SOUTH-EAST Asia’s fintech models are now moving to specialisation over commoditisation, a report by venture capital firm January Capital indicated.
This comes after the proliferation of fintech services, such as payment systems and lending applications, which has produced significant fragmentation for merchants.
The firm noted that more companies in South-east Asia are embedding fintech in their services to meet user needs and increase their share of customer spending.
“Over the past few years, core fintech infrastructure has become very commoditised, so the focus has shifted to specialisation and verticalisation,” Zennon Kapron, director of fintech research and consulting firm Kapronasia, told The Business Times.
“The fintechs that are winning are the ones that provide very niche solutions for specific verticals or use cases,” he added.
Cryptocurrency has become the centre of attention for most fintech infrastructure vendors, while new payment methods such as embedded finance, alternative lending and buy now, pay later models continue to emerge, said Su Lian Jye, chief analyst at technology research and advisory group Omdia.
He also noted that fintech vendors are increasingly incorporating various artificial intelligence (AI) solutions into their offerings, mainly for customer care, security and compliance, fraud detection, credit rating, and loan approval.
For instance, generative AI enables fintech vendors to “create more human-like conversational AI for better user experience and enhanced customer retention”, Su told BT.
January Capital found that fintech has been one of the biggest contributors to the venture capital deal count in Asean over the past six years, and made up 13 per cent of the total deal count in the first half of the year.
Fintech is the top sector for venture capital funding in Asean, comprising 27 per cent of total capital invested.
However, pre-money valuations at early-stage investments have fallen across most sectors, with fintech clocking the second-highest material declines of 14 per cent at the seed stage and 39 per cent at the Series A stage.
“The economics have changed dramatically from the heady near-zero interest rate environment we saw over the past few years in venture capital. From funding data and recent raises, we can see that fintech continues to be a focus for venture capital,” said Kapron.
Su noted that for fintech startups in South-east Asia, funding is always the main challenge – so they need to be very differentiated.
“To receive significant funding, they are expected to have brilliant business models that are profitable and scalable. At the same time, these startups face a less sophisticated population in digital finance. We also cannot ignore macroeconomic factors like the seemingly looming recession threat and inflation,” he added.
“The challenge for any fintech today is scale… To scale, it needs to have a very tight market fit and rapid uptake in that particular focus area,” said Kapron.
Whether the market can support these fintechs is another matter, and he noted that there are signs of strain with the big names.
“In Singapore, we are starting to see strain at even some of the region’s most well-known fintechs, but it could still be some time before we can tell if they can survive in this very different funding environment,” added Kapron.