Technology companies are built to scale. If they can’t scale, they may not survive. This is why many Asia-based fintechs and digital banks are always looking for new markets to enter. But the region’s very diversity makes it a difficult place to add geographies.
“We need to ask ourselves, what’s the unmet need?” said Yogesh Sangle, head of Instarem, the direct-to-consumer and SME business at Nium, a payments infrastructure unicorn. “Are we solving for something by entering a new market? Do our customers need it?”
For many businesses, but most of all digital banks, this question is likely to be answered by the local regulatory landscape and licensing requirements.
“Differences in regulation will impact your business and your operating model,” said Coenraad Jonker, CEO of digital bank Tyme, which recently launched in the Philippines and is looking at its next regional market.
For example, there are a lot of details around tax law that can make or break a bank’s ability to become profitable.
Regulatory questions will also involve customer onboarding, data treatment when using cloud computing, and the possibility of needing additional licenses.
“The details can surprise you,” Jonker said.
The complications of growth
The same challenges hold true for companies adding new products in markets where they already operate. Nium has licenses and offices in several markets around the world, but having a money-operating license isn’t enough for Nium’s other services, such as credit cards or mobile apps. “Each of these raises its own operations, regulations, and security questions,” Sangle said.
The process of geographic expansion is also slower than fintech companies might initially expect, from licensing to finding partners to investing in the nuts and bolts of the business.
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“We entered new markets early because it takes time,” said Kelvin Teo, co-founder and CEO of Funding Societies, a lend-tech company that built out three markets from the start (Singapore, Indonesia and Malaysia) and has added two more, including Thailand.
Once the decision is made to enter a new market, the most obvious question is to what extent operations can be streamlined. Fintechs must evaluate whether market entry is best served through acquisition, partnership, or building everything themselves.
This is usually about balance, rather than making a black-and-white decision.
Tyme, for example, is a technology company. To make that work as a licensed digital bank requires a strong local partner.
“We need to work with a business that understands regulation, provides distribution and retail integration, and has deep pockets,” Jonker said. “It can cost as much as $100 million to create a digital bank.”
Costs won’t be as high for non-bank fintech businesses, but partnership is always vital.
“We begin by partnering with local banks,” said Teo, who says entering a new market is still complex. Funding Societies serves retail investors as well as uses its balance sheet for lending, and it relies on a crowdfunding model. This mix makes entering new markets difficult.
What can be outsourced
Fintechs therefore analyze how much of their work can be outsourced, which means understanding their core competence, and how much of the business can be centralized and how much must be fitted to local conditions.
“If it’s not a core business, we are happy to partner,” said Sangle.
Jumio, a regtech company, is one example of a business that helps fintechs and digital banks expand into new markets, by supporting their compliance needs.
“Fintechs use us to create their online customer onboarding,” said Santosh Rajvaidya, senior director of product management. Jumio’s KYX Platform includes know-your-customer and anti-money laundering checks, and other tools to root out potential risks and fraud. “It’s about end-to-end online identity proofing, eKYC and AML monitoring throughout the customer journey,” he said.
Fintech executives like Sangle say such services help relieve the pain of dealing with compliance and security across different markets.
This makes vendor selection a critical skill for a growing business, be it for compliance, payments, human resources, or other functions. Even when outsourcing, fintechs and digital banks need to understand what they can control, and how responsive a vendor can be in a given market. This makes vendor selection important early in a fintech’s existence, because choices in new markets will impact a company’s scope for action later on.
“As we reach maturity, we can standardize more,” said Teo.
That means the balance may change, but no firm is going to be able to operate effectively across multiple markets and product lines. If they’re still growing fast, fintechs are adding complexity, especially in Asia.
To hear case studies from fintech and digital bank leaders in Asia, be sure to register for DigFin’s upcoming webinar, “Fintech Growth in Asia”. We will be hearing from these executives in more detail as they discuss the challenges from growing into new markets, and share their learnings.