SEA fintech firms show strong growth aspirations amid funding challenges

By Digital News Asia April 6, 2018

Forty-five percent in Southeast Asia rely on self-funding
Talent and government support key to growth of the sector

SEA fintech firms show strong growth aspirations amid funding challenges

A STRONG 87% of financial technology (fintech) firms in Southeast Asia and a corresponding 73% in Malaysia are planning to expand their footprint beyond their current markets, according to the Asean FinTech Census 2018 study by EY, which surveyed 170 Southeast Asia-headquartered fintechs across 16 key subsectors, including payments, blockchain, money transfer, data analytics and robo advisory.

About three-quarters (77%) of the fintechs believe that they will be able to compete internationally, with 87% of the respondents planning to expand outside their home or current market in the next 12 months. Fintechs in Malaysia reveal a similar direction, with 73% of respondents planning to expand beyond their home markets. Outside of Southeast Asia, the preferred destinations for growth and expansion are the US, UK and China.

The survey also found that 61% of fintechs in Southeast Asia are planning to achieve revenue growth within the next 12 months as their immediate future goal, with 46% of the respondents expecting to achieve a compound annual growth rate (CAGR) of 30% for their revenue.

Funding challenges create growth barriers

Funding remains an issue for the fintech firms surveyed. With most of the firms in the earlier stages of development, more growth-stage equity and capital are needed.

However, over two-thirds (68%) of the respondents have a runway of less than a year to plan and raise funds for growth. In fact, 45% of the respondents rely on self-funding. While most (76%) of the respondents agreed that there are enough funding channels available, 52% still found it difficult to obtain funding on their own.

SEA fintech firms show strong growth aspirations amid funding challenges Shankar Kanabiran (pic, right), partner and Malaysia Financial Services Banking & Capital Markets Advisory leader at Ernst & Young Advisory Services Sdn Bhd explains: “As with most start-ups, fintech firms may find themselves limited by funding options. Venture capitalists and banks are often the first port of call for fund-seekers, although most will not take on the credit risk of companies with a track record of less than three years.

“That said, there are many incubator and accelerator programmes, and even government channels that fintech firms can leverage for seed funding. They should also look to access the wider network of business opportunities and investors who can help them to scale and be a source of funding too.”

In Malaysia, 19% of fintech firms believe there is high support from the government in terms of funding support, while 50% say there is medium or moderate support, and 27% indicate low support. According to the respondents, the government should make funding more accessible (43%), come up with more assistance schemes (29%) and have a wider range of criteria (29%).

Talent and government support are key to growth of sector

The study also revealed that fintech firms find talent shortages an acute issue, with over half (60%) saying that there was a lack of start-up or fintech talent in the markets they operate in. The skills gaps are in technology and software, product management, and sales and marketing. Most of the fintech firms are still relying on personal connections (57%) and recommendations (48%) to hire talent.

Respondents also believe that the government can do more to enable the growth of the sector, in particular, increasing tax incentives for angel investors in early stage investment (78%) and introducing policy reforms to make it easier to hire employees (78%).

Shankar comments: “Locally, all the Malaysian fintech firms surveyed say they have trouble hiring the talent to meet the needs and growth of the industry, with 73% saying that there is a shortage of fintech talent in the country. The top three areas of talent shortage for Malaysian fintechs are in technology and software (73%), sales (27%) and compliance (27%).

The availability of talent and skills needed to run fintechs at the different stages of their growth can make or break success. Governments play a vital role in shaping a conducive fintech ecosystem that helps to attract and develop the right talent pool, and promotes innovation, collaboration and healthy competition.”

Shankar adds: “Southeast Asia offers an attractive play for both fintech players and investors. Rapidly expanding economies; young, urban and digitally savvy populations; increasing mobile and internet penetration; and largely under-served small- and medium-sized enterprises and consumer markets have led to the rapid adoption of fintech innovation in the region.

Key to the success of fintech firms are access to customers and technology, and understanding the regulatory and compliance requirements. As such, it is important to help bridge the gaps between fintech firms, traditional financial services providers and regulators, by providing local knowledge on the market landscape, and the fund-raising channels and government support schemes available.”

In terms of regulation, 45% of Malaysian respondents have expressed that it is either moderate or difficult to conform to local financial sector regulations, while 75% have asked for more support from regulators and policy makers to assist fintech start-ups get off the ground.

When exploring a range of potential growth enablers which they believe will be most effective, Malaysian fintechs have identified three key areas: increased tax incentives (90%) for angel investors in the early stage; policy reforms (90%) that make it easier to hire employees, such as payroll reforms and skilled migrant visa; and government mandated open data protocols (open Application Programming Interface (API)) (85%).

“With strong growth aspirations in our local fintech industry that looks to expand beyond current markets, government support, policy and regulation are key to foster a sustainable and robust financial services ecosystem. In line with this, continuous dialogue with ecosystem players and the drive to push policy momentum further to ensure our financial markets remain competitive and secure are key,” concludes Shankar.