Tilman Ehrbeck is Managing Partner at Flourish, a global venture capital investment firm. He is based in Washington, DC
When COVID-19 first struck a year ago, start-up entrepreneurs and early stage investors paused briefly to assess what the pandemic could mean for the burgeoning theme of fintech innovation. Rather than threatening new financial business models, the pandemic has driven the future forward, dramatically accelerating changes in customer behaviors and industry structure in Asia and beyond.
What was previously expected to happen over the years was accomplished in a matter of months. And with new data showing finance volumes for fintech companies hit record highs in the first quarter of 2021, I think we’re entering an accelerated phase of innovation in finance.
This has the potential to produce better outcomes for consumers and small businesses around the world – and I expect it to be shaped by three related themes that have demonstrated their importance over the past year: platforms, plug-ins and plumbing.
These themes should be at the heart of an increasingly robust funding environment for fintech. Investments in the sector slowed during the initial uncertainty surrounding the pandemic, but picked up late last year and rebounded in the first three months of 2021. According to CB Insights, fintech companies have lifted nearly $ 23 billion in funding in the first quarter. 2021 – more than half of the total funding they attracted in 2020. Asian fintechs attracted $ 3.7 billion in the first quarter, compared to $ 1.9 billion in the last three months of 2020.
Integrated finance, or the integration of traditional retail financial services into platforms that millions of people use daily, has gained momentum during the pandemic. Start-up entrepreneurs and early stage investors have redoubled their efforts in this area and – judging by the multitude of recent news – more advanced investors and public stock markets have taken notice.
Integrated finance has three key elements. The first concerns platforms that are relevant and useful for people’s daily lives during the pandemic: the workers’ platform that creates income opportunities, the e-commerce platform that delivers products to neighborhood stores, Agri-food supply chain networks that connect the farm to the food plate. and social media platforms that help people stay connected.
Platforms like these naturally integrate digital payments. They have a rapidly growing number of users, often requiring solid trust and commitment. Importantly, they also generate proprietary data and insight into user needs and behaviors, allowing them to expand into financial services other than payments.
When Grab announced its intention to go public through a merger with Altimeter Growth, a Nasdaq-listed special-purpose acquisition company, it highlighted its integrated financing plans as one of the three priorities and opportunities on the rise. The proposed merger, worth nearly $ 40 billion, is the largest PSPC deal to date and would be the largest share offering ever made by a Southeast Asian company.
The deal has attracted more than $ 4 billion in new parallel funding from renowned investors like BlackRock and T. Rowe Price, as well as sovereign investors like Temasek of Singapore, Mubadala of the United Arab Emirates and Permodalan. Nasional Berhad from Malaysia.
The second component of integrated finance is the plug-in products that take advantage of these popular platforms’ high engagement, payment transaction data, and other customer information. With these plug-ins, platforms can deliver a broader, more personalized, and often less expensive set of financial services than was previously possible for or available from traditional providers – especially new forms of credit or insurance.
The most visible example today is buy-it-now credit in e-commerce, which is often subsidized by online merchants who wish to stimulate consumer demand. Due to strong volume growth over the past 12 months, the CEO of Australian AfterPay has publicly considered a US stock exchange listing following a similar move by US competitor Affirm in January. Although it has been less important so far, a strong momentum is also developing behind the built-in working capital credit for the rapid digitization of small businesses and convenience stores through supply and distribution logistics platforms.
The third component of integrated finance is the new type of infrastructure based on an application programming interface. This plumbing is needed to connect the next generation of customer and product supplier interfaces to regulated balance sheets or the capital markets that finance, aggregate and manage back-end risk. In emerging markets, startups like Brick in Indonesia or M2P Solutions in India are rushing to provide the kind of connectivity that Plaid has created for financial data exchange in the United States – while Plaid itself has raised 425 million dollars in funding for a valuation of $ 13.4 billion earlier. in April.
Supercharged by the pandemic and lockdowns, integrated finance is changing the structure of traditional retail finance. Due to their large user base, strong customer engagement, and new data sources, platforms, product plugins, and new plumbing have the potential to bring financial services to many more customers, offering better services at lower costs than traditional bricks. mortar banking system.
This is especially true for Southeast Asia, which has higher per capita income and mobile internet penetration than other emerging markets, but where traditional banking penetration is still around 50%. By leveraging these three elements of integrated finance, entrepreneurs, investors, incumbent banking partners and regulators in Asia have the opportunity to create a fairer and more inclusive financial system as the region begins to recover from the pandemic.