Southeast Asia in 2010 started to experience an ecommerce boom with the likes of Ensogo, Rocket Internet’s Lazada and Zalora, Groupon, etc. It seemed to be at the height of its peak with money pouring in, mergers and acquisitions happening every day, and Amazon finally moving in to capture the region’s potential but amid these buzzworthy headlines, down rounds plagued startups such as Lazada, were sold for scraps like Zalora Thailand, or shut down completely, such as Ensogo.
What happened? Smaller startups began venturing into other fields providing human resources (Getlinks), car wash services (Wash Mobile), recruitment (JB Hired), agriculture (EverGrow), hardware (DriveBot), and more. It seemed that startups were shifting focus to offer niche services to carve out their own demographic in a saturating market but could they sustain themselves?
A Sustainable Model: Fintech
Across the region and even in once-upon-a-time unicorns such as Flipkart and Snapdeal, news reported large reductions in hiring, peaking salaries, and a slowdown in capital flow shadowed the once profitable businesses VCs banked hard on. The customer behavior in Southeast Asia, more specifically trust, is simply not mature enough.
It also cannot be denied that a capital and inventory intensive model requires deep pockets. After running a successful ecommerce company in Thailand for three years, I realized it was necessary to go back to the basics, to start a business model that encompassed the three components of sustainability:
- High margins
- High customer lifetime value (LTV)
- Low customer acquisition cost
A business with these characteristics usually has a strong foundation and presents a good investment opportunity because it shows promise for profitability down the line. While ecommerce does have low customer acquisition due to the nature of retail and lower commitment products, such as retail and consumer goods that are being sold, it severely lacks in margins and customer LTV (lifetime value).
Margins are often eroded away by high operation costs, packaging, shipping, and inventory while LTV is nullified by heavy competition as most ecommerce companies do not have exclusivity on products and pricing. After all, it isn’t in the best interest of product owners and manufacturers to only distribute their products through one single channel.
Fintech on the other hand, a recently booming industry, does not suffer from these disadvantages. Like most tech companies, there is no inventory to hold, the margins are much larger and once you have acquired a customer, you have an 80% renewal rate for at least the next four years (Bangkok Insurance’s internal data). By building better fintech, it would change the behavior of consumers in Southeast Asia and eventually fuel the growth of ecommerce in the region.
Lack of Innovation: More Room to Grow?
Fintech is ripe for entrepreneurs because existing legacy players such as Viriyah and MSIG in the market lack innovation. Companies like Bangkok Insurance, HSBC, and other traditional financial institutions are only beginning to realize the magnitude of the tech wave that has hit the world.
As the saying goes, it is hard to steer big ships, and ships seldom get bigger than the companies that make up our financial industries. These companies earn a vast majority of their profits from traditional channels, leaving the unexplored to opportunistic entrepreneurs like myself with Frank.co.th and many others who have managed to convince investors for support.
A recent report from Accenture found that global investment in fintech has skyrocketed from $930 million back in 2008 to over $12 billion by the beginning of 2015. Europe experienced the highest growth rate with an increase of 215% to $1.48 billion in 2014. Globally, fintech startups have raised investments totaling $19 billion according to a insight report published by Citibank. This has begun to eclipse other startup sectors as it continues to grow.
Challenges of Fintech
The next big thing does not come without its own challenges. Fintech startups need to realize very early on that there are many rigid regulations which were not created with innovation in mind. For example, in Thailand, selling insurance online requires a business to report to at least three different governing bodies all of which have their own set of rules to abide to. This increases admin work for small companies and also requires legal knowledge that most new companies lack.
Companies are also not allowed to call a customer to confirm purchase as that would be considered “telemarketing insurance sales” and requires a different license. One of the biggest challenges for fintech companies is encouraging users to trust young companies with their financial information, savings, and future to adopt its products and services.
It takes time and a lot of marketing dollars to explain to customers who you are and why they should trust you with their money. These challenges do get easier as more startups enter the space and educate their audience through smart marketing initiatives.
Rabbit, a company based in Thailand, is the first integrated online/offline payment platform in Thailand accepted in multiple retail stores, restaurants and used for public transportation. Its partnership with LINE earlier this year means over 5 million users are slowly allowing their financial information to be connected to some sort of a tech platform.
“This joint partnership [Rabbit LINE Pay] will strongly support government policy in driving Thai people into a cashless society,” says Nelson Leung, chief executive officer of BSS Holdings, the operator of Rabbit card.
Influence from neighboring countries such as Singapore and Malaysia, a lot of which have already set up country specific ‘sandboxes’ to trial for fintech regulations, are also moving towards a cashless society to drive the realization that there is a need for innovation in the financial sector.
Ecommerce is a big market, but until the shopping habits of Southeast Asians are shifted to online spending habits, it can never reach its full potential. The emergence of fintech and its supporters mean that by building the fundamentals, companies in the entire ecosystem can benefit from its success. 15 years ago, people would call a travel agent and ask them to book a ticket. And now? When was the last time someone called a travel agent to book a flight or hotel room? Behaviors change, but it takes innovation and time.