By Kristie Neo
Southeast Asia has arrived at a crossroads at which it may borrow multiple influences from fintech ecosystems across the US, China and India, said Tilman Ehrbeck, managing partner at early-stage investor Flourish Ventures.
But how these fintech innovations are adopted and executed in the region will depend on macroeconomic and regulatory factors, including per capita income, how far a population is banked, and the local regulator’s stance on innovation.
The Reserve Bank of India’s (RBI) move to launch the unique identity system (UID) in 2010 was one key example of how a single piece of regulation had long-lasting repercussions on how fintech innovation may be shaped in a single market.
The move allowed entrepreneurs to build businesses around the UID, after which the RBI put together a United Payments Interface (UPI), which threw the doors wide open on how they could address fintech problems, spurring a multitude of innovation in the South Asian market.
This UID however, does not yet exist in Southeast Asia. As such, Southeast Asia fintech innovation has tended to draw more inspiration from China in the form of non-financial platforms or superapps like Grab, GoTo and others.
“Because Southeast Asia is relatively underbanked, there is this notion of finding entirely new ways to create financial services for consumers or for small businesses. This is why the non-financial platform play is probably most relevant in Southeast Asia as a region because of the demographics, per capita income and the low penetration of the traditional banking system,” explained Ehrbeck in an interview.
Ehrbeck added that Southeast Asia is also drawing inspiration from US-led fintech innovation, particularly in open financial data exchanges. The emergence of startups like Indonesia-based Brick, which develops APIs that make it easier for tech companies to add identity verification and access user financial data, is one such indicator.
“There are also lots of innovation happening in the API infrastructure space in the US which is private sector-led, with no top-down government or regulatory intervention. That might be what is going happen in Indonesia and the Philippines,” shared Ehrbeck.
US-headquartered Flourish Ventures is a fintech venture investor which was spun out of the Omidyar Network in 2019 with a portfolio of $200 million already built and a fresh commitment of $300 million. Roughly half of the fresh capital committed at spin-out has been deployed.
Flourish focuses a range of areas including neobanks, insurtech and embedded finance. It has a global portfolio of around 65 companies, of which roughly 25% are from emerging markets including India, Bangladesh, Indonesia, and Singapore. Some of its Southeast Asian portfolio companies include Grab Financial, Qoala, Tanihub and ShopUp.
Edited excerpts from an interview with Ehrbeck:
You have a small but pretty sizable emerging Asia portfolio, particularly in India. How did you get started there?
We started in India. I had been there for about five years, so I had a pretty strong network and knowledge of the market. When I was there, India was considered the backwaters in the global financial innovation space. The RBI was very conservative, and it was very much a bank-led system. There were a lot of the early fintech innovations that happened elsewhere like East Africa with the rise of the cell phone and mobile which India completely missed. But then India catapulted itself to the forefront when the government made a series of investments in public digital infrastructure beginning with Aadhar which is the unique identity system (UID).
The UID didn’t just create a digital identity that was universal. It meant that businesses could layer on top of the UID, for example, using it to follow Know-Your-Customer (KYC) requirements for compliance purposes. And then India put together the United Payments Interface (UPI) as a public utility with an open architecture design. This created enormous opportunity.
So, around 2015, we started making a series of hypothesis-driven investments in India around digital credit and insurtech because there was a real opportunity.
For instance, we invested in a wealth manager called Scripbox. Aadhar and the India digital infrastructure allowed them to crush the signup and onboarding costs by some 95% which made their product dramatically cheaper, allowing first-time investors and smaller savers to access the market. That’s the type of stuff that we like – when the combination of technology, behavioural insights, new data sources creates new value propositions that are dramatically better than what was previously feasible.
What about the Southeast Asian market?
Southeast Asia is an interesting region. Compared to India, Southeast Asia has higher per capita income, higher cell phone penetration and mobile internet access, but it’s less banked than India. India has this tradition of state-owned banks, as well as innovations by mass-market retail banks like ICICI Bank, and HDFC.
Because Southeast Asia is relatively underbanked, there is this notion of finding entirely new ways to create financial services for consumers or for small businesses. This is why the non-financial platform play is probably most relevant in the region because of the demographics, per capita income and the low penetration of the traditional banking system.
We are very interested in the region. I spent a good chunk of my time in 2019 in-person in Southeast Asia and we actually had plans to open a physical office in Singapore in 2020, but those had to be put on hold due to COVID. We are still new to investing in the region, so we typically invest alongside other investors which are often general VC firms.
What we bring is the financial sector expertise and learnings from other markets. We typically invest in the early stages, which could be seed, Series A, sometimes Series B for our first cheque. We have not led deals yet in the region, because we need to get comfortable first, so we are slowly building our portfolio and network.
India’s UPI system was a clear impetus for you entering India. But we’ve not yet seen anything similar happening in Southeast Asia. How does that change the way you pick the kind of investments that will work well here?
Yes, so that’s why we have this hypothesis that while India is poorer on a per capita basis, its financial sector is very much a standalone, separated from commerce.
India’s policy and regulatory stance has also meant that standalone financial sector innovations and fintech startups can be big in their own right because they have an enabling public infrastructure and policy regime.
Many of the emerging Southeast Asian markets like Indonesia, the Philippines and Vietnam don’t have that. That’s partly why we think that this notion of embedding finance in non-financial platforms might be particularly relevant in Southeast Asia.
The region has already seen this growth of platforms with large numbers of daily users, and the rise of the superapps associated with that. They have this ability to say – we have these large numbers of active daily users who trust our brand, and for whom we play a meaningful part in their lives.
These firms have an in-built distribution network, an ability to design products, and they can do things that the traditional banking system just can’t do. So, this notion of embedded finance with non-traditional platforms, financial product plug-ins, new API-based infrastructure plumbing, is actually more relevant in Southeast Asia than other regions of the world because of this combination of income, incumbent market structure, and lack of public infrastructure.
There are some large fintechs like Grab Financial which have a really large front-end and will do certain things themselves, but smaller platforms will require the balance sheet of a traditional bank, or a traditional insurer with its reinsurance relationships, and the ability to connect all of those pieces. That’s also why we think you’re going to see more startup activity in the B2B fintech infrastructure space as well.
Have you seen any kind of business model innovation within Southeast Asia that you haven’t seen in India? Or do you think that Southeast Asia is still very much following what we have already seen in ecosystems like China?
I think if we stepped back and looked at 10 years ago, everybody was still looking at Silicon Valley for innovation. The market shift happened when emerging markets started looking at China for inspiration with the rise of Alibaba and Ant Financial, with WeChat, Pinduoduo, etc.
Our Bangladesh portfolio company ShopUp will say that their inspiration is Alibaba. The CEO would say “I want to have this iron triangle between e-commerce, logistics and financial services”. There’s a flywheel effect for the corner stores they serve when they supply them with cheaper merchandise and via superior logistics. Later on, they can then bring in bank partnerships and provide better payments or credit terms. Once you get this flywheel going, that is a very, very powerful value proposition for small businesses in the informal economy.
India has a very developed formal financial banking sector with a number of state-owned banks and private sector banks that are very dynamic. India also has a very sophisticated capital market that you can tap into as a non-bank lender.
That’s interesting because 10 years ago, India was looking at Africa and startups like Mpesa for inspiration. Do you think we can see new models could arise out of Southeast Asia?
I am pretty sure, and that’s why we are so interested in Southeast Asia!
I think Southeast Asia is now in this place where it can borrow elements from the US approach, for example regarding open financial data exchanges. In the US, there is also a lot of innovation happening in the API infrastructure space, which is private sector-led, with no top-down government or regulatory intervention. That may happen in Indonesia and the Philippines. Southeast Asia can then borrow pieces from the India experience, and it can borrow business model pieces from the China learnings.
Southeast Asia has big markets that are attractive enough domestically to come up with its own innovations. What they are exactly going to be, I do not know. That’s why we are philosophically a venture investor!
What about LATAM? How does it compare with Southeast Asia?
Latin America increasingly looks structurally more like Southeast Asia. It has relatively higher per capita income, but surprisingly low banking penetration, although this does vary from country to country.
Brazil, for instance, has a very traditional banking system that does not reach lower-income and mass markets. There are several startups there also looking to digitise the corner store for small business banking that traditional banks haven’t pursued – similar to what we see in Southeast Asia.
The Brazilian central bank and regulators are looking at India and would love to copy their UPI. Brazil just introduced a new instant payment system called PIX to enable this. So there’s a lot of exchange between global policymakers. We’re living in a flat world where a lot of successful ideas and learnings are travelling fast.