“Many Fintech M&As won’t come from banks, but from Asian tech and e-commerce giants”
Many regions in Asia are developing major technology ecosystems, and the finance industry is not an exception to this trend. To a great extent, these innovation efforts are driven by the Asian tech giants, coupled with the emergence of a very dynamic Fintech landscape.
In this latest CFO Brain interview, we talk about this phenomenon and other topics with Igor Pesin, Fintech Investor and Partner at Life.SREDA VC fund. This venture capital fund is one of the first FinTech-only non-corporate international VC firms in the world and was established in 2012 and headquartered in Singapore.
Arturo: How did you become one of the most successful Fintech VCs in Asia?
Igor: We started almost 5 years back, in 2012 – before all the Fintech buzz started –as part of a large financial group in Russia. However, we decided to spin-off our investment business and became an independent venture capital fund.
The first fund was $40 million, and between 2012 to 2014 we invested in 13 different startups in the US, the UK, Germany, Russia and Ukraine, mainly Seed and series A deals. Fortunately, these investments were quite successful, and some of the companies from our portfolio became iconic brands in the first wave of Fintech firms, including Simple Bank, Moven, and Fidor. Out of these 13 companies, we did 7 exits through M&A or secondary deals.
In 2013 and 2014 we foresaw that the next Fintech wave would be not in the US or Europe, but in the emerging markets, and particularly in Asia. So, after trying to make several deals from our headquarters in Moscow, we understood the difficulties of remotely investing into Asian companies. Asian business people prefer to know you in person, so you need to physically be present when explaining how you will add value for them. This cultural difference is why we moved our company to Singapore – although we still have a team in Russia, Austria and the UK – where our investment in the last 2 years has been focused on 8 companies based in the Philippines, Malaysia, Vietnam, India and Singapore.
VC funds are actively investing in Fintech. What do you think of bank investments in the finance technology space?
The Banks’ approaches are certainly different from a classic form of VC investment because their main target is to bring value and synergy to the core business through such investments, not to just support a stand-alone successful startup and get pure financial return on investment after exiting. In fact, there are only a couple of banks’ corporate VC (CVC) funds that are well-structured and have a purpose that stands along with direct return on investments approach.
Another important difference between VC and CVC is their internal culture, mindset and business motivation of fund managers. Where people in traditional VC are doing business like startups with entrepreneurial approach, in CVC, fund managers acts more like a hired employees without real business motivation and related risks and uncertainties.
Regarding investment strategy, banks are often entering into equity with a plan to use a startup’s product internally and develop new tailored products for them. Think of Santander that invested $4M in Ripple to use new developments in the Blockchain space; or Sberbank that invested in EToro to produce tailored made multi-asset brokerage products; or UOB that invested $10M in Ourcrowd to expand its B2B lending offerings.
However, there are also CVCs that are focused on the direct return of investments that, organizationally, do not have a direct link to banks. This strategy is typical for funds that aim to raise capital from other LPs, so in other words, they are not linked with a narrow pool of investors. Unlike in Europe and Asia, this model is very popular in the US, such as with . It makes sense to add that initially Propel VC was an in-house venture arm of BBVA and only after several years of operation, they decided to change structure and the whole investment strategy and approach.
Banks are increasingly creating ‘innovation labs’, trying to get close to Fintech culture and technology developments. Do they bring real innovation to the market?
I think they mainly bring innovation to specific banks rather than to the market as a whole. However, I would differentiate between bank accelerators – a sort of innovation unit that attracts early stage startups and provides them mentoring and coaching – and the innovation lab which is a kind of internal R&D made for creating solutions for the bank.
We find a lot of examples of the first one: “Rise” by Barclays, “FinLab” by UOB, “Innovation Lab” by Deutsche Bank, “Digital Factory” by Scotia Bank and many others, but the second type has, in my opinion, a more hands-on experience with the project. Here we find examples such as HSBC’s internal lab developing facial recognition technology; Bank of America’s lab that developed an AI Chatbot to answer queries; RBS’ in-house lab developing a clearing and settlement mechanism based on Ethereum DLT; CITI’s counterpart developing a Touch-ID authentication service; the list goes on.
Most of the successful and sustainable fintech companies that I know didn’t participate in any accelerators or innovation labs and from the beginning, they were independent from big corporates and banks.
Here you mentioned several European and US examples. Do we find similar cases in Asia?
If you’ve read some news from Asia, banks would appear to be very active in Fintech, but the reality is slightly different. For example, in Singapore – a relatively small city – there are more than 20 Fintech-oriented accelerators and labs that are boosted by banks, with more than 200 participating Fintechs. Many of these ‘labs’ have been created not to develop these firms, but mainly to produce the impression that they are innovating, without a real and concrete goal to become innovative. I’m sure there are successful labs near or inside the banks which are helping startups to grow, but again, my personal perception is that much of the noise around these accelerator stories mainly serve to protect banks.
Besides, many of the efforts to bring startups inside the banks are usually not so effective compared to a scenario in which these would grow as a standalone company. People within these labs may have great tech skills and product vision, but their motivation and their approach becomes corporate. So, they are not that business-oriented, and they do not have this kind of culture which drives you to be thinking 24 hours a day about the next big challenge. They become just an innovation arm within a big corporation.
There are many relevant tech giants in Asia (Alipay, WeChat) that are becoming financial leaders in the region. How do you assess their global expansion?
AliPay started the launch of their product AliPay Wallet in the UK and Europe, although it is currently only available to Chinese tourists who want to pay in Europe with their Chinese Wallet.
Besides, they just announced their entrance into Southeast Asian countries; as well as an investment of 200 million into Kakao bank, a Korean digital bank. So they already dominate the local Chinese market, and there is no doubt they will continue their global expansion.
Coming back to your question, I think they will be able to build a successful business outside of China, but it will be most likely in the form of M&As, so they won’t need to develop products from scratch. This is also good for the Fintech industry since many M&As will come not from banks, but from these non-bank players – from tech giants to Telcos, e-commerces, etc, and surely China will be one of the biggest players in the exit markets.
Wallet Payments could be one of the Fintech segments more attractive for these actors. True, it is a very low margin business, but it allows you to acquire customers, which is an essential first step for such big players. Once they are successful in creating a big enough customer base, other products will also appear, like wealth management, loans, and such.
Are Asian Fintech products capable of competing with US and European ones?
I would not say that Chinese Fintech giants – which are 5 out of top 10 Fintech unicorns globally – have the best products on the market. However, they have the best ability to work with customers via great acquisition and loyalty strategies linked to an excellent distribution of the product.
Let’s take PayTM as an example, which received investment from Alibaba. They are the largest e-wallet in India, with dozens tens of millions of clients. Their wallet or mobile bank was not better than their European counterparts, but they spread thanks to their capacity to work with the market, i.e. thanks to their ability to understand what their customer wants, how to motivate them to use the service, and how to acquire them as aggressively as possible.
What do you think will be the next Fintech trend in Asia?
There is a lack of advanced banking infrastructure in the region, which means that many digital companies have problems working with Asian banks. While in Europe, different so-called banking-as-a-service platform solutions exist already, in Asia, there is still a gap with only few players on the market (Wirecard, BAASIS), so there is room for many Fintech companies that connect traditional banks with new digital firms (E-commerces, Fintech, Telcos, etc.).
Asian banks are quite bureaucratic, meaning that if you want to work with them, you have to reach an agreement with many different people like the CEO, the CIO, the Head of Compliance, the IT Director, the Head of Retail, etc. And even if you have all their commitments, you have to integrate directly with their core banking system, i.e. IT legacy infrastructure that is 20 or 30 years old and without APIs and with an evident lack of security. That’s why this kind of new Fintech players, which will be like a medium between banks and Fintech startups, will be one of the most interesting trends in the next couple of years.
You have written about how Asian telecom firms are entering the financial arena. How do you explain this trend?
Telecoms are becoming more and more active in the Fintech space, especially in Asia, Africa and a few other emerging markets. The main reason is that, regarding customer base, they are even bigger than traditional banks, and since their average revenue per user is decreasing due to mobile internet and all those big trends, they see an opportunity in leveraging such client base through the introduction of new products like financial technology.
They have a lot of data and information about their customers, regarding where they go, what they do, how they spend money, etc., so they can use these data points to analyse client behaviour, build scoring models based on alternative data in order to provide additional products, including Fintech solutions, like paymentss, transfers, loans, insurance, etc. That’s why they could become a power in finance greater than banks, at least in emerging markets.
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