Fitch: Southeast Asia Fintech To Focus On Profitability As It Scales

South-east Asia’s fintech companies are likely to sharpen their focus on profitability as the industry gains scale, says Fitch Ratings. This follows a rapid rise in fintech adoption amid broadening internet connectivity, spurred by the social-distancing measures to contain the Covid-19 pandemic.

The region’s large unbanked population underpins its market potential. South-east Asia’s top-six economies comprised a population of over 580 million at end-2020, of which more than half were unbanked.

Digital services have boomed amid broadening online connectivity and physical distancing restrictions stemming from the Covid-19 pandemic. Internet users in the region’s top-six economies increased by about 40 million in 2020, with close to 70% of the population now online, up from around 46% in 2016, according to reports by Google, Temasek and Bain. Digital financial services are benefiting from this trend. Electronic wallets, in particular, have gained rapid share, accounting for 15%- 20% of point-of-sale and e-commerce transactions within the top six economies in 2020 (2019: 5%-10%), according to payment technology provider, Worldpay. This serves as a launchpad for other financial products to be distributed on the same platforms.

Local regulators are generally supportive of the fintech industry, drawn by the potential to broaden financial inclusion and drive product innovation. Nonetheless, aggressive business practices are likely to attract a strong regulatory response, the rating agency expect stiffer sector regulation as the industry expands.

Many fintech business models remain developmental, with unproven paths to profitability, despite the growth opportunity. Large financial-sector incumbents will remain formidable competitors, with the resources to outspend new entrants in technology investment. Sector competition is likely to remain intense, and we expect economies of scale and tighter regulation to drive industry consolidation in the medium term.

The success of fintech aspirants will rest on their ability to navigate the sector’s evolving competitive and regulatory landscape. Fitch’s applicable rating criteria for a fintech company will depend on its business model, regulatory framework, funding structure and degree of balance-sheet risk.

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