How financial service providers can win over the 600-million strong SEA market

With competition in the financial services space heating up in Southeast Asia, companies that control the most data and better understand consumer behaviour will have an advantage over others, according to Jianggan Li, founder and CEO of venture builder and investment consultant Momentum Works.

Since the Asian financial crisis in 1997-1998, the financial sector of the region has developed significantly, attracting a high volume of private capital and investment, according to a report published by the Manila-based Asian Development Bank.

With a young population of 600 million people who love to spend, Southeast Asia has become a magnet for financial services companies, especially major Chinese firms, according to Li.

“People and companies are trying to innovate to become key players in the region’s financial services sector. There is strong optimism in this market,” he said.

Headquartered in Singapore, Momentum Works operates in four core areas – venture building with mature companies, business consulting, investment consulting, and direct investment.

DEALSTREETASIA spoke to Li to discuss the region’s financial services space and the growing number of Chinese firms that are exploring investment opportunities in Southeast Asia.

Edited excerpts:

Competition in the financial services space seems to be heating up in Southeast Asia. What do you think drives this trend?

In tech, financial services are the closest to money. In China, financial services are a huge hit. Take, for instance Alibaba’s Ant Financial. It has become the world’s most valuable financial services company and a lot of people and companies in Southeast Asia are trying to copy that model hoping to make it big in the region.

Of course, Ant Financial started with payment and then created an ecosystem where everything flows. Within that ecosystem, people pay vendors using Alipay, a third-party mobile and online payment platform. The money stays in the system. It has since then grown (so) big that it now offers virtual credit cards, deposit service, and unsecured loans.

Local payment companies such as Grab’s GrabPay, Go-Jek’s GoPay, and those in Thailand and Malaysia are also bullish on the market but it will be totally different for them to copy the Alipay model.

Do you think local financial services firms have the advantage over their Chinese competitors in the region?

I think they have different objectives. Chinese companies, such as Alipay, want to provide data exchange. They want to be at the back while local companies – Singapore’s Paynow, Thailand’s PromptPay, GrabPay, and GoPay – want to be in the front accepting and processing payments.

But Southeast Asia is different from China. Banks in China allowed Alipay to flourish. Alipay, however, would not compete directly with local players because it would require lots of work and the company will have to deal with regulatory issues.

Alipay’s model in the region is different. It wants to create something like Visa, like a card issuer and data exchange. It wants all transactions to go through its system.

The ultimate goal is to control customers and data. If you have access to customers and data you can do a lot of things. That would be key. If you have data, you have a better understanding of the market.

Do you see consolidation in the region’s financial services market?

I think Alibaba as a whole will be investing in more companies in the region but will not take 100 per cent ownership, The company will take significant share where it has effective control over the system but not to the point that raises government suspicion.

How would banks operate in this space?

Merchant banks in major countries are actually quite alert. They are looking at what is going on in the market. Can their internal structure plus external compliance and regulations allow financial services firm to go as fast? We don’t know.

I think there is an opportunity for banks but it will not be easy. In China, financial services firms are big enough that they can disrupt banks. I think banks in the region are probably scared especially if GoPay and GrabPay become too big that they will start to offer deposit services.

Aside from financial services, what other areas do you consider interesting in the region?

I think logistics is very promising, being the infrastructure of e-commerce. I see a lot of opportunities in cross-border trade. In fact, we are planning a project in this space.

More Chinese companies are now looking at Southeast Asia, do you consider that as a threat to local VC firms?

The more money that comes in, the better because it creates an ecosystem. A few years ago, if you build a business to Series B, you will find it hard to find Series C investors. There were very rare Series C deals.

That has changed with more Chinese money coming in. Major companies such as Alibaba and Tencent are investing in later rounds. This entices early-stage investors to put in capital because Chinese investors are investing in later series.

Chinese and Southeast Asian VCs can work with each other, the can do deals together. The only challenge is that lots of Chinese VCs give higher valuation to companies than what local VCs give.

Chinese and ASEAN VCs will complement each other but I don’t think Chinese VCs have enough understanding about the market. They just have the money. Only one or three funds have people stationed in the region. Most of the Chinese funds just send people to look for projects. They are also interested in companies that are operated by Chinese because they can communicate directly.