Scaling Embedded Lending in Southeast Asia

(upbeat music) - Hi everyone and welcome back to Fintech for the People. I'm Rahil Rangwala, managing partner at Axion Ventures. At Axion Ventures, we invest in early stage Fintech companies building responsible financial solutions for underserved individuals and small businesses across global markets. Over the years, one theme we've seen consistently is that financial innovation doesn't just come from new products. It often comes from improvements in the underlying infrastructure that makes these products. This season, we've been focusing on the company's building these rails. And Southeast Asia is a particularly exciting region for this conversation. Over the past decade, the region has seen rapid digital adoption from e-commerce, logistics, and digital platforms. But despite that growth, access to credit for small businesses and consumers still remains uneven. And launching financial products can be complex through the regulatory requirements, fragmented data, and capital constraints. That's where infrastructure platforms are beginning to play a critical role. Today's guest is Marcus Pramik, co-founder and CEO of Fintech. Fintech is a leading infrastructure platform based in Indonesia that enables digital platforms to integrate white-label credit products directly into the ecosystem. Through its API-driven platform, Fintech provides tools such as loan management systems, credit scoring, or folio analytics, and access to capital, allowing companies to launch lending products much faster than building the infrastructure themselves. Before Fintech, Marcus also built consumer lending businesses in Indonesia and saw first hand the massive demand for credit across Southeast Asia, particularly among underserved consumers and SMEs. In today's conversation, we'll talk about the evolution of Fintech infrastructure in Southeast Asia. Why embedded lending is becoming such an important layer of the ecosystem? And how platforms like Fintech are helping digital businesses unlock credit for millions of users? Let's get started. Hi Marcus, it's great to see you. Welcome on the show. How you doing? - Hey Rahil, good being here. Thanks for looking for an invitation. We're excited to be here. - And where are you dialing in from? - I'm dialing in from Jakarta, Indonesia, which, as of last year, is considered to be the largest metropolitan in the world. It over took care. - Oh wow, that is quite a fact. That's a good note to start this conversation on. - There's a reason to be here. (laughing) - I learned something new every day. Hey, so Marcus, before you found it, Fintech, you were building a lending company in Indonesia. Where did you learn from that experience and made you realize that the real opportunity might actually lie in the infrastructure rather than just the financial data? - It's a great question. And correct, I've been in Indonesia for the past 10 years. And the first six to seven years, six years I spent building direct consumer lending company. And we scheduled it, reached profitability before COVID. But after COVID, I would say the business risks materialized. And that also made us realize the probability that there's limitations to where that type of products would grow or can it actually bring sustainable financing or access to sustainable financing? When we reflected back over the learnings we had, when we started thinking of how to build Fintech or what Fintech looked like or before the name even was made up, we realized the three things that actually direct lending has three challenges that direct lending has. One comes down to the unit economics, right? So everything open, unit economics are a lot worse. If you can embed credits, and that's what we're doing today with Fintech embedded lending infrastructure, we're able to techniques improve the unit economics. And when we speak about unit economics, often that it's overseeing is the cost to acquire, cost to underwrite, and either that's automatic or manual, and then cost to service. And being able to embed our hypothesis is and what we see now. So is you're able to remove or reduce those costs by about 10x? You work in partnerships, so acquire through the partnerships so there's a marginal cost improvement, increase in cost. You utilize data which already platforms have, especially when you're embedding to another platform, which means you're able to really reduce the underwriting costs, either manual work or the data cost, and you're able to service them with a lot cheaper than you would have to have your let's say, even when it comes to collections, like feet on the ground, right? So you can avoid a lot of that stuff. So that was kind of like the learning number one that the bet we made is that lending will go from open market to embedded in emerging markets. And that was 2022. The second learning and what we had was Indonesia, and I think a lot of Southeast Asia actually works well with partnerships, but everyone wants to monetize their own ecosystem. So how do you structure the partnerships? So that is a win-win. That's where we decided that we would focus on building only an infrastructure because it helps to form partnerships easier. And B, if you're thinking access to finance and ability to give access to finance, why don't you think that the emerging markets have are very high barriers to entry? And that means a lot of good lenders might not consider entering the markets because the barriers are very high. Payback barriers are very long. So that's why we decided to build out as an infrastructure to also reduce those barriers to good quality lenders. - It's a good way to start this conversation because you've given us a lot of information and we can try and unpack your economics, the partnerships, how do you monetize within your ecosystem and how do you share that value? Well, always, you can't really do partnerships. So it's very interesting. And maybe we can go into each one of these because when we talk about this large credit gap, everyone really just talks about the last mile financial product that's being built. No one talks about why this gap even continues to persist, even after decades of building new financial products, and it is really the inadequate infrastructure. It is the inadequate abilities for easy entry, for easy partnerships. You know, you laid out all these different pieces and I'm gonna ask you maybe a harder question, which is, which do you think is the largest infrastructure gap? Is it on the collection side? Is it on the embedded side? Is it the partnerships? What do you think is one, two, or three? And if that's not the way to think about it, what's the best way to think about it? - He'd say it's very hard for sure to help. - Yeah. - And then the way I would describe lending, and especially when it goes to digital finance, what we're mostly speaking about right here with Fintech, I think we need to go back to, I'd like to talk earlier so it Swiss watches. It works when everything is aligned and synched. So on one hand, it would be great to pinpoint, let's fix the partnership, and then everything is gonna be great, or let's fix the collections. But I think it's gonna be the combination of how that old infrastructure works together. That's the way how I would see that. It's difficult to solve just one part of the value proposition. If you want to do good quality lending and good quality lending infrastructure, but it needs to be the whole end-to-end process to build Fintech or, unfortunately, we're not there yet. I can't fight as much as that. (laughing) - So there's no magic bullet is what you're saying. You gotta do it all. - You gotta do it all. There's no magic bullet for say. - It does make sense. I mean, you can't build a credit product without good collection, then you can't build a good credit product without underwriting. I think you're so dependent. - And the way you acquire the way you communicate. - The cost of acquisition and maintenance, maintaining that relation though. - Messaging. - And to turn it around, right? So action ventures, you're in early stage VC, you're messaging is going to early stage companies. You're not targeting yourself to see, or see, or see, or see companies to come and raise funding from you. Similar to lending that initial messaging is already very important. - So now that you've told us that there's no easy solution, how does Fintech as a digital platform, how do you enable this ecosystem? How do you think of embedded lending as a form of financial infrastructure rather than just the Fintech product? - The way we're thinking about embedded lending as a form of infrastructure is we believe that that using the SwissWatch technology. - Well, let's stick with that. - Let's stick with that. It's the infrastructure that puts those pieces all work together. So how do we align, and let's stay with the same acquisition and collections and underwriting? So how do we align everyone that, hey, it's not your goal number one to disperse as much as you can, which is often what distribution partners come to you. We don't care. We just want to grow our GMV, and let's disperse as much as possible. And then lenders don't want that. Lenders on the other hand are like, well, we want to disperse, but we want to collect as much as possible and more than we disperse, otherwise it's not sustainable. And that's something we believe with embedded lending infrastructure with a right approach. And that's not only technological, right? So that also is business development and partnership expectation setting. We are able to align and embedded lending infrastructures focused on aligning the interests incentivization so that the partnership could work longer. You don't want to be in a situation where this distribution partner will come to you and say like, hey, we're ill, great that you want to lend to us, but you disperse so little, we don't want to waste our time with you. Or you would go to them and say like, We dis first, ten million dollars last month, but we collected eight. Confess for too long. It has to work for both sides, right? Otherwise, if you don't get a sustainable business out of that, when companies want to offer credit to their users, you know, you talked about entry barriers, and how challenging it is for lenders, or lenders who are interested in a new ecosystem, or a new market, whether it be capital requirements, all sorts of regulatory challenges as well, and risk how does Fintech-infra play a role in easing those entry barriers? What does that all look like? Internally, within the team, we've identified, and we've put an out lender into a kind of like a six-step face. Every lender who's trying to enter or consider launching a new product, they go through six steps. The first one we believe, let's go in mind, is like, hey, we, for example, we want to launch in Indonesia. What is the compliance and regulatory situation? Do we need to get a license? What type of license are available? What is being issued? What's the cost of that? And that can be a very big bottleneck in making credit accessible, because many businesses and many lenders skip a market because the compliance and regulatory situation is not great. Either it's too expensive, either too volatile, or anything like that. So that's where, for example, we're able to bring in and lower the barriers as Fintech-infra has a lending license in Indonesia. We work in partnerships, and many of the lenders and lenders we work with, they can basically leverage already on that license that we have as part of our infrastructure. And it took us five years to get that license. So instead of spending five years on lawyer fees, time, resource, and unknown, if that will ever come, you've basically worked with an infrastructure provider who does that for you. That's kind of like step number one. Step number two, where we often get them, what we see that in Southeast Asia is definitely a big barrier, is that pace and the time to form partnerships when we come to distribution and acquisition. So every lender, so once you already know, okay, we can do lending there. We know the product you want to. How do we get the customers and the borrowers to apply for us? And that's something that is not straightforward. And in Indonesia, often it takes a lot of time to build those partnerships. So that's where infrastructure providers, they could have those partnerships already made. They may know the right people, or they may have already a letter of intense in place that enables those lenders to quickly establish the right relationships. Similar models, you could think of like FMCG or those G6 businesses that know your 7/11 purchase directors and so on, they know when a brand wants to enter how to best get to that distribution channel. Then step number three, that's mostly about the infrastructure for KYC data access analytics and credit scoring. And that comes to while lending and LMS systems can be global and everything. But every lender, even if their regional headquarters is in Singapore, they would need to establish their own specific infrastructure for Indonesia, which is resource money investment time. And infrastructure provider could take that away from you. They are connected with the right credit for us, with the right payment providers. They know which data sets are most efficient and how to combine them. So that could be your blog and play solution. That you connect to your let's say regional LMS and you could still keep everything with yourself. Step number four, that's underwriting. So that means making credit decisions. In Fin for case, for example, that's something we don't do. So that's the value of a position that all the lenders who work with us, they're able to do their own credit decisions. We're building and developing products according to their needs. And that's very important for them because otherwise, if they have a great, let's say, loan consolidation product in India, which she would like to come to Indonesia or supply chain financing product, they don't want to have a process or underwriting that is forced by a bank partner or any other partner. They can own the underwriting themselves. They can own the underwriting in lending. That's one of your core things. So that's what you want to defend. And that's why that's something where we only get the inputs. We don't see any of the IP and we work very silo spaces. Then step number five, once you're underwritten approved, disperse, money in, money out obviously, but those four servicing and collections. And that's where we have developed infrastructure automated collections. We're building right now with payment acquires and banks out of debit and direct debit opportunities. And for everyone looking who's not from Indonesia, unfortunately, Indonesia infrastructure is not like in India or Brazil, where you have central bank to develop the extremely goods, payment infrastructure, which has good functionality. So that's something where we would need to go through every bank by themselves. And even the last example, it took us three or four months to sign documents and open account for out of debit which state don't banks. Hopefully, you don't have to do that repeatedly with new lenders. Once you solve it once, everybody else who follows on doesn't have to pay that four month cost. Exactly. So us as an infrastructure provider, we're putting that Capix in money in resources, time or money. We're enabling that to everyone. So that if anyone in a lender who would come, I would like to expand and do this, for example, for his infrastructure, they have that availability immediately and there's a value end. Once the clients pay back, default, collected, then step number six is basically capital and reporting. Once every lender is doing well, all of those steps, obviously we have reporting infrastructure where we help do reconciliation, portfolio reports, everything along those lines. And as an infrastructure provider, we're also building out network across liquidity providers. And that's more like an ecosystem build out. So that lenders and our infrastructure and our ecosystem, we could connect them with the right funding partner who could be looking to provide liquidity to certain lenders. And this is kind of like a six steps of looking from the lender perspective, what's important? To launch a scale and launch, grow and scale your business. And within financial lending infrastructure, lending infrastructure, we want to support our partners and clients in all of six of them, except their underwriting. - You know, I think this ties really well, or it explains really well, the earlier part of the conversation on unit economics and the cost of lending. Each one of these is so expensive, if they had to do it themselves. That's a very high cap ex or op ex, depending on how the business is designed. And that really increases the cost of lending and borrowing for the ultimate borrow rate. So it's interesting to see how tangible you're making it and how clear you're making it, the value proposition for potential lenders to come in. - That's actually said that it makes it very expensive for a final borrower. That's the exact point where we want to make is that, we believe that in Marquis II Indonesia, where libraries center are very high, borrors are being the ones losing doubts because good quality lenders are not, they have other markets for to enter. And I'm sorry to speak, but every lender is looking at what is our payback for you, but it's our return of investment. - Of course. - Which market doesn't make sense to enter. And that's what we're solving at Finfra is, and that was what we're learning. Let's solve the front end. Let's open up the funnel so that more good quality lenders could come to the market, which will result in better outcomes for the borrowers. - How do you see these infrastructure improvements solving for the financial needs of the marketplaces and the SMEs across Southeast Asia? And particularly, and I think Indonesia is a good example where this customer has historically not qualified for traditional lending as well, right? So what's the shift that you're seeing as a result of Finfra? - It's a large answer for that small question, right? - Yeah. - We were seeing from different aspects. Obviously, we're talking about financial inclusion and I would say today financial inclusion has made any more access to finance. It means not just access, but it means sustainable access. Meaning, can I move from unofficial physical loan shark that charges fishermen 5% a day to, let's say, digital paid lenders that charge pretty high rates. To now, could we actually think something that works for long term? And we're in that stage now. - Exactly. I think financial inclusion now is not about access as much, but it's about quality. Is the product appropriate, responsible, and usable and solving the needs? Where they think the dialogue and discussion has definitely moved away from assets. It's about quality, right? And that's where we see that to provide quality, everyone needs to, the lenders need to bring down their unit economic costs, right? So, to the previous segment, which I spoke all about the barriers to entry, now coming to the second, which is more, let's call them on a loan level, a loan level economics. You'll start from the fact that you're essentially lowering your unit economics, where we started off the session today. How much does it cost to underwrite? How much does it cost to acquire customers? And if you're able to reduce your own costs, you're able to, as a lender, you're able to pass that on to the customer. That's number one. Or if you're not able to pass that on to the customer, you're suddenly opening up a wider array of customers you could target, because you have that buffer from the improved unit economics. And last but not least, right? So, only financial perspective. Let's talk about prediscoring and underwriting and the data perspective, which of course often our lenders do, but we've seen the impact is, instead of focusing on own and traditional data points that have value in developed markets, and often the value comes from the fact that law enforcement and legal systems are more efficient. But then in emerging markets, everyone's forced to be creative, and to understand different data points that can support them. That's where that data point could be a truck driver completing and having that verified proof of delivery to any of the M and Cs. And you're able to actually underwrite based on that data. regardless of if that truck driver pretty scores good or well, because you pretty don't care, because that MNC will pay directly to you. Or what's the moment really proper in Southeast Asia and growing is for every based financing or merchant cash balance product, which is utilizing anonymized transactional data from POS systems and payment gateways. And that as well can be a good indication of size of the business and the productive use. And you're removing this fair of well, you've seen the business and you assume that they will continue delivering the same revenues and you can underwrite their income and profits. Yeah, you're kind of also going into this discrete static underwriting to continuous underwriting. You're probably getting real-time data, whether it's the delivery on for the trucking, for the trucker or for the positive devices. These are continuous, almost continuous data allows better monitoring and not just underwriting. I think that's a unique differentiation. And then the collections. We use an example in the truck driver, but essentially what makes that very possible is that the collection goes without the borrowers touching the money. You remove the risk of willingness to pay. That's very powerful. To give a bit of context there, right? So if you look at usually banks and lending institutions, how do you think about risks? You have the capacity to pay, which is basically do you have the money, do you have salaries, your business earning enough? If you don't have that, it doesn't mean it's bad if you have the willingness to pay because you could always restructure. Now, if you don't have the willingness to pay, which could be intentional fraud from the start, or it could be changes in your life or business that suddenly you lose that willingness. And then in the banks, you had collaterals. If you lose those two or a case, you'll take the land, you'll take the house. Then the FinTech 1.0, I would say, came and removed that collateral aspect and said, hey, we can write to you based on mobile data and understand your willingness and capacity. What we do with embedded finance specifically, and what us as FinTech as an infrastructure is kind of promoting is that with embedded finance, you're also able to remove potential that willingness aspects. So you only need to underwrite the capacity aspect. Once you understand the cash flows that really is reducing risk significantly. Yes. But it's so powerful. That's definitely the lenders perspective, which is how do I underwrite, but if I take the borrowers perspective, getting alone in the right context, the right time, and when he or she needs it, it's so powerful. We don't have to wait six days for approval. It is seamless and collections is seamless. It's a win-win for the consumer as well on the other side of it. I want to step back a little bit. I think this has been fascinating just getting into the nitty-gritty of the infrastructure and how it impacts both the lenders as well as the borrower. But given that you're now what a decade in Indonesia and Southeast Asia, what do you say makes the region unique when it comes to building financial infrastructure? And do you feel you can compare across regions and saying why Indonesia or Southeast Asia is unique? What's your perspective? Well, I haven't done specific business in other emerging markets, but I would say lending is regulated activity. And first and foremost, any lending company would be emerging or develop markets or emerging markets. It's going to be always a question like, can you do that same product in another country with the same regulation? And that's even, for example, within Europe that differs a lot between Spain and Estonia because interest rate gaps, regulation, consumer protection, right? That overheads can make a very big difference. But I think what's specifically when we look at Southeast Asia, in addition to all the regulatory aspects what you usually have, you need to add this cultural aspect of contextualization. And even within Indonesia, which is 17,000 islands, going from North Sumatra, the most western point, which is close to West from Malaysia and Tanang, all the way to West Papua, which is the easternmost point of Indonesia, the cultural differences between themselves are already massive and huge. And those aspects actually make it very unique on how credit products are being presented, sold, accepted, not accepted. How do people think about the repayment from the, I would say, very prehistoric culture aspect, right? So do you see some guru who will suddenly make you free out of all the depths? And do you believe so? Because that's maybe the environment you're raising, growing up in, not where law, I wouldn't say law abiding citizen, but where law perhaps is not the primary course of guidance. Not your contractual obligation, is it supposed to be? Correct, correct, against your traditions. And those things can be very different, right? So I think that adds this interesting moment to that aspect. And of course, as I mentioned before, all the, I would say technical details of like regulation plus, in Philippines, ability to collect and when you default and ability to collect and take your assets, even though which are not collateralized, is a lot easier than it would be in Indonesia. And that changes that aspect and the cost of recovery a lot. Do you want to add to this answer anything from an opportunity perspective for Southeast Asia, like highlighting that uniqueness? I think that fragmentation definitely while it creates challenges, those creates opportunity. If you look from the traditional lenders perspective, like banks and financial institutions, they are focused on more larger size companies enterprises and providing credit to them just because the unit economics coming back to the whole theme, the unit economics, right? It's easier to Indonesia has 60 conglomerates, right? So it's easier to provide credit, they trade credit for them, finance the build of nickel shelters or anything else than think of how do I give access to these thousand SMEs that are doing now suddenly digital business? What is even digital business, right? That Black app, if executed correctly, creates a massive opportunity. And that's across Southeast Asia, I would say, and I would see. And I wouldn't want to call it laziness, but that mindset gives opportunity to do different lenders that have built up very strong products for the new economy and new segments. For you, Mark, we're looking forward now. What is the next wave of fintech innovation and fintech infrastructure innovation that will happen in Southeast Asia? What can we anticipate and what needs to be built for us to get there? Coming from the lending perspective, I believe that there's still a lot to do in that aspect and appearing to my own drum, we believe that lending infrastructure actually has to be built to be able to actually get achieved, achieve good unit economic scale. But if you look, assume that out, we're looking a lot in cross-border trades. That's a massive opportunity, especially in the geopolitical world, believe it now, where I would say many of the Southeast Asian emerging markets have been reliant on the US or China, what's going on now? I think a lot of them are like, okay, hey, we have a bit of a turbulence, where how do we cooperate together? How can we become better? That cross-border trade, excluding everything logistics, but going back to finance, it's going to be the question, well, how do we pay? How do we receive funds? How can we buy from a small manufacturer in Vietnam? We can't get access to credits and the small buyer in Indonesia can't get access to credit because they're starting to sell out. That payments infrastructure credit infrastructure for cross-border, I think that's something very, very interesting and very, very unique. I don't know the numbers on top of my head, unfortunately, like, what's the trade volumes, but even if I look in Indonesia and China, supposedly it's about $40 billion worth of trade and nearly sent from China to Indonesia. There won't be an insignificant market, that's for sure. Yes, let's put it this way. So I think that that's how to make that happen, you know, how to improve the payments, facilitate the payments, and then provide credit on top of that. I think it's a trillion-dollar question who will set infrastructure. It's an exciting opportunity and it's clear there without the right infrastructure. It's going to be either impossible to get there, it's going to take much longer to get there. So not only are you accelerating getting us the future, you're making it happen. So that's great to hear. Thanks so much for joining us today. I was a bit more and a little bit more about FinTech infrastructure and the Southeast Asia ecosystem and how FinFOR is planning to critical role there. Thanks for here. I love it to be here and thanks a lot for the great conversation. We really enjoyed it. It's exciting to see how platforms like FinFOR are helping digital businesses unlock access to credit and build more inclusive financial ecosystems. And thanks to you all for listening to FinTech to the people. Throughout this season we've been speaking with founders building the infrastructure that powers financial innovation across markets. These systems may operate behind the scenes but they play a critical role in expanding access to financial services and supporting the growth of entrepreneurs and small businesses across the world. If you enjoyed this episode be sure to subscribe and share it with a colleague or friend interested in the future of FinTech. Thank you so much for tuning in. Until next time this has been FinTech for the people.