Venture-backed fintechs raised a record $30.8 billion in the second quarter of this year, up 30% over the same quarter last year. And they’re raising more, and faster, than ever — the average deal size stands at $47 million this year. Just a reminder that you’re reading the right newsletter today 😉
Today is also 10/10, a mega discount shopping day in Asia. I’m sure a lot of BNPL activity happened today. And with that, I’m very excited to highlight today’s Buy-Now-Pay-Later themed Special Dive - written by Adan, a BNPL pro!
Note: Are you looking to raise angel funds for your fintech? I may be able to help. Reach out to me at vinay.palathinkal@gmail.com.
If you have any questions or thoughts around Wise’s Platform API, reach out at vinay.palathinkal@wise.com. You can also do all of the above via LinkedIn.
🎣 Dips
The big Indonesian banks are partnering with fintechs to get into the BNPL arena. Traveloka, with their PayLater product, is currently partnered with BRI, Mandiri and BNI. ShopeePay has also partnered with BNI. Instead of partnering, some are building in-house solutions - Bank Mandiri (possibly shedding their Traveloka partnership), CIMB Niaga and BCA are creating proprietary BNPL products. It makes sense, commercially - earlier this year, it was reported that in 2020, 55% of new e-commerce users chose to use BNPL options when they made purchases on e-commerce platforms in Indonesia.
Fino Payments Bank became one of the first Indian fintechs to get approval to list on the national stock exchange, SEBI, and is expected to raise ~$173 million. Compatrior fintechs, Paytm and MobiKwik, had also filed applications but haven’t heard back from SEBI just yet. In India, IPO approvals are contingent on a number of things, including profitability.
Stripe has been planning to launch in Indonesia for a while, but that might be delayed due to regulatory hurdles. Indonesia is a challenging market for foreign entrants, who have to navigate local regulation, like getting relevant approvals and licenses from Bank Indonesia and OJK. While challenging, it’s obviously a valuable market - fintech investment in Indonesia totalled approximately $178.48 million, accounting for approximately 20% of SEA’s total fintech investments.
Avengers, assemble! Singapore’s local banks are working together with Singapore's local financial regulator, MAS, to create a fincrime-focused platform called COSMIC. It is a very exciting sounding name, and they’re basically agreeing to share data on customers and transactions, in the hope that this will help provide more predictability when it comes to reducing money laundering and terrorist financing. In most jurisdictions, a common challenge that financial institutions face is being unable to warn one another about unusual activity in customers’ accounts, according to MAS.
Singapore may not be regulating BNPL in Singapore anytime soon, because it’s too small. In a recent parliamentary reply, MAS’s notably eloquent chair Tharman Shanmugaratnamnoted that BNPL is still a pretty niche area right now and is not at a level of regular consumer adoption just yet. For some context, BNPL currently sits at just 0.12% of the volume occupied by Singapore’s credit and debit card market. Minister Tharman sounds fairly pro-BNPL, noting that the current features of BNPL schemes in Singapore are actually effective in mitigating the risk of excessive debt accumulation by consumers.
“For example, BNPL users’ accounts are subject to credit limits. They will typically be suspended by the BNPL provider – that means no further use of that BNPL scheme, once a payment is overdue. Late payment fees apply, but these are typically capped. As BNPL schemes do not charge compounding interest on the outstanding amount, the risk of rapid debt accumulation is also not large. As of end 2020, the total outstanding value of BNPL transactions was about S$12 million. This includes the value of instalments that had yet to fall due.”
Nonetheless, he did mention that transparency is an important principle for BNPL vendors to provide - so the regulators may enforce this so customers are clear about the repercussions of not paying your bills on time.
MAS is nonetheless assessing whether a regulatory framework is necessary to guide the evolution of BNPL schemes as they become more widely used in Singapore…. for instance, clear disclosure at the point of account opening is helpful in ensuring that consumers are fully aware of the late fees chargeable if they do not pay on time.
🐋 ✨ Special Dive✨🐋
Buying now, paying later: a business model for acquiring risk
Inspired by Joyce who wrote the first crypto edition of IFW, I'd like to introduce you to a hot area of fintech that sprung up in recent years - Buy Now, Pay Later (BNPL) - with the likes of hoolah, Atome, Klarna, and Afterpay to name a few.
These companies have their roots in a layaway concept that was inverted to suit today's craving for instant gratification and provide consumers, merchants, and partners an offline/online ecosystem to meet in.
Fundamentally, BNPL is a business model for acquiring risk.
Consumers typically receive 0% interest as merchants pay for the privilege. Consumer fees do exist, but don’t consider them as a primary source of revenue. Rather, consumer fees are used as a deterrent to one of the key challenges listed below.
Since an ecosystem is only as valuable as the network, partners are a necessity to double or triple the size. However, creative providers like Afterpay came up with a unique open card that allows transactions outside of the network. To be clear - interchange fees make open network cards a loss-leader designed to supplement retention and provide data on new merchants to pitch.
Let’s dip into a few challenges:
🏃♂️ Customers who don't pay it back
Fraud, identity theft, and defaults are real problems the industry faces and made worse by the difficulty in obtaining historical financial data on each new customer.
New entrants are stuck hedging risk with guesstimates or better yet, purposely affording less risk upfront. Banks are better suited for this challenge due to the scale of information they hold.
🛍 Merchants that confuse inherent value
Shoppers of all income levels share an emotional desire to afford quality products, however some may not have the financial capability to fulfill this responsibly such as gig workers in SEA.
BNPL allows this segment to selectively "borrow" from their future and helps merchants convert window shoppers to customers, or even purchase bundles of complementary products they couldn’t previously afford.
However, heavy marketing emphasis on rewards and coupons has attracted customers outside of the ideal segment and influencing merchants to view this as a cannibalizing model.
🔍 Regulatory scrutiny
Every new innovation in fintech encounters regulations sooner or later.
Right now, BNPL lies in a regulatory gray area essentially because the model doesn’t actually loan money directly to consumers but rather acquires debt from the merchant. Often there’s no need for credit checks or other requirements that licensed payment institutions adhere to.
Yet disturbing trends led the Australian Securities and Investments Commission (ASIC) to publish a report regarding the state of the industry after they discovered an equivalent of 30% of the Australian adult population could have had an open account. Even more shocking, 21% of the users they surveyed missed a payment in the preceding 12 months.
Expect a shake up of the industry soon.
📈 Future growth
Presently discounts, coupons, and other marketing activities around pricing are effectively turning new customer acquisition into a net negative game of chicken between competitors.
Sustainable growth of the industry in SEA is dependent upon achieving a healthy balance of products and services that serve the lifestyle needs of repeat customers which find inherent value without heavy discounting.
Take a deeper dive
Iching to learn more? Prince Jain, another building in this space, has a great write up here that discusses the industry in more detail.
🍹 Twitticisms
(P.S. Again, if anyone has SEA or Asia focused fintech Twitter accounts I should be following, tweet me. The accounts I see on my feed are overwhelmingly 🇺🇸 focused)
