Herston Elton Powers was stuck in a Jakarta traffic jam. As he gazed out through the car window at a sea of e-commerce billboards and professionals hailing scooter rides, he was reminded of China and India a few years earlier. It was at this moment that he realised “The new economy in Southeast Asia is going to be huge.”
At the time, Powers was with BNY Mellon advising pre-IPO companies considering New York Stock Exchange and Nasdaq listings. He had seen just how much companies could flourish amid dynamic market conditions, and he wanted to make a more direct contribution to their success.
The absence of pure fintechs among Southeast Asia’s unicorns suggested untapped potential. It’s this potential that lured him from banking to join Singapore-based venture capital (VC) firm tryb to invest in and support fintech startups.
Why fintech? Why now?
Powers views this as the right time to invest in early stage Southeast Asian fintech 1 as the region still has relatively low levels of digital payments, as well as limited banking, credit and insurance inclusion. At the same time, it has higher penetration of smartphones, mobile internet and other tech adoption metrics relative to other markets. He believes these conditions, combined with demographics and projections for continued high economic growth rates, make the outlook potentially even better than in China seven years ago.
Indonesia, Philippines, Singapore, Vietnam focus
While tryb is open to opportunities throughout the region, it focuses mainly on Indonesia, which has the world’s fourth largest population, at 271 million2.
Powers views the smaller Philippines market as having more attractive valuations and a VC ecosystem that is less competitive compared with Indonesia.
Despite its maturity and population of just 5.8 million2, tryb also sees Singapore as an important market, particularly for enterprise startups.
Vietnam is another core market, and the firm is also looking opportunistically at South Asia. In fact, it has uncovered a number of particularly interesting companies in Bangladesh.
Digital banks to address region’s inclusion issues
Having moved with BNY Mellon from New York to Hong Kong and then to Singapore, Powers observes that “Inclusion issues are so stark” in Southeast Asia. Many fintechs target large underserved or unserved markets such as banking for the unbanked, or lending to small- and medium-sized enterprises (SMEs). Powers expects digital banks to play a dominant role in banking inclusion. He forecasts that, within five to seven years, over half of customers opening their first bank accounts will open them with digital banks.
“Channelling” a key trend
However, in the meantime, Powers sees a lot of fintechs embarking on what he calls “Stage One” of their development. This entails entering a market segment that is expensive or difficult for traditional financial services providers to address.
Rather than setting up as a bank or insurance provider from the outset, Stage One involves focusing on customer acquisition. Then, in order to deliver the actual product or service, e.g. loans or insurance, the fintech partners with incumbents. This allows the startup to test the market, as well as to assess the feasibility of extending its operations to become a bank or insurance provider in its own right.
In this vein, tryb has invested in an insurtech called Maria Health that aggregates health policies from a number of providers for individuals and SMEs in the Philippines. Customers compare and shop for insurance plans on Maria Health’s website, but policies are issued by third party insurers.
Sharia-compliant SME financing marketplace ALAMI is another portfolio company that works with partners to address a gap; in this case in Indonesia. Despite being the world’s most populous Muslim country, Indonesia’s proportion of Islamic banking makes up less than 6%3 of the total, trailing far behind Malaysia’s 24%.3
Mobile payments winner yet to be decided
Another feature of Southeast Asian fintech is the large number of digital wallet providers, including Indonesia’s banks-telco-energy partnership Link Aja, and ride-hailing unicorns Grab and Gojek.
Powers points out that the Southeast Asian market is fragmented, unlike in China, where mobile payments are dominated by Tencent’s WeChat Pay and Alibaba’s Alipay. “That kind of market power doesn’t exist yet, so there are still many opportunities.” He sees Southeast Asia as being around seven years behind China in terms of digital payments.
Crying out for infrastructure
Powers also sees potential for early stage fintechs in areas where infrastructure is lacking or non-existent. For example, technology is badly needed to automate basic tasks such as matching payments on e-commerce sites to bank accounts.
Another area concerns liberating the tens of thousands of microfinance institutions and credit unions in Indonesia from a reliance on Excel or in-house-built solutions. Cloud and SaaS core banking-type technology would allow these micro organisations to function more effectively, and potentially expand their offerings.
Not just a job
In terms of Southeast Asia investment trends, Powers observes that overseas interest is rising as investors are finding it difficult to generate the high returns they were accustomed to in the Chinese and Indian markets.
Southeast Asia early stage fintech is the biggest investment opportunity that he sees.
“I’m betting my career on it.”
1The views contained in this article are those of Herston Elton Powers; not FinTech Fiends. The information on this site does not constitute financial or investment advice, and should not be relied upon for any purpose. FinTech Fiends will not be held liable for any reliance on content posted to this site.
2United Nations, Department of Economic and Social Affairs, Population Division (2019) World Population Prospects 2019: Data Booklet. Available at: https://population.un.org/wpp/Publications/Files/WPP2019_DataBooklet.pdf (Accessed: 10 August 2019)
3News Desk (2019) ‘Shariah-compliant fintech to improve financial inclusion’, The Jakarta Post, Jakarta, 19 February. Available at: https://www.thejakartapost.com/news/2019/02/19/shariah-compliant-fintech-to-improve-financial-inclusion.html (Accessed: 14 August 2019)