This article first appeared in Corporate, The Edge Malaysia Weekly, on June 27 - July 3, 2016.

FUNDING for financial technology (fintech) companies in Asia accounted for 32.6% of total global funding in 2015. Some US$4.52 billion of the total global funding of US$13.8 billion went to Asia, according to numbers compiled by CB Insights and KPMG (see chart).

“The spike is attributable to a notable rise in US$50 million or more fintech company deals, which included One97, Dianrong and BankBazaar,” say CB Insights and KPMG.

“After taking fewer than 10 US$50-million or more deals between 2011 and 2014, Asia saw 17 US$50 million or more deals to venture-backed fintech start-ups in 2015.”

Singapore-headquartered global venture capital fund Life.SREDA VC’s Vladislav Solodkiy is a fintech evangelist who is excited about Asia’s potential for innovations and disruptions in the financial services sector.

“The fintech wave may have started in the US and further refined in Europe but it is in Asia that the true potential of the sector is becoming evident,” Solodkiy writes in Life.SREDA’s Money of the Future report.

The twin giants of Asia — China and India — are taking the lion’s share of investments in fintech.

China is by a mile the giant in Asia-Pacific’s ecosystem in terms of deal size and number of deals completed. Domestic technology giants and start-ups there managed to scale by virtue of the sheer size of the population before growing outwards. Take Lufax — a China fintech giant valued at over US$19 billion — that received US$485 million in Series A funding in April.

India is the next biggest start-up ecosystem and certainly one of the region’s fastest growing.

According to FinTech APAC Landscape Developments, a report jointly issued by startupbootcamp FinTech and PwC, China has seen a total investment of US$26.4 billion in 1,728 fintech deals while India saw US$4.5 billion poured into 877 deals.

It is hard to deny that countries like China, India and Indonesia offer big opportunities thanks to their large population, proliferation of cheap smart devices and subpar banking infrastructure.

Apart from that, Asian hubs like Singapore, Hong Kong and Seoul have adopted pro-entrepreneur stances. What is more, legacy banks too are starting to invest in new technologies and initiatives in financial services.

“… you get a perfect storm of circumstance that is targeting needs beyond basic billing and banking services,” says Solodkiy, who has been named one of the world’s top 35 most influential people in fintech.

In the last two years, the spotlight has been on Southeast Asia. Singapore is the hub for fintech because it is a regional hub for financial services.

The city state has implemented friendly policies to foster innovations in financial services, and it is working.

Malaysia’s fintech is still some miles behind in terms of investor interest and maturity of start-ups. “A lot of the fintech start-ups here are at very early stages. There aren’t clear potential winners for venture funds to bet on. Maybe this will change soon but there will be a lag,” says a person familiar with the tech scene in Kuala Lumpur.

According to Solodkiy, Southeast Asia-based start-ups are entering an exciting time and Singapore sits at the epicentre of a diverse range of markets that hold plenty of opportunities.

Singapore is one of the gateways of the Asian financial market and is building a rich fintech ecosystem.

There are around 200 banks with total assets of US$2 trillion with operational headquarters in Singapore, according to the Money of the Future report. Crucially, the IT procurement budgets of those banks reached US$485 billion last year, according to the Asian business magazine Nikkei Asian Review.

Last July, the Monetary Authority of Singapore established a FinTech and Innovation Group. In May, MAS put out a regulatory framework for a “fintech sandbox” to encourage incumbent financial institutions and technology companies alike to come up with innovation in financial services.

Large banking groups like UBS, DBS Bank and Citigroup have also launched innovation labs and initiatives in the city state.

The Singapore start-up environment consists mainly of international entrepreneurs who aim to expand into the region or the globe, says the report by startupbootcamp FinTech and PwC. Last year, Singapore saw 156 funding deals worth US$773.3 million in the fintech space.

Indonesia, the largest Asean country by population, is of interest to fintech players who want a large market of underbanked and unbanked population in the region.

startupbootcamp FinTech and PwC’s report also points out that last year, Indonesia saw a 50% year-on-year growth in funding for fintech to US$63.8 million across 103 deals.

Regional fintech players and observers also point to Vietnam and the Philippines as two exciting emerging hot spots for fintech in Asean.

“Vietnam is increasingly on the radar because it has a relatively large population and banking services there are not quite mature. Best of all, it has a pool of young and competent tech talent,” says a tech industry observer.

In fact, Malaysia-headquartered 1337 Accelerator, headed by Bikesh Lakhmichand, is set to launch a fintech-focused fund in Hanoi by September.

In the Philippines, one Malaysia-based banker points out, there has been a rush to create fintech solutions for remittances and to widen the use of electronic payments. “Remittance from overseas citizens is a big part of the Philippine economy. So, there are opportunities there for sure,” he says.

What are investors looking at?

One investor taking a close look at Southeast Asia is Dymon Asia Ventures, which is part of Singapore-based Dymon Asia Capital. Led by Jinesh Patel and Christiaan Kaptein, Dymon Asia Ventures is a venture capital fund that focuses exclusively on investments in financial services.

Kaptein has his eye on fintech developments in Southeast Asia and beyond. “Southeast Asia is not at the forefront of technological development but more of business model innovation, so we still have to look at places like the US and Europe to see what could happen.”

But he says Dymon Asia Ventures’ approach to investing to fintech is to look more for the “‘fin’ that is enabled by ‘tech’”. “You have to start with the ‘fin’ part of it. If something is not solving a real problem or serving a real need with the right business model, all the tech in the world is not going to save you.”

This is important because what happened in the world of e-commerce and, to a certain extent, in financial services, is that a lot of start-ups were peddling solutions with beautiful user experience but did not have a business model that made sense.

“If the business model does not make sense, you are going to go out of business. Is there a real market you are addressing? Is there a real problem? Can you monetise?” says Kaptein.

Fintech and financial services is a rather wide landscape, spanning across things like payments, lending and insurance.

Kaptein is looking at online direct lending because globally, there is a clear trend towards online lending, either in the form of peer-to-peer (P2P) or balance sheet lending.

“The amount done on online lending in Southeast Asia is still miniscule compared with the total money lent. While in China, it is about 10%, in Europe and the US, it is about 2% to 3%.

So, Southeast Asia is fair and square behind. There is now an interesting opportunity to get into some of these markets,” he says.

The other areas that Kaptein is looking at are foreign exchange and block chain technologies. However, he is less inclined to invest in consumer payments companies. “I can see [technology giants like] Alibaba and Tencent being big in that space but that’s not a space we can play in.”

What then of Malaysia?

Malaysia appears to be a good mid-sized market with its population size of 30 million and a well-formed financial services sector. Is it attractive enough to make start-ups and investors bet on innovations in its market?

Internet marketing service provider Jirnexu CEO Siew Yuen Tuck notes that from an absolute perspective, Indonesia’s total gross domestic product and population size trump that of Malaysia and their Asean neighbours. “Some people want to build the largest business in absolute size and have a high tolerance for risk … then it’s Indonesia.”

Jirnexu’s business is in two parts, an online comparison site for consumer financial services products and a technology platform addressing the client acquisition and management niche. Its clients are banks, insurance companies and telecommunications companies. It has clients in Malaysia and Indonesia.

For Siew, tempting though Indonesia’s big numbers may be, he reckons it is not time to write off Malaysia’s potential for innovations yet.

This is because financial services are built on several foundations, chiefly know your customer (KYC) and risk assessment. “In Malaysia, while we are not the biggest market, we are a fairly stable and secure market and we have both of them in place. We have a very good national identity card system and a good risk assessment system built in — CTOS and the Central Credit Reference Information System.

“You can say, on the one hand, that there’s less space for innovation. True. But on the other, you can build on top of this to be innovative and provide services to customers that you cannot provide in other markets like Indonesia yet,” says Siew.

So, for Malaysia, will the business be as big as Indonesia’s in 20 years’ time? “Probably not but you can do a lot more today based on those foundations,” says Siew. 

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