This special series analyzes how CreditTech companies in Asia have survived the COVID-19 pandemic and what lies in store. Today we conclude by looking at the industry’s winners.
- More in this series:
- CreditTech after COVID
- Will VCs continue to back lending platforms?
- Small P2P platform survivors retrench
In the wake of the COVID-19 crisis, two fintechs solidified their status as CreditTech leaders, Validus and Funding Societies.
How do we know this? Both were endorsed by the Enterprise Singapore, a government statutory board, as “participating financial institutions”, meaning they can access government money to lend on to borrowers using their platform. (Technically they had subsidiaries that were so named.)
Both have also achieved a robust size. Validus is the largest P2P platform for SME financing in Singapore, with about S$720 million ($542 million) of total disbursed loans. Funding Societies is the biggest in Southeast Asia, facilitating $640 million of loans in 2020 – most of them in Indonesia (where it competes with another large player, Investri).
These firms are recognized as the leading names by their peers and by venture investors.
How did they do it, and what lies in store?
Fintech business model
First, these firms follow sensible lending practices. Validus prefers to lend to SMEs for invoice financing and purchase-order financing, not for traditional working capital. It uses technology to develop credit scenarios, using proprietary algorithmic machine-learning engines.
Funding Societies simply ran a more conservative book, shortening tenors and tightening underwriting standards. It also favors use-based lending, such as for invoices, rather than general cash loans.
It also saw a material shift in new business away from Singapore, which was constrained by lockdowns, to Indonesia, which now accounts for more than half of its business. (It also operates in Malaysia.)
Good underwriting requires good data and the means to analyze it.
Singapore is a good place to do this because the government’s infrastructure, like MyInfo, provides a lot of data, but fintechs can also access traditional vendors, or credit bureaus and government tax departments.
But it takes a strong technology stack to access, process and make decisions this way. “Credit checks at banks can take days but our platform takes minutes,” said Shashank Singh, group CTO at Validus.
Getting that kind of data is harder in places like Indonesia. But the country did not experience lockdowns, despite the pandemic, so there was a boom in demand even as local banks pulled back. Funding Societies’s business there, operating as Modulku, ended up growing fast through the crisis.
“We cherrypicked the best deals and grew by nearly 50 percent in 2020,” said Kelvin Teo, Funding Societies’s co-founder and CEO in Singapore.
Better borrowers, diverse funding
Second, these companies are very engaged with their borrowers. They put a lot of resources into financial literacy, to help SMEs remain solvent.
They also work with investors, who are usually unfamiliar with fintech lending, to ensure they understand where SME loans fit into a portfolio, how to diversify, and how to hedge. And they worked to diversify their funding, with a preference for adding banks and institutions, and relying less on wealthy individuals and family offices.
Third, they are able to scale beyond the home market. In 2020, Validus launched in Indonesia and Vietnam, and hopes to open in Thailand this year. Funding Societies has been operating in three markets from the very start, and is now very dependent on Indonesia, where it competes with Investri for the biggest market share. It is also looking to add two markets in 2021, with Thailand, Vietnam and the Philippines under consideration.
Fourth, they have developed good relationships with regulators. Validus works with regulators to draft frameworks and policies for SME financing, including explaining how technology platforms can drive financial inclusion.
This paid off with them being named PFIs, or participating financial institutions, a status until now reserved for licensed banks. “We’re breaking the traditional barriers,” Singh said.
For better or worse, this respectability means these companies are now balancing the need for growth with the need to be profitable.
Validus could break even by Q3 this year and is looking at strategic partnerships to ensure a sustainable future. These could be with e-commerce companies, other fintechs, or even government programs, anything that serves as a channel to source more SMEs.
Funding Societies is also thinking about strategic partnerships; one of its new backers is Bank Rakyat Indonesia, which provides a channel to borrowers.
Maximum profits, maximum fintech?
Funding Societies is also much more focused on profitability, with the aim of breaking even by the end of 2021. Teo says venture investors are no longer enamored of a WeWork-style bonfire of cash.
Funding remains important. Validus’s backers include Vertex, a subsidiary of state institution Temasek. Singh says the company will look to raise a C round in 2021, both to help the company expand (new products, new geographies) and possibly make acquisitions.
Yet raising capital is getting harder. Funding Societies announced a C round in 2019 counting investors such as Samsung, but some of the other investors abandoned their commitments in the wake of COVID-19. Teo says the round has closed.
Some of these jitters reflected COVID-related concerns. But it’s also a question of how to value a fintech that is also a PFI. These businesses lack a bank’s size and heft, but they are beginning to operate more like a bank.
For them to maintain an attractive valuation, they will need to focus on technology, from top to bottom, to grow at scale while keeping costs under control. The good news is that more automation and more data will lead to better credit decisions, which will help reduce the cost of lending and improve margins.
Even as the leaders in CreditTech gain they respectability of banks, they need more than ever to be maximum fintech.