Fintech is changing the financial services landscape, creating significant returns for those who can spot the new trends early on;
But the sector also creates challenges for investors, who need to be wary of regulation and not overpay for assets, SuperReturn Asia heard.
Melissa Guzy, co-founder and managing partner at Arbor Ventures, said: “We like to think about how the world is changing and how are people going to transact.”
She added that if you took the 10 largest populations in the world, only three of them were now defined by a geography, a government or a reported GDP number, with the largest population in the world Facebook.
At the same time, she said you had one billion shoppers who were going to spend USD1trillion cross-border on e-commerce.
“These are the macro trends that change the way people actually interact, get paid, buy insurance and pay for things,” she said.
Sebastiaan Van Den Berg, chief investment officer at Sun Hung Kai & Co Ltd, said the new technology was also partly being driven by consumer demand.
“One of the things we have observed is that younger people don’t want to go to a bank or a branch, they want to do their transactions on their mobile phone,” he said.
Guzy said the development of fintech meant it was time to think about how to define a bank.
“The largest bank in the world today happens to be WeChat with 600 million customers,” she said.
She added that WeChat, Ant Financial and Uber had more than one billion customers between them.
“We are starting to see the rise of the non-bank banks.”
A cashless society
Asia, and particularly China, is leading the field in fintech.
Sally Rocker, managing director at J.C. Flowers & Co LLC, said China had transformed from a cash economy, skipping the intermediate stage of banking, into a cashless one.
Guzy agreed: “When you go to China, you don’t need anything other than your mobile phone.”
She added that people outside of China and the Asia region did not understand how advanced this part of the world had become.
She said the question was whether companies such as WeChat and Ant Financial could scale outside of China, especially in cash-based societies.
Van Den Berg said regulation in Asia appeared to be more relaxed than in other parts of the world.
He said in Asia there was a lot of online activity and people were very used to using their mobile phones and having their lives take place online.
“In the US and Europe there is much greater sensitivity regarding what happens to your personal data. Here I think people are less guarded and share it more easily,” he said.
“In the US regulation is quite crippling and that is going to impact the speed at which change takes place.”
When it comes to investing in fintech companies Rocker stressed that people should not forget about the financial side.
She said: “We had an investment in a company based in Germany operating in emerging markets using big data to underwrite consumer loans.
She said over time the company was having mediocre growth, haemorrhaging cash and trying to expand into a lot of countries at once.
“When we came in and made our investment we helped the company pare back and try to grow in a more measured way towards profitability,” she said.
“We have also tried to professionalise the board and bring in new management.”
She added that it was important not to forget that it was a financial services company and you still had to worry about the backend in terms of collection and losses.
Getting in early
Guzy pointed out that in venture capital there were always hype cycles in almost every single market segment from time to time.
“We are always looking at the world three to five years from now and what is going to be relevant and important.
“If you can identify the trend early enough, you can enjoy the upside,” she said.
But she added that if the trend was already clear you got a lot of ‘pile on’ investors.
She pointed out that there were 2,800 alternative lenders in China and almost every venture capital firm had one in their portfolio.
“You have to be ahead of the curve, you have to be thinking about what is next, what is the new technology and what the implications are,” she said.
Van Den Berg said all the interest in the fintech space had led to valuations in the sector “going through the roof”.
He said: “Being disciplined on valuations early on is very important. You want to make sure you aren’t overpaying.”