the risks would be reduced,” says Wong Wai Ken, country manager of digital investment manager (DIM) StashAway. “But it turned out that the overall risk still remained the same.”

The threat of Covid-19 remained as the Delta variant swept the world, which also resulted in supply chain bottlenecks. More recently, inflation has been a top concern. 

“People are trying to time their exit from the market because equity markets had a decent run in 2020. In Malaysia, the index has been flat, so we see people trying to diversify their holdings,” says Wong.

Overall, however, he did not notice Malaysian investors changing their behaviour that much. The number of investors on the platform remained steady, he adds. The platform was also constantly educating investors about the importance of long-term investing.

“The negative narrative will always be there. If it’s not Covid-19, it’s inflation. Before that, it was things like the inverted yield curve and a big tanker ship being stuck in the canal. There’s always going to be something. If people can cut off the noise and invest for the long term, they can ride through it,” he says.

It was not easy for the DIM to ride through 2021, but it was not as difficult as 2020, says Wong, since it already knew what to expect. Since its inception in July 2017, its portfolios’ annualised performance had ranged from 3.5% to 12.7% (as at October 2021), depending on the risk index. 

In anticipation of new risks, a portfolio re-optimisation was done in July to protect investors against inflation. Other than moving into inflation-protected assets, it also maintained or increased its exposure to China technology companies.

Unfortunately, the latter was the source of another challenge for StashAway. These counters were badly affected when the Chinese government cracked down on major tech players in the country and imposed new regulations. However, Wong remains confident in the potential of China technology companies.

“It has been stabilising in the last couple of months, and regulators in China are now making the right moves to assure the capital markets. We still have a lot of conviction in this theme,” he says.

The Chinese government is hoping to onshore its semiconductor supply chain and catch up in developing technologies related to electric vehicles, for instance. 

A huge milestone that StashAway achieved in 2021 was reaching US$1 billion in assets under management across five countries. It also launched in two new markets this year and introduced a technology thematic portfolio. 

Going forward, inflation will remain a risk, but the re-election of Jerome Powell as the US Federal Reserve chair will introduce some stability to the markets, Wong believes. Covid-19, meanwhile, will likely continue to influence markets.

“We will continue to grow because we are still small compared with the industry. There are a lot of interesting investment opportunities to offer. But whatever we introduce, we want to make sure that we add value. We want to give people a curated offering that has been considered from many angles and that people are comfortable investing in for the long term,” says Wong.

He is looking at environmental, social and governance (ESG) portfolios, for instance. But it will have to be done carefully to avoid greenwashing, he adds.

Another area that StashAway is exploring is offering an alternative option to pension contributors. “We have already gained some ground in that DIMs can offer pension retirement schemes, but we will move towards looking at the regulations now and operationalising it,” says Wong.


DAX: An exciting year for digital assets

Several cryptocurrencies had surged to record highs in 2021. Non-fungible tokens (NFT) became all the rage, a bitcoin-linked exchange traded fund (ETF) was launched in the US, and crypto play-to-earn games took the world by storm.

Malaysians were also in on the trend. Luno, the first digital asset exchange (DAX) here, has accumulated over RM1 billion of digital assets and 371,000 active customers since it launched in 2019. In 2021, it had processed over RM12 billion worth of payments, according to country manager Aaron Tang.

As at October, Luno had over nine million customers globally and in the last year alone, it added 3.6 million new customers.

The hype around cryptocurrencies was already there in 2020, but this went up a notch in 2021, says Tang. “We saw a lot of big names and institutional investors lend their support to this asset class. Back in 2016, crypto was still very retail-focused. The market has matured so much since then, and we can see regulations being created around cryptocurrencies.”

Of course, there are countries like China which have banned cryptocurrency transactions. This announcement led to a sharp drop in cryptocurrency prices. “But then the market has recovered. Apart from that, you see El Salvador becoming the first country in the world to make bitcoin a legal tender,” says Tang.

These developments have forced investors to seriously consider cryptocurrencies as an asset class, he believes. “If we talk about the adoption curve, we’re crossing into the early majority segment already. We’re past the innovators and early disruptors.”

But with record-high prices come volatility as well. There have been times when famous individuals like Elon Musk have influenced cryptocurrency prices drastically with a single tweet. 

“It works both ways. Higher volatility means it can also go up. I think, over time, if more capital comes into the space, we may expect that volatility to decline,” says Tang.

In Malaysia, cryptocurrencies are still mainly a retail play. Tang isn’t sure if there have been huge fund managers who have committed to this asset class, but he is confident that it could happen. Introduction of products such as a bitcoin ETF, for instance, could make a huge difference.

“It makes it very easy for people to invest. It could also be a mutual fund that invests in cryptocurrencies locally. Over time, as the infrastructure improves, institutional investors will get more comfortable,” Tang asserts. 

Will Luno consider introducing these products? “Definitely. We are constantly trying. We have received interest and spoken to parties. This needs to be discussed with regulators. But it’s something that we hope to grow,” he says.

On the other hand, NFTs have taken off in Malaysia. Many artists are selling their artwork through NFTs to investors. Whether this has directly led the NFT buyers to cryptocurrency investing is unclear, but Tang believes that it has contributed to more understanding of the asset class.

“For instance, people can understand NFT better than something like decentralised finance (DeFi). NFTs are like a digital form of a highly valuable art piece. But unless you have a more technical or finance background, you might find it harder to understand DeFi. NFTs have done a good job in sparking retail interest in cryptocurrencies,” he says.

The interest in crypto assets is likely to continue, Tang adds. Malaysian investors want more products, and this is something that Luno hopes to support with regulatory approval. 

“As for the application of crypto assets like play-to-earn, we’re seeing a lot of interest in this. I do see that in 2022, it may expand to learn-and-earn or other avenues where cryptocurrencies are used to incentivise real-world behaviour,” says Tang. 

The company also plans to double down its efforts on education and localisation next year. For instance, there will be a Malay language version of the platform, content and roadshows, he reveals.


ECF: Gearing up for bigger things ahead

Investor appetite for start-ups on equity crowdfunding (ECF) platform Leet Capital in 2021 was evenly split between those who could not invest due to the pandemic and those who were eagerly looking for deals.

The latter included the sophisticated or angel investors and retail investors, observes CEO Bikesh Lakhmichand. These investors also expressed interest in supporting green companies. In full circle, an influx of such companies were approaching Bikesh to raise funds on the ECF platform.

“We now have two companies [fitting this criteria] lined up for fundraising. They want to raise big amounts,” says Bikesh.

One of these companies is Green Lagoon Technology Sdn Bhd, which turns biogas into energy. The company actually raised funds via ECF platform in 2016 and had a successful exit in 2019. Now, they are hoping to raise RM15 million via Leet Capital.

Incidentally, the Securities Commission Malaysia (SC) increased the upper limit for ECF fundraising from RM10 million to RM20 million per issuer in the revised Guidelines on Recognised Markets this year. “This (Green Lagoon) will be one of the biggest fundraisings ever on an ECF platform in Malaysia,” says Bikesh.

Another company that he is excited about is a family business involved in wooden furniture. However, its holding company is an unlisted public company and could not raise funds from ECF before this. Again, this changed when the SC expanded the scope of eligible ECF issuers, which was gazetted in November.

“The next generation took over the 28-year-old business, and he’s very into sustainability. He wants to create a zero-waste factory … This will be the first unlisted Berhad that we want to put on our ECF platform and raise from the crowd,” says Bikesh.

The company wants to raise funds via ECF because it wants to tap the crowdfunding power of retail investors, he adds. “Retail investors are a bit more woke, and they want to put money into things that matter. In ECF, retail investors become your ambassadors and customers.”

In 2021, Leet Capital still managed to get around 500 new, fully verified investors and 80 issuers who officially stated their interest to raise funds. These are good numbers for the platform, according to Bikesh.

“I think next year is going to be a substantial one for SMEs to raise funds. The fact that you could survive the pandemic shows that you are a well-run company,” he says.

“We’re already seeing interesting companies coming to us. We are eventually trying to list a company by a group of doctors who built a queuing system for their clinics. They got a contract to run the vaccination service that gave them an influx of cash. Now, they’re expanding the company to do other things. We’re going to start seeing more people think bigger.”