Major APAC banks could embrace fintechs in emerging Asia for next wave of growth

Introduction

Financial technology companies in emerging Asia could receive increased backing from large Asia-Pacific banks seeking growth in these fast-growing economies.

Large Asia-Pacific banks have been avid fintech investors, and we expect them to align their fintech investment strategies with expansion plans in emerging Asia.

Lured by the prospects of higher economic and population growth, major Asian banks in mature markets have been expanding their footprints in emerging Asia economies. While some lenders have taken to acquiring local banks to gain a foothold in these markets, many have emphasized a digital focus in their offshore growth strategy. As such, we believe incumbents will be actively looking for more strategic partnerships with domestic fintechs that can help further their growth ambitions in these jurisdictions.

Large banks seeking growth in emerging Asia

Faced with an increasingly saturated market and constrained domestic growth, major Asian banks in markets like Singapore, South Korea and Japan have long been diversifying into emerging Asia for better growth prospects. Thailand's slowing economic growth is also pushing its domestic banks abroad. Thailand's GDP is expected to see average growth of 3.2% over the next five years through 2026, one of the lowest rates among emerging Asia economies.

Incumbents have taken various approaches to expand their geographical footprints. Besides setting up offshore branches, major banks in Singapore, South Korea, Japan and Thailand have acquired stakes in foreign banks, with countries like Indonesia, Vietnam and the Philippines being popular destinations for their robust economic and population growth.

Emerging Asian markets that further open their domestic banking sector may also receive greater interest from foreign banks. Myanmar, for instance, drew in foreign players like The Siam Commercial Bank PCL and KB Kookmin Bank to set up subsidiaries after the central bank opened the retail banking market to foreign banks in 2019. However, subsequent political instability may threaten to upend liberalization efforts.

Cost considerations and the desire to appeal to younger generations have prompted many large Asian incumbents seeking offshore expansion to view digitization as a way to compete and add value to the domestic banking sector in emerging Asian markets, many of which have young populations with a median age below 30 years old.

Singapore-based DBS Group Holdings Ltd. launched digital-only outfits in India and Indonesia while United Overseas Bank Ltd. did the same in Thailand and Indonesia. Hana Financial Group Inc. jointly launched a digital bank in Indonesia with LINE Corp., a messaging platform. Kasikornbank PCL plans to build digital banking platforms in its growth markets through joint investments with local partners.

Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and KB Financial Group Inc., on the other hand, had committed to helping their portfolio banks in Asia with digital transformation through the transfer of knowledge and tech investments. KB Financial Group, for example, had supplied Indonesian subsidiary PT Bank KB Bukopin Tbk with an upgraded core banking system that will serve as a foundation for KB Bukopin's innovation plans.

Banks building fintech collaborations for growth pursuits

Large lenders in Asia-Pacific have shown growing appreciation for fintech collaborations and have increasingly been investing in these startups to shore up digital capabilities. In 2021, major Asia-Pacific banks took part in 53 fintech equity rounds, up 26% and 20% from 2020 and 2019 levels, respectively.

Likewise, banks have shown an inclination to pursue fintech investments in key growth markets, a move likely motivated by their digital focus in these offshore markets.

MUFG, for example, has also been on the prowl for tech investments in Asia. In 2020, the bank injected $706 million into Grab Holdings Ltd. as part of a strategic alliance in which MUFG's Southeast Asia partner banks will co-develop financial products with Grab for the latter's users, merchants and drivers. Grab is a pan-ASEAN super app that offers on-demand transport, food and package delivery services and a slew of financial services. MUFG has earmarked Asia as a key growth pillar and has been buying stakes in regional banks since 2012.

MUFG's fintech investments in Asia are set to rise with the recent closure of a $300 million India-focused fund in March. The fund will focus on middle- to late-stage tech startups in the country.

Similarly, KB Financial Group has made several investments in Vietnam, one of its key growth markets. Subsidiary KB Securities set up a fintech-focused joint venture with G-Group, a local conglomerate, with the view to distributing financial offerings to G-Group's user base. The bank had also participated in the series A funding round of G Payment JSC, the e-wallet that G-Group launched.

With incumbents expending more efforts to digitally scale their growth markets, we expect these lenders to inject more capital into emerging Asian fintechs, perhaps in the early innings of this trend.

Broadly, domestic fintechs still dominate lenders' interest, but the proportion of funding transactions involving foreign fintechs has been growing over the years. Notably, overseas fintech investments that large Asia-Pacific banks made were concentrated in emerging Asia. Fintechs based in Malaysia, India, Indonesia, Thailand and Vietnam accounted for 44% of the volume of offshore investments made by large lenders that have backed at least three foreign fintechs over the past five years.

Areas of interest

Large Asia-Pacific banks have generally been more active in funding business-to-business fintechs but have recently diverted more attention to business-to-consumer models. In 2021, consumer fintechs accounted for 41.5% of fintech transactions that saw participation from at least one major Asia-Pacific lender, up from 34.5% in 2017.

Banks' interest in direct-to-consumer fintechs stems from a desire to expand their addressable markets.

Many consumer fintechs like electronic wallets have carved out a niche in serving consumers or small businesses with thin credit profiles, segments banks may find it difficult to cater to. In Indonesia and the Philippines, large e-wallets were even appointed by the government as disbursement channels for COVID-19 relief aid to ensure a broader reach.

Forging an alliance with consumer fintechs can thus allow banks to leverage vast distribution networks and reams of consumers' data to expand their outreach in potentially underserved segments. MUFG's strategic investment in Grab, for example, has led to Bank of Ayudhya PCL, or Krungsri Bank, disbursing 110,000 loans to Grab's drivers in Thailand between September 2020 and November 2021. Krungsri Bank is a subsidiary of MUFG.

At a time when venture capitalists are increasingly gravitating toward B2B models in favor of companies with better unit economics, banks' growing willingness to back B2C fintechs spells good news for these entities.

Payment companies and investment and capital markets technology companies garnered the most interest from large lenders in 2021, with both segments accounting for 58.5% of total fintech transaction volume involving major Asia-Pacific lenders.

In the payments category, Indonesia-based PT Ayopop Teknologi Indonesia saw the largest number of new bank backers in 2021 with financing received from domestic incumbents PT Bank Mandiri (Persero) Tbk, PT Bank Rakyat Indonesia (Persero) Tbk and PT Bank Central Asia Tbk. Ayopop is an application programming interface platform offering a range of payment APIs that enable individuals and businesses to send and receive money. Other solutions include bill repayment APIs and open finance APIs.

In the investment technology segment, South Korea-based Tru Technologies Ltd. received funding from three major domestic banks: Hana Financial Group, Shinhan Financial Group Co. Ltd. and KB Financial Group. The firm provides securities finance software solutions that reduce errors in securities lending and trading transactions.

^{This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.}