The sustained decline of fintech funding in Southeast Asia is now a pressing issue, significantly impacting the region's economic stability, startup survival, and financial inclusion for underserved or unbanked citizens. The temporary investment boom experienced by residents from 2021 through 2022, as the world was reopening after the COVID-19 pandemic, is now a distant memory.
Market intelligence platform Tracxn pointed out in its Geo Quarterly Report that in Southeast Asia, fintech funding fell by 13% in the first quarter (Q1) of 2024 compared to the previous year (Q1 2023) and 44% compared to Q4 2023. Last year's Q1 investment was USD 607 million, whereas Q4 generated USD 939 million, compared to USD 530 million in Q1 2024.
Additionally, 2024 has only had 67 Initial Public Offering (IPO) deals thus far, representing a 21.2% drop compared to 2023. Last year, signs of the fintech industry's struggles were highlighted as analytical centre Robocash Group documented an 83% year-on-year (YOY) decline in startups in South and Southeast Asian countries.
Factors contributing to the decline in fintech funding in Southeast Asia
From a broader perspective, the United States (US) led in fintech funding worldwide from venture capital (VC) firms, followed by the United Kingdom (UK) and India. ASEAN faces many issues that affect operations, limit business scaling, and prevent innovation and competition.
There are several significant reasons for the plunge in fintech funding, including:
Geopolitical tensions and economic headwinds
Regional and international conflicts and flailing economic conditions have reduced investor capital and enthusiasm, diminishing confidence in the stability of startup ecosystems. These factors prevent investors from accessing vital funds to send to their chosen ASEAN startups.
The lack of capital flow also means businesses will struggle unless they innovate solutions to boost their revenues.
Privacy and cybersecurity
Cybersecurity remains a concern for many people, especially senior citizens, who fear making online payments or sending money to others. It can also lead to identity theft, losing money to fraudsters, sending money to the wrong person, and privacy concerns like activity tracking.
Furthermore, there have been increased and diversified attacks, such as fake websites, ransomware, phishing scams, unwanted subscriptions, and unauthorised credit card charges.
Inaccessibility
Some fintech companies are in rural areas or places with underdeveloped infrastructure. Thus, internet connectivity fluctuates, and tech illiteracy limits the possibility of convincing tech investors to fund local businesses.
Startup overvaluations
When the pandemic recovery efforts began in ASEAN, investors had been clamouring to return to funding businesses, pushing startup valuations to unrealistic levels.
Therefore, the industry is now resetting and returning to more accurate numbers, harming companies when their publicly announced valuations are lower than expected. Investors count on their investments to accomplish their missions, so it can be a blow if their value drops before they have a successful deal exit.
Investors shift to sustainable businesses
Startups operating without ESG (environmental, social, governance) policies are no longer receiving funds from investors. Companies must align their operations with eco–friendly approaches to attract investors. For example, fintech companies can reduce paper use and shift to online receipts.
Complex regulatory climate
Financial regulations continue to hinder the industry, making it challenging to fund startups with disruptive solutions that challenge legacy systems. There is a desire to replace fintech options like cryptocurrencies with Central Bank Digital Currencies (CBDCs), which are government-controlled as opposed to the former, which is decentralised.
Potential opportunities in fintech funding declines
In the long term, ASEAN's fintech funding decline will make it harder for underserved and unbanked citizens to access financial services. Without adequate financing, the industry will also find it challenging to engage in research and development, and the government may have to step in to help cover the deficit.
Nevertheless, the current funding shortage encourages the industry to try new approaches to self-sustenance. First, stakeholders can collaborate with traditional financial institutions like banks to upgrade legacy systems. Second, they can innovate in underserved markets to boost regional financial inclusion.
Third, the industry has a vital role to play as nations shift to eco-friendly governance. A report by the McKinsey Global Institute shows that fintech can help mobilise capital to fund global sustainability and achieve net zero. This involves eco-friendly banking, ESG intelligence and analytics, green financing, carbon offset credits, and other solutions.
To further boost fintech funding in Southeast Asia, governments must change laws to ensure cross-border transactions operate smoothly, securely, and conveniently. They must also make it easier for companies to hire skilled experts in financial technology to address local challenges. Finally, it should be easier to access technologies like AI to enhance fintech or switch to Web 3.0 to unlock what could be a trillion-dollar industry of the future.
Southeast Asia remains a place with innovative, digitally ready citizens who are open to new ideas. The region should focus on tech literacy to encourage fintech adoption.
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