Funding winter settles upon ASEAN fintechs, but rebound in sight

In the meantime, fintechs can take advantage of the lower valuations and acquire other firms.

After the “extraordinary” highs of the past two years, the 2023 year-to-date funding for ASEAN financial technology (fintech) companies may seem like a drop. But it’s not all doom and gloom.

“Just in the last five weeks [October-November 2023], we saw a significant uptick in funding,” Arthur Leong, head of strategy and digital engagement, UOB, told Asian Banking & Finance in an interview during the 2023 edition of Singapore Fintech Festival that took place on 15-17 November at the Singapore EXPO. “We do think that in 2024, we could see a rebound already.”

Leong cautioned that it would not reach the “dramatic” highs of the past few years, however. 

Investors and in particular venture capital (VC) firms are reportedly now more cautious than ever, and fintechs who wish to continue receiving funding are the ones who have “stood the test of time.”

“They should be able to demonstrate to the VCs, whether they [have] become more profitable, whether they managed to lower their cash burn on a monthly basis,” Leong said.

Fintech funding in the region reached its highest in the first nine months of 2022, at just shy of $4.5b— higher than the combined sum from 2018 to 2020. But even then there were already signs of a slowdown, with the number of deals made falling to its lowest in two years during Q3 2022.

In the first nine months of 2023, fintech investments in the six biggest ASEAN economies plunged 70% year-on-year to just $1.3b, according to the “FinTech in ASEAN 2023: Seeding the Green Transition” report, jointly launched by UOB, PwC Singapore and the Singapore FinTech Association (SFA) in November 2023.

Cautions investors, customers
Part of the reasons for investors’ caution were macroeconomic factors: the slower economic growth, high inflation, high interest rates, and fintech customers’ spending less money.

The COVID exuberance that led to a flight to fintechs and in turn record-breaking investments was also fading.

“In the previous two years— because there’s a lot of investor exuberance, a lot of cheap capital floating around— you can recall all the buzz about fintechs being ready for the big mega exits. That helped to propel investment into fintechs to an extraordinary high between 2021 and 2022,” Leong noted.

Their current environment also meant that investors may not be willing to wait to get their investment’s worth from fintechs, especially as fintechs grapple with fewer customers.

“A lot of traditional consumers of fintech are also being more cautious, especially on the corporate side,” Leong said. “They are spending less or deferring their spending.”

Bucking the trend
Whilst VCs are cautious, their investing behavior also bucked the startup investment trend, the study found. Instead of more funding going to established firms, it’s the early-state ASEAN fintechs that’s captured more funding.

“We saw a greater proportion of funding going to early stage fintechs,” Leong said. Early stage startups are defined as companies who are raising their series A and series B capital. 

“And that's because during the downturn, during the last 12 months, a lot of the VCs are raising less money. Right, so it's easier to invest in smaller, earlier stage startups,” he added.

Investors are also looking for something “new” to invest in. New fintechs have lower valuations. This gives investors the possibility of a potential upside in the future: when the economy recovers and the interest rates come down again, those valuations may rise again.

Becoming the investor
Given the dearth of funding coming their way, what can fintechs do to survive the funding winter?

First, don’t obsess with the macroeconomic conditions, Leong advised.

“It may be a funding winter, but it won’t last forever,” Leong said. “They should think long-term. They should be thoughtful with how they manage and use their cash reserves.”

Fintechs that can demonstrate a clear path to profitability, and have a clear narrative of how their funds will be used, will gain the trust of investors.

In the meantime, they may even think of investing in other fintechs themselves.

“The advice here is to consider strategic investments into other fintechs if you have the adequate resources. Now’ the time to take advantage of the lower valuations to gain strategic advantage through acquisitions,” Leong said.