GTR speaks with those at the coalface of fintech in Asia Pacific, to discuss some of the most interesting events and trends in the industry over the past year.
Let’s get digital
Online lending is not a new thing, but it continues to dominate the fintech and digital banking space in Asia. In conversations with bankers throughout the region this year, there’s a wariness that the underbanked SME market is being picked off by nimble online lenders, which are able to provide quick decisions on loan approvals and which have higher risk appetites than traditional banks.
In China, the statistics for the online lending space are staggering. A Peterson Institute for International Economics (PIIE) study from last year found that “outstanding loans exploded from a paltry Rmb26.8bn (US$4.3bn) in 2013 to an eye-watering 16 times that amount, Rmb440bn (US$71bn), only two years later”. But, as the report also points out: “All numbers tend to be big in China’s financial sector.”
Sometimes, it is difficult to grasp just how significant the penetration of online banking is in China and Asia. There are 700 million Chinese people using popular payment method WeChatPay, but much of the evidence cited is apocryphal. Recently, GTR heard a tale about somebody trying to buy a few limes using cash in Beijing, but they were turned away as the fruit monger only accepted WeChatPay. Anecdotes like these demonstrate how penetrative online banking has become in China. It’s quite clear that the market is booming.
Patrick Lynch is the CEO of First Circle, a Manila-based company that matches investors’ money with SMEs that need capital using an online platform, providing trade finance facilities and making money off the risk that they inherit.
“We are a direct lender. We have off-balance sheet debt. We earn primarily from the risk, we charge a client one price and pay lenders a different price. Our ability to select between the group of applicants is ultimately what gives us the spread. We’re mutually incentivised with our debt investors, which is fundamentally different from a peer-to-peer (P2P) platform,” he tells GTR.
Lynch describes a “leapfrog effect” that he can see taking place in Southeast Asia, where consumers and small businesses are bypassing traditional banking channels and going straight to digital. In the Philippines, for instance, only 25% of people have a current account and the vast majority of those who don’t have one are unlikely to ever enter a brick and mortar bank any time soon. “In Europe, a bank account is on offer to everybody, so the proposition of a mobile wallet is not very compelling. But if it’s not available to you, it is compelling,” he explains.
The astonishing reports of the rise of online lending in Asia (China in particular) are often accompanied with a warning: it is rarely regulated as tightly as mainstream banking, nor is it monitored as closely. For Lynch, there are parallels to be drawn with the sub-prime mortgage crisis that helped usher in the global financial crisis.
“We see a lot of P2P, which is much easier to set up, you don’t have this inherent requirement to go through as many loan cycles to raise capital. Retail investors are less knowledgeable in what they’re investing in. When there’s a 12 to 18-month loan tenor it’s difficult to determine how effective the underwriting models are at determining credit risk,” he explains.
“In the short term that mightn’t be a problem. It’s only when you think of scale that having proven credit models becomes important. If you think about China or Southeast Asia, we’re at the end of a long credit supercyle. There hasn’t been any macroeconomic event that has put these P2P underwriting models to the test. As soon as one or two of them start showing cracks, it’s like a run on the banks. Once you have one or two cracks, investors will get very sketchy about all of them, and their liquidity will dry up and I think they’ll have very significant funding problems.”
The rise of the factors
Factoring is still considered a dirty word in parts of Asia, according to some of those spearheading its nascent rise online through the region. One source describes how loan sharks in China quickly rebranded as online factors as a way of legitimising their business. Others talk of the cultural challenges of offering legitimate factoring services online.
“There’s a stigma around factoring in Asia,” says Brian Teng, CEO of InvoiceInterchange, a Singapore invoice financing and factoring company. “A lot of business owners think their customers will think negatively of them if they use factoring or invoice financing. They think the customers will feel their backs are against the wall: it’s a last resort that you would sell your invoice. That’s the perception some Asian businesses have. But as the mindset changes people are becoming more aware and acceptant of this as just another financial tool to help them run their businesses better, to take away the pain of waiting to get paid and focus on growing their business.”
There’s now an awareness that there’s a massive gap in Asia Pacific and firms are racing to fill it. UK-based Stenn Financial launched a US$300mn fund to offer invoice financing in Asia late-last year, telling GTR at the time that it is facing little or no competition from the banking sector, because they simply aren’t interested in the smaller side of the market.
This is a point reiterated by Pawel Kuznicki, CEO of Singapore-based Capital Match, another online platform that has done S$45mn in invoice financing and factoring since launching in 2015. He tells GTR: “Banks in Asia aren’t really doing factoring or invoice financing anymore. OCBC closed three years ago. UOB we haven’t seen much. Maybank is not doing any, DBS does a bit. But in the SME space they’re not doing much.”
He says that the main competition comes from Bibby Financial Services, a larger competitor, from which Capital Match is winning customers with regularity, due to what he perceives to be Capital Match’s higher flexibility and speed of doing business – somewhat ironically, the reason why non-bank lenders such as Bibby often win business from traditional lenders.
The competition is becoming more fierce, with online platforms popping
up on a near-weekly basis. Factoring’s penetration remains low in Asia, but at this rate, it won’t be long before the online market reaches saturation point.
Blockchain: the granular approach
You knew this was coming, but Asia Pacific has without doubt been home to some of the greatest innovations using distributed ledger technology (DLT) to date. You’ll read more later in this piece about the good work being done by the Monetary Authority of Singapore (MAS) in nurturing innovation there, but we’d like to focus on something slightly different to the trade finance proof of concepts that have dominated the year.
GTR has focused before on blockchain’s use in track and trace and in the physical supply chain, where it is being used to improve provenance and efficiency. The agricultural supply chain is particularly suitable for DLT technology, says Emma Weston, who founded the hotly-tipped AgriDigital start-up in Sydney, which brings “transparency, efficiency and trust to farmers and the post-farmgate ecosystem”.
She explains: “Blockchain has the potential to radically transform many industries. However, the nature of agriculture, being highly paper-based with multiple participants needing a view in to the same, verified information about the provenance of a commodity, in many ways makes it naturally suited to blockchain.”
AgriDigital is a commodity management solution for the global grains industry. Companies such as Skuchain are doing interesting things with the agri supply chain in the US, while cotton tech company The Seam is trialing a blockchain solution that could be used industry-wide, but we’ve not come across too many solutions which are ready to use commercially. When AgriDigital launched in August 2016, it did so with the backing of six of Australia’s largest grain buyers and exporters on board. More were being on-boarded ahead of the harvest in September.
Weston adds: “As far as we are aware, no other provider offers the ability to transact using a single platform the entire way down the supply chain. There are some incumbent players in the space providing customised enterprise solutions, however these tend to be closed networks and at a largely inaccessible price point. We are seeing the rise of some state-of-the-art, on-farm technology solutions alongside AgriDigital, and this is great for the industry. Our blockchain pilots are industry leading in agriculture. Last December we executed the world’s first settlement of a physical commodity on a blockchain.”
This is a rapidly developing space. Along with the deluge of “firsts” and commercial applications on the financial supply chain, we’re expecting to see more companies like AgriDigital exploit the need for security and transparency in Asia Pacific’s physical supply chains over the next year.
Government is good
It’s no coincidence that the most successful fintech companies and industries have sprung up in the places where governments have been most supportive. Look at Singapore, which is the world leader in trade digitisation. Its latest initiative to get tongues wagging is Project Ubin, which was launched late-2016 but which looks set to develop very quickly over the coming months, sources tell GTR.
The project will see MAS, the Singaporean central bank, facilitate interbank payments using blockchain.The successful conclusion of a pilot in March involved bank blockchain consortium R3 and Deloitte, while phase two will see new methods to conduct cross-border payments using central bank digital currency.
Each of the companies spoken to for this article praised the environment their respective governments created for fintech companies to grow in.
Teng at InvoiceInterchange describes the situation in Singapore: “It helps a lot that the government is backing fintech companies. It’s been a good experience for us so far. It’s clear and efficient with regards setting up a company and finding information on how to navigate administrative issues. There are plenty of accelerators and interest from banks in the space willing to collaborate. Government grants help as well.”
Hong Kong is playing catch-up to an extent, but is, for the time being, Asia’s second hub of fintech behind Singapore. The recently launched Hong Kong Fintech Association has backing from both government (through the HKMA) and industry. Musheer Ahmed, a director of the association, tells GTR: “The HKMA is pushing blockchain, regtech and lots of other areas, with co-operation from the government. With blockchain you can support trade and the finance industry, there will be lots of support for it. I see them pushing through this.”
Lynch at First Circle in the Philippines says: “There’s a new [central bank] governor, [Nestor] Espenilla, who’s very forward thinking on fintech and the need for regulation to be at pace with innovation in the sector, which the central bank regulates. He’s just come in for a seven-year term. Over the course of that I would expect the Philippines to become the leading regulatory environment for fintech, perhaps second only to Singapore.”
Of developing fintech in Australia, Weston at AgriDigital says: “In comparison to other jurisdictions, Australia fares pretty well. Australia has a thriving fintech community, supported by government-funded organisations like Fintech Australia. The Australian blockchain community is a global leader and we are very fortunate to have this expertise on our front door.”
Governments come in for a lot of flak for regulation, red tape and holding trade back. But in the case of Asia Pacific fintech, they are an absolutely vital cog in the machine.
