Mobile payments: Breaking down barriers

As recently as three years ago, Mikko Perez's objective would have seemed unreasonable. As founder, chairman and CEO of Ayannah, a Philippines-based digital payments business, he will spend the next 4-6 months raising a Series A round of funding. "I would love to have a large Japanese fund and a large Silicon Valley fund invest," Perez says.

AVCJ Research has records of 24 VC investments involving Japanese groups in Southeast Asian e-commerce and online services companies since 2010, and at least 12 M&A deals. Fourteen have been announced in 2014 alone. E-commerce is the dominant segment, but there have also been around half-a-dozen investments in payments-related start-ups.

Ayannah already has Japanese representation among its shareholders - the VC units of digital marketing agency IMJ, social networking giant Gree, and e-commerce player Beenos Asia. "We like working with guys who either run internet companies or who have worked for internet companies," Perez explains. "Our three Japanese investors have a lot of operating experience and they are looking to expand into new markets."

These investors' ability to add value is endorsed by Neil Davidson, co-founder and CEO of Indonesia-based Coda Payments. Among his company's backers, he singles out GMO Venture Partners for helping scale the business; CyberAgent Ventures for providing merchant partners; and Rakuten for facilitating synergies with its other portfolio companies in the region.

Strong fundamentals

While both are payments companies, Ayannah and Coda come from different parts of the industry spectrum - the remittances specialist versus the mobile billing platform. Yet they are united in the underlying factors driving their business: rising Southeast Asian consumer markets that want to spend money on products and services but lack a financial infrastructure to enable this demand. Mobile solutions in markets where mobile penetration can top 90% make sense, hence the Japanese interest.

"When we say alternative payments it's a tremendously large space," says Justin Hall of Golden Gate Ventures, an investor in Ayannah and Coda. "There's a lot of room for growth and the payments space in Southeast Asia as a whole is still extremely immature. We don't know the direction this market will go and we don't know who the leaders will be."

Mastercard's Mobile Payments Readiness Index ranked Singapore highest in Southeast Asia, followed by the Philippines, Malaysia, Thailand, Vietnam and Indonesia. The latter five generally scored well for consumer readiness but they were less strong in terms of infrastructure.

The genesis of Coda was the identification of a gap in the market whereby companies could leverage telecom providers' existing infrastructure to provide billing services for third-party merchants. No longer would the lack of a credit cards or debit cards not set up for than online purchases prevent consumers from spending money.

However, creating partnerships with telecom operators is no easy task. Coda wanted better economics than those typically granted to third-parties that use operators' billing capabilities for mobile content. And, to begin with, it was going into meetings with an idea rather than a proven business model.

"It is hard work to persuade an operator that you are going to deliver something that is valuable enough to them that they will make some significant changes to business as usual," says Coda's Davidson. "You talk to the operators and they ask, ‘Who are the merchants?' You talk to the merchants [groups that pay Coda and the operator for billing services and infrastructure] and they ask, ‘Who are the operators?'"

Coda started off with one telecom partner and found there was strong demand from merchants. The company gained momentum and hasn't looked back. It measures operator acquisition cycles in years but once a deal is in place it is a strong competitive advantage.

For Ayannah, the route was different but no less fraught. The company started out targeting cross-border remittances by Filipinos living overseas. This has since been supplanted in size by a service that caters to the domestic remittances market. Financial services were the ultimate goal but Ayannah first needed points of sale, so the company sold mobile phone charge cards. "Mobile airtime is the most liquid and available form of stored value," Perez says.

With the distribution network established, Ayannah too gained momentum, moving into micro-insurance and then remittances. There are partnerships with large local retailers as well as with the handful of non-banking financial companies (NBFCs) that dominate lending at the lower end of the customer spectrum. Like Coda and its telecom partners, these relationships help create a defensible market position.

Looking overseas

The flip side is that these relationships are a barrier to entry in new markets. Thailand, for exampe, presents a challenge because payments firm 2C2P has an entrenched position, emboldened by tie-ups with most of the banks.

Ayannah accepts that accessing the more established payments markets in Southeast Asia will involve cooperative arrangements with local players. Coda, meanwhile, has expanded into Singapore and the Philippines largely on the strength of its merchant network. In this respect, the links CyberAgent provides to game developers that want to go cross-border are valuable.

Different markets have their own consumer idiosyncrasies, regulatory frameworks, and business networks. As such, the Southeast Asia mobile payments map is still divided into countless pieces. VC money is drawn in by the market opportunity and the lucrative prospect of backing a winner early on.

However, it remains to be seen how the industry deals with the expected comprehensive roll-out of payment services provided by sizeable e-commerce players such as Rocket Internet and Alibaba Group. Strategic Japanese investors may also play an acquisitive role in this situation.

"At some point there will be saturation and consolidation will follow," says Hall. "Either these companies will merge or somebody larger will come in, buy 3-4 of these companies and just roll them up."

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• Topics
• Financials
• South Asia
• Technology
• Consumer
• Early-stage
• Financial Services
• Thailand
• Indonesia
• TMT
• Technology
• Consumer
• Venture
• Golden Gate Ventures