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Where is the world’s fastest growing market for financial technology? It might come as a surprise to learn that it is Asia-Pacific, a region where nearly three-quarters of the population don’t have a bank account. That void has enabled technology startups to flourish, fueled by the region’s young, mobile-first population. But this industry could be headed for a bust, as the coronavirus crisis exposes Asian fintech’s overreliance on a single business model – that of providing financial services to the unbanked.
In the past three years, Asia’s fintech sector has received $72bn from investors. In China, Ant Financial, which is a unit of Alibaba, now has a higher valuation than some of Asia’s biggest banks. Even companies that did not start out offering financial services have joined in. Grab, southeast Asia’s version of Uber, now also offers loans to its customers. Singapore e-commerce startup, Zilingo, offers loans to retailers on its platform. While Ola, the Indian car booking app, last year invested in an online lending startup.
Lending has been one of the most successful fintech business models, with millions of customers who previously had no access to debt financing now able to borrow money to set up a small business or even just to buy a motorbike for the first time. However, Covid-19 has cast a shadow over the world economy. The poor, especially those working in the informal sector, are disproportionately affected.
Companies that rely on providing financial services to this section of society, the so-called unbanked majority, face a daunting challenge as their business models are tested for the first time by a severe economic downturn. The coronavirus crisis has already triggered problems at a number of companies. Akulaku, an Indonesian online credit startup, failed to repay 5.1m in loans raised from investors on time. ClearScore, a UK company that offers online credit scores loans, was forced to shut its Indian business in April.
Others are managing the escalating risks by reducing loan sizes or fleeing to higher quality borrowers. Validus Capital, which provides invoice financing to SMEs in Singapore, Indonesia, Vietnam, and Thailand, said it stopped lending to some repeat customers. Funding is drying up too. In the first quarter of 2020, funding fell by almost three-quarters, far more than in Europe and the US. Even those that have raised money, such as Funding Societies, are suffering. The peer-to-peer lender has cut 18 per cent of its workforce.
For young growth industry that has yet to prove its resilience, such a drop-off in funding is a significant problem. As Asian governments try to lift millions out of poverty, distress in the companies that are trying to help risks a credit crunch for millions of small businesses and consumers. And while many will survive the crisis, it is clear that online lending in the region, until now one of the best funded and most hyped growth stories, has had a reality check.
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