Answering the why is an 8 part series that talks about the latest trends and explore the fundamentals that enable Southeast Asia’s tech ecosystem
CEO of Momentum Works, Jianggan Li, and our Head of Insights, Alfonso De Los Reyes, shared the backstories of these tech giants, how and why did the regulators stepped in, regulatory trends in SEA, and what investors should be aware of when assessing investment.
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Check out the transcript below!
Hello, everyone, I’m Yorlin, the COO of momentum works. For those who may not know momentum works is a venture builder. And we are also a thought leadership company in Southeast Asia. So for today, we want to introduce a series called answering the whys. So this is a series where we want to explore the fundamentals that enable the Southeast Asia tech ecosystem.
In our talk today, we have our CEO Jianggan Li, and our head head of insights. Alfonso, who will be joining us to talk about a topic very close to our heart and very and what we see in the news today. So the topic of our talk today is why should Southeast Asia investors learn from and financial and WhatsApp? And what is what is happening and what we can learn from them? Right. So without further ado, I would like to pass the stage on to Jianggan and Alfonso to share with us their thoughts and insights about this piece.
Thank you, Yorlin.
I think everyone’s been following what was happening in China. An IPO that’s supposed to be the biggest this year, and I think was the biggest in history, has been coded two days before trading was about to start.
And just in that way, the most anticipated IPO has to suspend so we try to link that to another story which also happened, which probably many have not noticed, which is after a few years of trying, and WhatsApp Pay, owned by Facebook has finally been approved to launch India.
That’s after lots of lots of haggling with the regulators. So what’s in common between these two stories? This is something that I want to discuss today. And how should we learn from them and why.
Most of its profits came from the lending products. And so there has been a lot of controversy of what Ant Financial will really be recognized as, so for a long time The name was Ant Financial.
And before the IPO a few months before they changed name to Ant Group. So basically removed the financial word, which I think that the leaders try to position the company more as a tech company rather than a financial company for the right reasons because they will be subject to different regulations.
And investors will see that as different types of business, which will give them even multiples. So this has always been controversial.
I think they have been working with the regulators, sometimes pushing the boundary a little bit which, which I think is perfectly understandable because that’s what innovation is should be. And investors are sort of sorry, regulators have also sort of tolerated some of the boundary pushing and, over the years, there’s this balance, which allowed ant financial to grow to what it is today. Um, you’ll see that in the middle of this slide.
There’s this comment from Tencent boss. And because I mean Tencent is Alibaba its biggest competitor, they also have a WeChat payment service. But for a long time, it’s embedded in Tencent instead of being spun off as a separate business. So basically, very, very recently. On the right, this is an article which came out after the talk between regulators and and and, antgroup bosses before the anticipated IPO.
This is very funny, because you see an image of a horse in the clouds, jack ma Chinese’s name literally means horse cloud. So there’s some cryptic, cryptic message behind it. And some people see it as a sort of a way to criticize what jack ma did. But what did he do?
A week before that. He attended this bank summit, which talks about finance. And the summit was opened by the Vice President of China, Mr. Wang Qishan. And where Mr. Wang emphasized. The most important thing about finances is stability.
When Jack Ma came on stage, he said, Oh, I’m not retired. I’m no longer the director of Alibaba, I can talk more freely. And he lashed out at the regulators, he said, The regulator’s global regulators have become an old men’s club. They stifle innovation. And he also blamed that banks of having a partial mentality, everything is to have collateral, otherwise, it doesn’t work.
So he made his speech, while the state regulators, all of them were in audience and some of them became angry and I think some sort of internal memos were circulated among the top leadership of China, and which led to what surprised everyone so the whole of IPO um.. There’s so that there’s something much, much deeper behind it.
But I do believe that I mean, the common lesson is that how do regulators interact with innovation? How do they see the innovation? And? And specifically about Ant financial what exactly allowed them to grow? And? And which part becomes too risky? And how do you? How do you balance this?
WhatsApp so that’s the story. I mean, interesting we made a prediction, I mean, we do this prediction every year. And every year we said, okay, these are things which are likely to happen in the tech ecosystem the next year. So we did predictions for India.
And I think at that time, and Facebook, Google saying that WhatsApp pay, which was in a way similar to each other in China, you have the payment system embedded into a chat app that people use every day. So whatsapp pay was about to be launched in India, and we’re just skeptical because, because to allow this powerful payment option to be launched, there are so many things that regulators need to be careful about.
So you will probably be- we made a prediction in December 2018, saying it will probably not take off in 2019. And that’s exactly what happened. So, um, so I think, I think Facebook worked really hard, really hard, to launch whatsapp payment in multiple places.
Eventually, the first market they did was Brazil and even in Brazil, was called off by the regulators, just one week after the official launch. That itself is also interesting. And I think we can see, in a way sort of corresponds to what ant financial encounters in China.
So everybody thinks that it is okay. Then regulators stepped in and said, okay, no, you can’t do it. So finally, um, thing just last week, whatsapp it’s, it received its permission to, to officially launch from its test base of customers to the wide wide audience. And I think that the regulators in India are a lot in tune to use the settlement system that the central, the central bank has developed, but also introduced new rules, saying that none of the players should exceed 30% of the total payment volume through the settlement system. So that they also find a way to try to balance that right.
Um, by allowing people to keep more communist to be consumers, but at the same time, sort of try to control it a bit so that each player doesn’t accumulate too much power. So there’s lots of them. I’m sure there’s lots of lots of things happening behind the scene.
And each push of the boundary or each new regulation, each new sort of a permit or license comes at the cost of lots of effort and, and resources invested. So, with these two stories in the background, what can we learn? And how does that relate to what I mean?
I think both Alfonso and I stay in Southeast Asia, but none of us came for this region. What exactly can we learn from it? I think one of the fundamentals is to understand that at the end of the day, a Southeast Asian is a different market compared to China, India.
And we do know that lots of international investors tend to make comparisons based on the population GDP per capita. But I think this, there’s something more to it that will help people shape their, um, I think, help investors shape the investment decisions of regulators look at what they should really do, what they should allow, and what should be, should the balance be. And here, I’m going to pass to Alfonso to talk about the fundamentals.
Thank you. So, I think that what you mentioned is important, because basically what we have been trying to do in momentum works is to try to establish some sort of base to understand like most of the common questions that people do related to different companies. So what we have been trying to do is try to make sense of, of what happened with Ant Financial, and how this affects to Southeast Asia.
So for example, we created this report that is called industry enablers. And basically, what we what we, what we have tried to do is try to understand all of these kind of macroeconomics regulations with different aspects of the economy in order to see if we can actually provide an answer.
And I think that there is a lot that we can tell about what happened with ant financial, and also how we’d relate that with with Southeast Asia. So what does Ant Financial situation basically mean for Southeast Asia? So it’s like the most basic answer. And it’s also a very politically correct answer is basically, it is an opportunity to learn to proactively cooperate with regulators to improve their financial sector. So that is the politically correct answer.
And in order to get the non politically correct answer, we need to actually to go a bit deeper, it is important to understand what is the wall of the regulation. So I think it’s interesting to understand that basically, economic development of a country can be basically separated in like in different layers.
So in the first layer, we will have something like the natural resources, the geography itself, and the population how the population is distributed in the region. So this is actually related to the point that we will just plug in right. A second layer is actually the regulators.
So now that we have all of these resources in the country, what do we do in order to have some sort of progress? And how what do we do? What does the country do in order to integrate this and to actually maintain some sort of unity in the country. So basically, those are the regulators.
And the effects of those regulations is basically what we are depicting in the black and the black boxes in the charts, but are basically three main dimensions. So due to the effects of the regulations, everything will be materialized in terms of our level of infrastructure, our level of connectivity, and on a specific level of human capital.
And this works like a, like a cycle. So I think it’s very important to realize that, that without regulations, basically there is no progress with regulations is basically it’s like a way to measure ourselves. So in many cases, with new products, and with new technologies, basically there are no regulations, because it is actually new. So there is nothing there.
This is why the government needs to be very proactive in terms of talking with with the companies are innovating in order to create regulations. So this is very important to realize that still, especially now that we’re talking about something that is related to fintech, there are countries that basically that doesn’t have a framework to to process, the FinTech itself to process FinTech companies.
So, this is very important relies on on and basically those three dimensions that we are talking about infrastructure connectivity and human capital, what we have seen is that they are able to summarize in a very good way, what is the current state of the of, of the region. So during like the last 30 years, there have been, like a great progress in terms of infrastructure connectivity and human capital.
And what maybe it is, it’s a bit small for you to see, but everything is actually improving. So in terms of in terms of the governments and the regulations, you can think that countries that are higher in connectivity, infrastructure and work in human capital will have a much higher exposure, will, the regulators will have a much higher exposure to different kinds of challenges and opportunities and to make changes to so with this kind of framework.
Do you think in China that if a country that has a bit more than Southeast Asia, you can see that they were actually much more exposed to challenges and opportunities in order to work in the regulations. So, if you have, if you have problems that you have never like faced very often before, and there is no that there is no purpose in creating some sort of rule or process.
There is no, there is no objective in creating some sort of regulations if you have faced a problem just once, but if you have faced that thing, many different cases, we create a role in order to be able to be to be efficient, and also to be able to improve the current state of the of the economy and the population in the region. So that is also super interesting.
This slide is showing how different regulations have improved. So it is different. It is difficult to measure regulations, right. This is why we’re using different kinds of indexes. So for example, we have infrastructure regulations, basically regulations that are related to the efficiency To make investments in concrete, for example, regulations that are related to the connectivity are basically related to the tariffs basically to being very protective or something like that, right.
So, at the end, you will say that we the development of an economy with the development of a country in terms of the infrastructure human capital and connectivity, the different the different regulations are going to actually improve and I will, they will actually go towards liberalisation basically liberalisation implies more more information flow, more resources flow through a country’s through different countries, right. So, regulations have also been improving during this last 30 years. So, this is also something that is related to the previous slide. And it makes sense.
Well, with progress, you will basically create new regulations, you will be able to, to be more productive, you will cooperate more with the private and public sector in order to make it happen. So, in Southeast Asia, this is something that is that is important that, even if you have countries that are still well under develop, I think that regulators can actually be proactive, when, when talking with the with the, with private companies in order to be able to measure the innovation and be one step ahead of them, in order to create this kind of regulation nicely.
And this is something that relates with what happened in China, right, like regulators were actively cooperating and participating with different kinds of companies, innovative, innovative companies, like um, ant financial, in order to actually be tweaking the regulation and improving the regulation and also checking what’s going on with, with with consumer with customers and with, with with, with the private sector itself in order to see if this makes sense, right. So a constant interaction with them. It is something that is nice to have.
So, so So guys, that was a very short introduction of the episode and lots of interesting insights from both Jianggan and Alfonso. I hope that it was useful, and I hope that you find out a bit more about the momentum works enabler report. We have more coming. So stay tuned for the next episode. So in the meantime, if you look on my right hand side, these are the ways you can connect with us and find out more about what we do. Find out more about the enabler report. And you can also just contact anybody from Momentum Works to find out more and if you want to find out more about what’s going on or understand what’s going on in our mind, go to our blog. So until next time, I’ll see you guys.
Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at [email protected]