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Asia private equity 2024 preview: Fintech

As Asian fintech investment flounders, hopes for a rebound are pinned to technological experiments and partnerships with incumbent operators. Scaling potential will be limited by geopolitics.


Through a lens of large deal flow, investor confidence in private financial technology companies in Asia appears to have returned to pre-COVID levels. Four deals surpassing the USD 200m mark had been announced as of mid-December, according to AVCJ Research. This is well below 2021 and 2022 – which had 13 and 18 transactions, respectively – but on par with the five years leading up to the pandemic.

The tone was set across asset classes in the first half and more visible when taking in the broader sector. Combining venture capital, private equity, and M&A activity, KPMG estimated deal flow in the region amounted to only USD 5.1bn during the period, calling it the lowest level of investment in almost 10 years.

Much of the correction is attributed to weak demand in China and the regionwide emergence of regulations around data governance, data security, and privacy protection. The key determinant, however, has been macro malaise in the form of inflation, rising interest rates, and geopolitical tensions.

There appears to be a groundswell of optimism that many of these pressures bottomed out in October, setting up a more buoyant 2024. A resurgence in public markets led by the most profitable technology companies in the past two months has gradually begun to include fintech categories where reputations for sound unit economics are lacking.

Stock in NASDAQ-listed buy now-pay later (BNPL) giant Affirm, which has yet to achieve profitability, has rallied 127% since October, giving the company a market capitalisation of USD 12bn. The NASDAQ Fintech Index and the S&P Cryptocurrency Broad Digital Market Index have gained 20% and 50%, respectively, since the end of October. This is widely seen as reflecting anticipated interest rate hikes.

“With a 5% risk-free rate hurdle, a number of less profitable fintech business models were not viable. If rates come down again, growth will be higher on the agenda versus margin and profitability,” said Barnaby Robson, a China-based partner at KPMG focused on fintech. “But there are still a lot of questions about whether this rally is sustainable. The level of uncertainty is really quite stark.”

Logistics to SaaS

Relative hotspots based on recent momentum could include logistics and supply chain finance, as well as wealth-tech and various enterprise and consumer-facing models targeting cash displacement in developing economies. Blockchain could see its biggest strides in the tokenisation of real-world assets that could benefit from fractionalisation such as funds, real estate, and even diamonds.

There is also growing enthusiasm for concepts known interchangeably as banking-as-a-service or embedded finance, whereby merchants are roped into a network via a payment scheme and eventually offered additional financial services.

There is some scope for fintech companies acquiring banking arms to have balance sheets that allow them to pursue wider merchant acquisition. Early examples of this include Hong Kong’s WeLab buying Bank Jasa Jakarta in 2022. Robson said that some insurance tech companies are looking at similar moves but that it could involve fundamentally changing the way the acquiring start-up is valued.

Vertical software-as-a-service (SaaS) models – solving specific industry pain points, especially in commerce – are expected to see traction with a similar playbook. This essentially means building datasets about enterprise customers and thereafter being able to target those enterprises more efficiently with various services.

Everett Leonidas, Asia lead for Citi Ventures, sees vertical SaaS, cross-border payments, and real-time payments are the key growth segments for the near term. He describes all three as open playing fields unlikely to become winner-take-all opportunities.

“Focusing on what matters to customers and their willingness to pay is something that some start-ups may have postponed due to the prior funding environment,” Leonidas said.

“Now, as board members and shareholders are encouraging start-ups to focus on sustainability and durability, revenue and business models have to be more thought out. Those models are a product of the willingness to pay. I think that will be a big part of the evolution of this space going forward.”

Old and new

Total investment by the private equity and venture arms of traditional banks in Asian fintech companies comes to USD 442m to date in 2023. This is down significantly from 2022 (USD 698m) and 2021 (915m) but on part with 2020 (USD 428m). Nevertheless, bank-owned VCs have consistently represented about 60% of annual Asia fintech investment and this isn’t expected to change.

“We’re seeing more collaboration between digital native companies and incumbents,” Leonidas added. “That is happening in Singapore with the digital banking licenses, in Indonesia with traditional bank partnerships, and in India with NBFC partnerships. Incumbents and fintechs will drift closer together, moving innovation from the edge to the core of financial services.”

Artificial intelligence (AI) is set to be a core part of these collaborations. Large banks need to clean up their data lakes to make them usable in the most interesting AI applications. In the meantime, customer experience optimization will be the main use case.

These experiments will be carried out during a period of geopolitics-driven consolidation. The effect will be accentuated in industries like payments where there’s less appetite to fund loss-making businesses. In areas such as retail payments, many markets appear likely to boil down to two or three big players.

“The industry has to rethink potential outcomes with fintech companies based on deglobalisation. The macro backdrop means a rise in prominence of national champions, which impacts your thesis in terms of players that can go global,” Robson said.

“There was a period when there were expectations that Chinese payment giants would dominate the Southeast Asian payment market entirely. However, due to the presence of implicit support for national champions, the landscape has evolved, leading them to adopt a partnership approach instead.”