Fintech & Beyond: Insights from Singapore Fintech Festival 2023

The Singapore Fintech Festival last week not only provided an immense opportunity to learn but also a small glimpse into the future. The punchline, as quoted by the President of Singapore himself, was “AI is disrupting the disruptors!”. Within the melting pot of innovators, thinkers & visionaries, the significance of AI echoed. The tone of the event was introspecting & thoughtful and highlighted several recurring themes such as AI, Payments, Insurance, and Embedded Finance. It was also interesting to hear from VCs across the globe about areas in Fintech where they see deep value creation in years to come.

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Below we highlight some of our key takeaways from over 25 sessions that we attended across the three most intense & enlightening days last week.

The Transformative Role of AI in Fintech and Beyond

1. Advancements in AI’s Capabilities

• Human-Like AI: AI is advancing towards acquiring more human-like characteristics, indicating a future where AI could achieve singularity in specific tasks, such as personalized customer service or complex problem-solving.
• AI in Healthcare and National Security: The use of AI in sensitive sectors like healthcare for diagnostic and treatment purposes, and in national security for surveillance and threat detection, necessitates stringent regulations to manage its profound implications.
• Diagnosis and Treatment Enhancement: AI’s role in healthcare, particularly in speeding up diagnoses and improving treatment quality, is set to be highly beneficial, especially for aging populations who require more medical attention.

2. AI’s Impact on the Workforce

• Job Replacement Potential: AI has the potential to quickly replace about 10% of tasks in 80% of jobs and as much as 50% of tasks in 25% of jobs, signaling a significant shift in workforce dynamics.
• Workforce Transformation: AI’s influence extends to reshaping the workforce, particularly in replacing tasks that require cognitive skills, thereby disrupting traditional job hierarchies and necessitating new skill sets.
• Shifting Skill Valuations: As AI takes over tasks requiring cognitive abilities, the emphasis might shift from IQ to EQ, recognizing the importance of emotional intelligence in areas AI cannot easily replicate.
• Impact on Programming and Medium-Skilled Jobs: AI’s advancement is likely to replace many programming jobs and impact medium-skilled job markets in developing countries, potentially leading to a shift in the global job market landscape.
• AI Co-pilot vs. Auto-pilot: Future developers will become better system thinkers and will be able to solve problems faster but they will not be replaced by AI. The problem statements will become bigger [think of industrial revolution and what it did to the evolution of the agrarian society]. Co-pilots will also help in faster diagnosis of system issues, reduce outages & increase reliability.
• English is the new programming language: Any natural language will become the new programming language. The logic will prevail, and productivity of engineers will see significant improvement. Will enhance collaboration and augmentation of code as inference of the code will become easier.

3. Ethical and Social Implications of AI

• Misinformation and Deepfakes: The use of AI in generating misinformation and deepfakes poses a substantial threat to the integrity of information, impacting democracy and social harmony, and requires measures to combat such misuse.
• Financial Inclusion and Ethics: While AI offers significant opportunities for financial inclusion by providing access to financial services to underserved populations, it also poses challenges in ensuring these outcomes are fair and based on accurate, unbiased data.

4. AI in Financial Services

• AI as Financial Advisor: AI’s role as a financial advisor is particularly effective, but its use in advising retail investors, especially regarding life savings, calls for careful regulation to protect consumer interests.
• Operational Streamlining: AI is being leveraged to simplify and enhance various operational aspects in financial services, such as automating customer service interactions and optimizing the client onboarding process.
• The Bionic Workforce: The concept of a ‘bionic workforce’ in banking, which combines human talents with AI tools, emphasizes the need for a balanced approach to service personalization and efficiency.

5. AI in Financial Crime and Compliance

• Fraud Detection and Compliance: AI is increasingly being used in the financial sector to enhance capabilities in detecting fraud and ensuring compliance with regulatory requirements, thus safeguarding against financial crimes and ensuring adherence to legal standards.

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Revolutionizing Transactions: Insights into the future of payments

1. Advancements in Payment Technologies

• Embedding Payments in SaaS: SaaS platforms are evolving to integrate payment solutions directly into their services, turning them into one-stop shops offering full-stack products and services. This trend is particularly noticeable in platforms like Shopify, Squarespace, and Lightspeed, which are transforming the way marketplaces operate​​.
• Breakthroughs in P2P and B2B Transfers: There has been a significant increase in transaction volume due to mobile number-based peer-to-peer and business-to-business transfers. This innovation indicates a shift towards faster and more efficient real-time transfer systems, enhancing both convenience and scalability in payments​​.
• B2B Opportunities: The next decade is poised to see significant growth in cross-border B2B payments. With AI expected to play a major role, there is a potential revenue opportunity exceeding $200 billion. This space is seeing increasing interest from venture capitalists and startups, indicating a robust future for cross-border payment solutions.

2. The Rise of Instant Payments

• Closing the Gap: The focus on instant payments is geared towards making money transfers more accessible and user-friendly. Efforts are being made to address real-time refunds, QR-based payments, and recurring payments, all aimed at creating a more customer-centric payment experience​​.
• UPI’s Impact in India: The Unified Payments Interface (UPI) in India has significantly reduced cash usage (from 97% pre-UPI to 83% currently), showcasing the potential of digital payment systems to transform financial transactions in large economies. The rise of UPI transactions exemplifies a successful shift toward digital payments​​.

3. Challenges in Payment Systems

• Interoperability in Cross-border Payments: A key area of focus is making instant payment systems interoperable across different countries, especially for cross-border transactions. This interoperability is crucial for businesses like Amazon that need to collect payments globally​​.
• Recurring Payments: Currently, instant payment systems face challenges with recurring payments, which is a crucial feature for unlocking new merchant segments and enhancing the payment experience for subscription-based services​​.

4. Digital Public Infrastructure and Its Impact

• Three-Layer Infrastructure: India’s approach to digital public infrastructure, including Aadhar (identity layer), the payments layer, and the ONDC (data exchange layer), is a key example of how such systems can democratize access to digital payments. These platforms are non-profit and aim to provide core infrastructure while allowing private players to innovate on top of them​​.
• Reducing Cash Dependency: The economic model highlights the cost savings in digital payments over cash. For merchants, the cost of accepting cash can be significant, and the economy bears a substantial cost in printing and maintaining cash. The government’s subsidization of small transactions and support for small merchants is an essential factor in driving digital payment adoption​​.

5. Inclusivity in Payment Systems

• Elderly and Digital Payments: The increasing comfort of seniors in Singapore with e-payments reflects a broader trend of digital financial services becoming more inclusive and accessible to older populations. This demographic shift is crucial for ensuring that digital payment solutions cater to all segments of society.

Transforming Protection: Key Trends in Insurance

1. Evolution of Embedded Insurance

• Dynamic vs. Static Products: The shift from static to dynamic insurance products is marked by a transition to ‘smart’ embedded models. These smart models utilize over 1000s of parameters in customer profiles to offer customized insurance and communication, which is particularly significant in China where banking is almost entirely digital​​.
• Customization and Personalization: Insurers are leveraging detailed customer data to offer personalized products. This approach is crucial for success in digital markets, exemplified by China’s lead in embedding services into financial products, like offering long-term accommodation for the elderly with full medical care​​.

2. Challenges and Opportunities in Embedded Insurance

• New Distribution Models: The concept of embedded insurance, though old, has gained new traction with companies like Amazon, which bundles health coverage with its services in the U.S. This model helps reach the underinsured and links micro-insurance products with other financial services​​.
• Scalability and Monetization: The scalability of embedded insurance models and monetization remains a challenge. The margins for reinsurers in digital embedded micro insurance get squeezed by manufacturers and distributors, making it a tough market for venture capitalists​​.

3. Global Insurance Gap and Insurtech Investments

• Insurance Accessibility: The global insurance gap is around $1.8 trillion, underscoring a vast market for insurtech solutions. Companies like Bolttech are addressing this by offering tailored, affordable insurance products across 35 markets in four continents, using a B2B2C model to widen access​​.
• Insurtech Deals: Tokio Marine, for example, has made 60-70 investments in insurtech and is actively seeking more deals worldwide. This reflects a growing trend among major insurers to invest in innovative insurance technologies for financial inclusion​​.

4. Impact of Regulatory Changes and Digital Trends

• Gig Economy and Insurance: The gig economy, which makes up about 10% of the workforce, lacks traditional employee benefits, highlighting a market need for adaptable insurance solutions. This gap represents a significant opportunity for insurtech companies to innovate​​.
• Digital Transformation in Insurance: In China, for instance, the digital shift in insurance has led to empty branches, with Ping An becoming the world’s largest car insurer through digital means. This trend challenges traditional models and underscores the importance of digital insurance solutions.

Embedded Finance: Integrating finance and tech

1. Trend and Future of Embedded Finance

• The last decade’s trend was about digitizing offline businesses.
• The upcoming decade is anticipated to witness a comprehensive merger of finance and technology.
• An example is the transformation of vertical SaaS businesses (like those offering restaurant management software) into comprehensive fintech businesses, incorporating financial services as a core part of their offerings​​. 

2. Infrastructure Development for Embedded Finance

• This transformation requires extensive infrastructure development.
• Essential components include integrating payment processing, payroll management, accounting systems, and creating a complete financial services stack within the business model​​. Examples: Unit, Layer, Salsa.

High conviction areas for investments from Global VCs

1. Supply Chain Finance (MSME Credit)

• Buyer-led working capital (WC) finance. Provide WC loans to small mom & pop shops through FMCG relationships. Ensure that loans are used for productive purposes.
• Key issues: Second highest #frauds in this space (Example: Greensill Capital).

2. Trade Anything Anywhere 

• Tokenize RWAs and bring them to decentralized exchanges.
• Build on-ramps & off-ramps for fiat to crypto and vice-versa.
• Key issues: Regulations. Control on money laundering. Political need to regulate cross border flow of capital.

3. Financial Products for GIG Workers

• 15% of Singapore’s population is in GIG economy with no employee benefits. 500M GIG workers globally will need benefits in next 10 years.
• Companies enabling platforms to provide benefits to GIG employees are likely to be the next big thing. Solutions will be localized & specific to markets.
• Strong regulatory tailwind likely. Singapore & certain areas in India are making it mandatory for platforms to provide benefits to GIG workers.
• Key issues: Lack of incentives for platforms to do this. Monetization. Scalability.

4. Climate Accounting (ESG + Carbon)

• International Society of Sustainability Professionals (ISSP) is likely to bring regulations around report % of revenue & profit that carries climate related risks including emissions related to supply chain. Lenders, shareholders & exchanges related to these companies need to report as well.
• Significant opportunities for fintech companies to create products & solutions that enable measurement, mitigation and compliance with these risks. Example: Accounting, hedging, trading, reporting, etc.
• Key issues: Regulation led; hence timing & value capture uncertain.

5. Cross Border Payments

• Transformation in B2B cross border payments in next decade = better automation, monetization. $200B revenue opportunity. AI likely to turbo charge this.
• Key issues: Old problem. Requires international coordination.

6. Focus on Specific Demographics

• In 2050, there are c2.1B people who will be more than 60 years old. In next 20 years, richest cohort of consumers = Seniors (likely to withdraw $14T from retirement plan in next 20 years). Baby Boomers in US own c$80T of assets.
• Opportunity 1: Elder friendly wealth management platform (opposite of Robinhood).
• Opportunity 2: Disrupt AARP (American Association of Retired Persons) which makes $1.6B in revenue.
• Opportunity 3: Products & Solutions that protect elderly from online scams.
• Key Issues: Elderly struggle with tech adoption. Hard to compete with non-profits.

7. Building on Digital Public Infrastructure (DPI)

• Best DPI example: India Stack.
• Huge opportunity to build along the stack: fraud prevention, dispute resolutions, products, solutions, risk, cyber security, payment gateways, etc.
• The need for services analogous to traditional financial systems like Mastercard and VISA, but designed for the digital infrastructure like India Stack.
• Key issues: Monetization.

8. Embedded Finance

• Last decade = bringing offline things online. Next decade = real merger of finance and technology. Example: vertical SAAS businesses (restaurant software) becomes a fintech businesses. 
• Opportunity to create platform & products that enable journey of SAAS business to full-stack Fintech companies [first layer with payments, then payroll, then accounting, then full stack finance solution].
• Example = Unit (banking as a service), Layer (Embedded accounting), Salsa (Embedded payroll company).

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VC Insights: Navigating the new investment landscape

1. Market and Investment Focus:

• There’s a zero-tolerance attitude toward companies merely focused on growing revenue or market share. The emphasis is now on unit economics, cash flow, and a clear path to profitability.
• Startups need to concretely articulate how they will generate profit in the next 2-3 years.
• The recent trend of startups achieving easy and free money is over. Aspiring entrepreneurs need realistic expectations about the challenges of building a business.
• The new investment environment will adversely impact innovation in capital-intensive Sectors.

2. Entrepreneurship Outlook:

• Many young graduates aspire to be entrepreneurs, but their perception, shaped by the last 13 years, is often skewed.
• Good entrepreneurs are characterized by their commitment and willingness to work extensively. In contrast, bad entrepreneurs are driven by the superficial ‘cool’ factor of being a founder.

3. Industry Cleanup and Talent Repurposing:

• Poor quality companies should exit the market, allowing their talent to be redirected to more significant problem statements and higher quality products.
• The period from 2019-2021 is likely to be the trickiest vintage for VCs, especially for growth funds. With over 2200 unicorns globally at the peak, the market is seeing significant adjustments through down rounds, forced M&As, and many startups going bust.
• The number of venture capital firms has also decreased from 11,000 at its peak to around 8,000 currently and is expected to drop to a steady state of around 3,000 globally.
• The influx of tourist funds (mutual funds, hedge funds, private equities) in growth stages is receding, impacting growth valuations.
• Early-stage funds are less susceptible to high valuations due to their smaller exposure per company. Quality venture capitalists add significant value beyond capital.

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As we neared the end of the Singapore Fintech Festival, one thing was clear, that the industry is at a pivotal juncture. AI’s potential to revolutionize not just fintech but multiple sectors underscore a transformative era where technology meets human ingenuity. However, this revolution brings its own set of challenges – ethical concerns, workforce impact, and the need for stringent regulation. The festival emphasized the criticality of embedding financial services in various business models, highlighting the seamless integration of technology and finance as the way forward. It also spotlighted the significant focus on sustainable and profitable growth, marking a departure from the era of unfettered expansion. As we forge ahead, the key takeaway is a balanced approach – where innovation is coupled with responsibility, and growth is aligned with sustainability. The fintech landscape is evolving rapidly, and staying ahead means embracing these changes with agility and foresight.