The growth of fintech startup firms in vietnam

Nội dung text: The growth of fintech startup firms in vietnam

1. THE GROWTH OF FINTECH STARTUP FIRMS IN VIETNAM Ngo Duc Tien*1 ABSTRACT: This paper presents the development of fintech startup companies, their types and their future in Vietnam. The expected scientific contribution supports the defining stages of development for Fintech startups, as well as their challenges. The goal of the research was to investigate whether Vietnam would be ready for the rapid growth of Fintech startups. Scientific and research contributions of the paper are reflected in the fact that there is a relatively small number of papers, especially in the external literature, that address these issues. Therefore, this research can contribute to a better understanding of the growth of fintech startups in Vietnam. Presented and interpreted results could be a useful basis and encouragement for a further research in this and similar topics related to the startup scene at the local as well as the global level. Keywords: fintech, startup firms, financial technology 1. INTRODUCTION “FinTech” is an abbreviation for “Financial technology” which applies the technology methods to solve financial needs. The original term can be initiated from the early 1990s, relating to a project namely “Financial Services Technology Consortium” created by Citigroup to motivate the technological cooperation2. Nevertheless, it is until 2014 that the policymakers, manufacturers and consumers alike have paid attention to FinTech. Now, FinTech is one of the large and fast growing industries which have been chose by many huge investors all over the world. This speedy growth led to demand of greater regulatory scrutiny which is firmly assured the basic role of FinTech in the functioning of finance and its infrastructure. Nowadays, FinTech is often considered as the special combination of financial services and information technology. Like many industries in Vietnam, the FinTech sector has seen rapid growth in recent years. Vietnam is currently ranked second in the number of incubator, accelerator, and innovation labs in the region, behind only Singapore. This is a positive signal for the development of fintech in Vietnam. While it is difficult to gauge the exact amount of investment new FinTechs have attracted, an estimate published in Vietnam Investment Review from the Topica Founder Institute put the total investment in Vietnamese FinTech startups in 2016 at $129 million dollars, accounting for 63 per cent of all startup contract value, with companies such as Payoo, VNPT E-pay, M_Service (Momo), and F88 leading in terms of deal value. Much of the development in the sector has been driven by technology entrepreneurs from outside traditional financial institutions. This has created some tension between these digital disruptors and legacy banks as the latter have moved to also create tech products for their customers. Vietnam can expect its fintech ecosystem to grow in the near future should it pay attention to the funding issue, growing talent in the field, and a legal framework to support such growth. Vietnamese Fintech startup firms are still small in scale and the policies and regulations for these * Banking and Insurance Faculty – Academy of Finance, Hanoi City, Vietnam, corresponding author. Tel.: +84 987 822 722, E-mail address: vcb.dtda.1@gmail.com.
2. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 181 companies are still limited. Many banks are still cautious in their decision to cooperate with fintech. They do not realise that there are people who have never opened a bank account, but the number of smart phone users is increasing. Fintech is the bridge that helps banks bring more services closer to more people. Apart from the funding issue, talent shortage and government support policies and regulations are other major challenges that fintech in Vietnam as well as the region have to face. Governments play a vital role in shaping a conductive fintech ecosystem that helps attract and develop the right talent pool and promotes innovation and collaboration and healthy competition. This paper analyzes the evolution of, and outlook for, the FinTech startup firms in Vietnam and considers the conditions of their growth. 1. LITERATURE REVIEW Definition of startup firm Startup firms are newly founded companies or entrepreneurial ventures which are in the first phase of its operations. They are funded by their own founders as they believe that a product or service provided is a trend of demand. There is a definition by NESTA (Dee at al., 2015) that defines startups as:“A young, innovative, growth-oriented business (employees/revenue/customers) in search of a sustainable and scalable business model”. This definition expands on Steve Blank’s (2013) definition of startups as organization formedto search for repeatable and scalable business models. Startup firms are usually, but not necessarily, associated with high-tech projects because they mostly concentrate on software which can be easily made and re-made. In addition, high technology projects, in their nature, can be powerful motivation for the growth. An interesting fact shown by the research is that technology-oriented startups are typically located in major urban centres. The reason is attributed to the need for a market that exceeds the local level (Baptista, Mendonỗa, 2009). However, there are more and more startup companies in traditional industries and business sectors. At the international level, there is more and more research associated with the importance and ways of financing entrepreneurial ventures (formal and informal), especially in the period of intense globalization. The operation of startups is often risky. First, many startups fail in the very early stages and less than one third of them turn into companies- “high rate of failure” (e.g. see, Vesper, 1990). Second, failure occurs due to several reasons, such as lack of finance, team management problems, lack of enough business knowledge, technology lag, etc.-“startup problems” (e.g. see,Nỳủez, 2007). Third, most of startups that survive might turn into successful companies which play a significant role in economies-“success stories” (e.g. see, Martinsons, 2002). Fifth, there is a black box called “valley of death” which is more of a metaphor than a well-defined stage (Hudson & Khazragui, 2013). Even if this black box is well studied, the startup itself is ignored as the level of analysis- “startup stage” (e.g. see, Van de Ven et. al., 1984). The product of startup firms is often very new and its first appearance can be very difficult as well as highly invested. Owing to limited revenue or high costs, most of these small-scale operations are not successful without additional funding from others financial resources (not only their owners). Definition of Fintech Kawai (2016), General Secretary of the International Association of Insurance Supervisors, a member organization of the Financial Stability Board, offers a working definition of “FinTech” as follows: it is a “technologically enabled financial innovation. It is giving rise to new business models, applications, processes and products. These could have a material effect on financial markets and institutions and the provision of financial services.” “FinTech is an acronym which stands for financial technology, combining bank expertise with modern management science techniques and the computer” [Bettinger 1972].
3. 182 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA “Financial Technology, also known as Fintech, is a new sector in the finance industry that incorporates the whole plethora of technology that is used in finance to facilitate trades, corporate business or interaction and services provided to the retail consumer” [Micu & Micu, 2016]. “Fintech is an emerging financial services sector that includes third-party payment, MMF, insurance products, risk management, authentication, and peer-to-peer (P2P) lending” [Shim & Shin, 2016]. The Fintech companies combine financial services with new innovative technologies. They provide Internet-based and application-oriented products. The aim of Fintechs is attracting the clients with more user-friendly, efficient, transparent and automated products and services. As a rule, new participants in the market offer Internet-based and application-oriented products. FinTechs generally aim to attract customers with products and services that are more user-friendly, efficient, transparent, and automated than those currently available. Traditional banks have not yet exhausted the possibilities for improvements along these lines (EBF 2015; Mackenzie 2015). The fintechs not only offer products and services in banking sector but also distribute insurance and other financial instrument or provide third party services. The term “Fintech” is not able to define on the basis of its use in legislation or official legal documents. Each Fintech company is under the different kinds of legal and regulatory obligations in accordance with their business models or products or services they make. In the end, it is not possible to construct a restrictive definition of “FinTech” that applies to all of the entities traditionally associated with the term. While most companies in the FinTech industry have certain features in common, there are always enough exceptions to render them inadequate for producing a general definition. For example, many of the FinTech companies are in their startup phase. However, since not all FinTech companies are startups, this category cannot be an essential part of a FinTech definition. The same applies to the participation of a large number of investors in a funding opportunity (the “crowd”) or the use of social-media components. Although these two features are integral to the operation of many segments of the FinTech industry, such as in crowdfunding or social trading, there are others, such as innovative payment services, where they have no importance at all. For this reason, rather than trying to provide a restricted or legal definition, the following sectionwill provide a summary of the various major segments of the FinTech industry. Segments of the FinTech Industry Figure 1: Segments of the FinTech industry Sources: [10]
4. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 183 Firms in the FinTech industry can be separated into four major segments based on their specific business models. By analogy with traditional value-adding areas of a universal bank, FinTechs can be distinguished on the basis of their involvement in financing, asset management, and payments, as well as other FinTechs, a loose assortment of companies that perform other functions. Figure 1 illustrates this categorization and provides a detailed representation of the sub-segments of the industry. 3. RATIONALE FOR FINTECH STARTUP FIRMS TO DEVELOP IN VIETNAM The country with young population and a larger number of Internet users Vietnam has over 90 million people with young population. Most of them were born from 1980 to 2000 and their lives have strong connection with internet. Vietnam’s Internet penetration rate reached 52% in 2016 while smartphone ownership accounted for 72% in urban areas and 53% in rural areas. This makes Vietnam one of the fastest growing adopters of smartphones in Southeast Asia. Figure 2: Internet users in Vietnam Sources: [14] 67% of Vietnamese population are Internet users, 57% are active social media users and 73% are individual mobile phone users. The annual growth rate in Vietnam is breathtaking –the percentage of Internet users increases by 28% (or 14 million people) and 20% for active social users, according to a Kepios report. This indicates great opportunities for new product ranges focusing on this consumer segment. Moreover, Vietnamese attitudes towards technology is very positive and with great potential, 61% of Vietnamese people believe that new technologies offer more opportunities than risks and 63% prefer to complete task digitally whenever possible. Choosing payment method provided by Fintech startups is a trend in Vietnam The digital finance industry in Vietnam is a promising market for both traditional banking institutions and new market players, spanning across payments, loans, financial inclusion, block-chain and more. At the same time, the continuous pressure to respond to ASEAN economic competition is encouraging local players to step up their game, while collaborating with foreign counterparts. The clients in Vietnam now can choose more methods for payment than the past. For example, to pay the electricity bill, the Vietnamese can use the fintech startup firms such as ECpay, Payoo, Bankplus wallet and etc instead of online banking or cash. Despite the fact that fintech is not too familiar with
5. 184 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA the Vietnamese (the first fintech firm was founded in 2005, namely VTPay), the amount of transaction is dramatic with various and potential suppliers to participate in. Following Statista (2017), the estimation of Vietnam Fintech transaction is US$ 7,259 million in 2017, with the average developing proportion of 17,5% from 2017 to 2021. The biggest field is “digital payment” with total transaction value of USD 7,252 million (99.9%). This is one of the very few best fast growing sectors, and one of the hottest investment trends for startups in Vietnam. Figure 3: Distribution of Fintech companies in Vietnam by activities Sources: [11] The capital flowing into Fintech startup firms is rising so fast Vietnamese fintech market reached USD$ 4.4 billion in 2017 and it is forecasted to be USD$ 7.8 billion in 2020 (following the research of Solidiance). In published report namely “Unlocking Vietnam’s Fintech Growth Potential”, Solidiance recorded plus point for some factors including the rate of internet and smartphone users, e-wallets, income and consumption and e-commerce. Following the report of Topica Founder Institute about top 6 industries with the highest startup deals in 2016, Fintech industry ranked the first place for 9 successful deals and total value was US$129.1 million. In 2017, Fintech stepped back to third place with 8 deals, contributing US$57 million. Although the capital flowed into Fintech startup firms decreased in 2017, it was still one of 6 sectors which received the highest investment value. 4. THE GROWTH OF FINTECH STARTUP FIRMS IN VIETNAM Legal framework for promoting the operation of Fintech startups Vietnam has set up the basic regulations for digital finance, including non-cash payments and intermediary payment services (e.g. digital wallet services) since 2010. The Overall plan for digitalizing payments were initiated in the promotion of e-commerce in Vietnam with the Prime Minister’s Decision No. 1073/QDTTg in 2010 on approving the master plan on e-commerce development during 2011-2015; and the Government Decree No. 52/2013/ND-CP on e-commerce. In November 2012, the Government of Viet Nam issued Decree 101/2012/ND-CP directing the issuance of regulations for non-cash payments. Circular 36/2012/TT-NHNN and Circular No. 39/2014/TT-NHNN were eventually issued in December 2014, providing guidelines for intermediary payment services. On July 1st, 2016, Decree 80/2016/NC-CP was issued amending Decree 101. Subsequently, Circular No. 20/2016/TT-NHNN was issued amending Circular No. 39.The digitalizing payment ideas
6. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 185 are clearly stated in the Government Decree No. 101/2012 on non-cash payment and Decree No. 80/2016 amending the Decree No. 101 above. Of which, non-cash payment can be carried out by both credit institutions (including microfinance institutions) and intermediary service providers who have licenses from the State Bank. The plan for implementing Government Decree No. 101/2012 has been made further steps by the State Bank of Vietnam (SBV) Circular No. 39/2014/TTNHNN on intermediary payment services. Government also limit transactions paid in cash in the Government decree No. 222/2013/ND-CP to promote more non-cash payment (e.g. no cash payment for organizations using State budget source, securities transactions via Stock Exchanges, enterprise capital contributions and purchases – articles 4,5,6)1. On 17th March 2017, Governor of the State Bank of Vietnam (SBV) signed Decision No.328/QĐ- NHNN to establish SBV Steering Committee on Financial Technology (Steering Committee on Fintech). The SBV Steering Committee on Fintech is led by Deputy Governor Nguyen Kim Anh and Deputy Director of SBV Payment Department Nghiem Thanh Son has been assigned as Vice Chairman of the Committee. SBV Steering Committee on Fintech with representatives from functional departments of the SBV and National Payment Corporation of Vietnam (NAPAS) is responsible for formulating and submitting to SBV Governor the annual action plan of the Committee; advising Governor the solutions to complete the ecosystem including a legal framework to facilitate the performance and the development of Fintech companies in Vietnam in line with guidance and orientation of the Government; discussing and submitting to SBV Governor several crucial substances relating to strategy, plan for accelerating the development of Fintech in Vietnam, and conducting other tasks as authorized by SBV Governor. In this Decision, SBV Governor also approved to establish a Working Group to support for SBV Steering Committee on Fintech including officials and specialists from functional departments of the SBV and the NAPAS. Deputy Director of SBV Payment Department Nghiem Thanh Son is assigned by the Governor to be the Head of Working Group.Payment Department of the SBV has been tasked to be a Standing Agency for SBV Steering Committee on Fintech. The Decision No.328/QĐ-NHNN takes effect from the date of signing. In 2016, the Prime Minister approved the “Supporting National Innovative Startup Ecosystem to 2025” Project, or Project 844, through Decision 844/QD-TTg/2016. It focuses on supporting the national innovation startup ecosystem through 2025 and developing a legal system and a national e-portal for startups by 2020. In addition, it will also provide funding support to 200 startup enterprises. In January 2018, the Law on Supporting Small and Medium-Sized Enterprises came into effect, with detailed provisions for support to startups in areas such as technology transfer, training, trade promotion, investments, preferential loans, and incentives for venture capital funds. Decree 38/ND-CP, which came into effect in March 2018, focuses on innovative startup investments. It identifies and recognizes startup investment activities as a business and provides legal status to innovative startup companies and funds. In addition, one of the regulations stipulates that the State can also invest in a startup, maximum to 30 percent of the total investments. Highlight Vietnamese Fintech startups’ timeline Fintech sector is still unfamiliar to Vietnamese consumers even though payment intermediates appeared in 2008. In 2017, Vietnam had 48 Fintech startups and most of them specialized in payment segment.
7. 186 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA Figure 4: Number of Fintech startups divided by segment in 2017 Sources: by author Basing on the statistics, over 40% of Fintech startups provide the online payment tools to clients, online POS/mPOS, transferring money and etc. Some popular Fintech startups in payment segment are e-wallet Momo and VNPT Epay from VNPT, VTC pay of VTC, ononpay, 123 pay, zing pay, sohapay, Other segments of Fintech industry such as crowdfunding, personal finance, money transfer, lending, data management, POS management, comparison sites and block-chain and bitcoin have small size and operate with the lack of law guidance. Comparing with other markets as Singapore, Hong Kong or Campuchia, a number of Fintech sectors in Vietnam are still smaller than the potential market. Regarding actual Fintech business / startups: Currently a lot of the “Fintech innovations” are still coming from the incumbents who have the money, the resources, the customer base and the infrastructure to roll out their solutions on a wide scale without the usual uphill battles startups have to fight. The flagship Fintech startup in Vietnam is certainly MoMo – the first Mobile Money company to really gain significant traction in this market. MoMo is especially focusing on bringing digital banking to the unbanked, rural population of Vietnam where the next physical bank branch can be kilometers away. Mobile wallet and payment app MoMo got great validation when it received some $28 million worth of investment from Standard Chartered Private Equity and Goldman Sachs back in 2016. A fintech startup namely Moca (mobile payment platform) had to make its way through hard times over the past five years in order to reach their current success. It was officially licensed by the central bank in 2016 and has just signed a co-operation agreement with their 11th banking partner for their mobile payment product. Moca and MoMo are just two of the numerous fintechs that have dared to think outside the box. By venturing to create financial solutions to address the needs of both the market and customers, they demonstrate confidence in the mobile payment market and the development of the fintech industry in Vietnam. In November 2016, Vietnamese mobile content provider VMG Media, a company listed on the country’s UPCoM bourse, sold its entire stake of 62.25% in VNPT EPay to UTC Investment, a venture capital arm wholly owned by Korea’s Daesang Group chairman. The size of the deal was not disclosed. VNPT EPay’s charter capital is VND 80 billion (USD 3.6 million), but sources said the South Korean investor had spent USD 33.8 million to acquire the payment firm, dealstreetasia.com reports. VNPT EPay, founded in 2008 by VMG Media and Vietnam’s third largest state-owned mobile network operator Vietnam Post and Telecommunications Group (VNPT), which holds a 35% stake, along with other shareholders, boasts itself as the country’s third biggest e-payment business, according to the source. UTC Investment specialises in buyouts and investments in startups, with a focus in the Korea market while also making cross-border investments primarily in China and Japan, VNPT EPay said in a statement. VMG Media had a debut on UPCoM in August 2016, the IPO that saw its VC backer Cyberagent Ventures exit. On 30th November 2016, Credit China FinTech Holdings Limited (“Credit China FinTech” or the
8. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 187 “Company”; together with its subsidiaries, the “Group”, stock code: 8207), a leading integrated fintech service provider in China,was pleased to announce that the Group intends to acquire approximately 51% of the enlarged issued share capital in Amigo Technologies Joint Stock Company (“Amigo Technologies”) at a consideration of approximately USD12.73 million, equivalent to a valuation of approximately USD25 million. Established in January 2005, Amigo Technologies is principally engaged in the provision of IT services and solutions for personalised financial services in Vietnam. It is currently a strategic partner of many ofthe world’s leading providers of IT solutions and devices including IBM, HP, Dell, Oracle and Microsoft. It ranks among Vietnam’s top five IT service providers targeting large financial corporations by market share. Vietnamese mobile wallet and phone top-up startup OnOnPay topped up its own balance with a pre-series A round worth US$800,000, the company announced in December 2016. The round was led by Asian venture capital firm Gobi Partners. Existing investor Captii Ventures participated. OnOnPay will use the funding to grow its user base and keep developing its tech. Founded in early 2015, OnOnPay addresses the needs of unbanked people in a market where credit cards are not widely used. The startup offers both a web-based platform and a mobile app that allows users to top up their prepaid phones and win rewards like extra credit and coupons. 5. CHALLENGES OF FINTECH STARTUPS IN VIETNAM Firstly, the legal framework is not accurately sufficient, especially for new technologies. The time for updating, amending and supplementing legal documents is too long and not adopting to the rapid development of technology. Secondly, Vietnam’s technological infrastructure does not meet the requirements of high technology development, especially security technology. Thirdly, Fintech startup companies often have difficulty with their business model, management model as well as long-term development direction, which can be obstacles to the growth of them. Fourthly, the awareness of consumers using Fintech services is not high so that they can create “security holes”. They still misunderstand the important of protecting their personal information such as full name, number of identification card, address, date of birth, and so on. This can lead to the threat for consumers’ accounts as well as the operation of Fintech startups. 6. SOLUTIONS FOR PROMOTING THE OPERATION OF FINTECH STARTUPS IN VIETNAM To overcome the challenges for better and moreeffective/efficient in promoting the growth of fintech startups in Vietnam, some recommendations to stakeholders are proposed as below: To the Government: Building Fintech development policy is closely linked to the development of the banking and financial system and the economy. The Government should consider the development of Fintech startup firms associated with promoting the application of science and technology in the field of finance and banking, is a part of the financial and banking industry, under the management of specific industries. Besides, there are tax exemption and reduction policies; policy to support accessing to capital; create an environment for investing in Fintech sectors, in cooperation with the traditional financial-banking institutions. Hợp tỏc song phương với cỏc cơ quan quản lý cỏc nước để trao đổi, chia sẻ kinh nghiệm hữu ớch trong quản lý cỏc DN Fintech. To State Bank of Vietnam: quickly complete the legal regulations on Fintech. Accordingly, it is necessary to establish rules and regulations for the Fintech ecosystem; to focus on the legal framework for Fintech services / products; to build quickly legal regulations on virtual currency, bitcoin and recognize it as a kind of “virtual property”; to set standards of product and service listings for Fintech companies to operate in a transparent manner, including credit operations; saving; payment services, online money transfer; investment, insurance, financial consultancy; data analysis ; to efined clearly business models of companies providing Fintech
9. 188 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA To Fintech startups: (i) promoting the research and applying the benefits of blockchain technology, distributed diary technology in the financial sector - banking and other fields due to the great benefits of this technology; (ii) improving the quality of human resources for Fintech application and management, having exemption to train and attract the talents to Fintech industries, using the technical support from international organizations such as ADB, WBG and so on; (iii) enhancing the cooperation between parties in the supply of Fintech products; strengthening the cooperation between Fintech companies and traditional financial institutions, as well as internet and information providers to ensure that the parties can take advantage of their advantages and create favorable conditions for development of Fintech in Vietnam in the near future. To other stakeholders (such as Ministry of Education and Training, Ministry of Information and Technology, Ministry of Labor, Invalids and Social Affairs, Ministry of Agriculture and Rural Development, and others): (i) Improving the internet and smart phone using quality; (ii) Actively implementing and participating in financial literacy campaign via several aspects; (iii) Utilizing social media (facebook, instagram, webs) for lowering the cost and increasing the access of people to key information relating to financial inclusion, fintech, e-wallet, money transfers, etc; (iii) Transfering the G2P into using all non-cash payment and encourage the final users/beneficiaries to use e-wallets. 7. CONCLUSION Overall, the paper reflected a positive outlook for the FinTech startups, and Fintech products in general, in Vietnam. Though the future may be bright, that light is still some way below the horizon as central bank authorities are supportive and taking steps to build a robust regulatory framework while trying to keep pace with the speed of innovation. In a sector moving so fast, it seem patience is the key. 8. REFERENCES Angela Scott-Briggs (2017), Top ten fintech companies Vietnam, January 9, fintech-companies-vietnam/; Chiristian Konig (2016), Fintech market overview 2016 graphic, Fintech News Singapore, journal/infographic-cai-nhin-toan-canh-v-thi-truong-fintech-viet-nam-2016; Economic Times (2017), State Bank of Vietnam Governor Unveils fintech Steering Committee, com/State-Bank-of-Vietnam-Governor-unveils-fintech-steering-committee-597928 , Monday March 20, 2017. Government (2010), Prime Minister’s Decision No. 1073/QD-TTg dated July 12, 2010 on approving themaster plan on e-commerce development during 2011-2015. Government (2012), Decree 101/2012/ND-CP dated November 22, 2012 on non-cash payments. Government (2013a), Decree No. 222/2013/ND-CP dated December 31, 2013 on cash payment. Government (2013b), Decree No. 52/2013/ND-CP dated May 16, 2013 on e-commerce. Government (2016), Decree 80/2016/ND-CP dated July 1, 2016 amending Decree 101/2012/ND-CP dated November 22, 2012 on non-cash payments. Government (2018), Decree 38/2018/ND-CP dated March 11, 2018 on investments in small and medium-sized startup companies; IMF (2017), Fintech and Financial Services:Initial Considerations Le Thanh Tam, Le Nhat Hanh (2018), Fintech for Promoting Financial Inclusion in Vietnam: Fact Findings and Policy Implications Topica Founder Institute (2016), Report of Vietnamese startups 2016; Topica Founder Institute (2017), Report of Vietnamese startups 2017; World Bank (2016), Solidance Research and Analysis;