Venture capital circles virtual banking

money-glitz | Stella Zhai 18 Nov 2019

First movers in the virtual banking industry are gaining attention from global venture capital and Hong Kong is expected to provide a model for other Southeast Asian markets, says Seamon Chan, co-founder and managing partner of Palm Drive Capital.

The New York-based technology venture capital firm is among the early-stage investors of WeLab, the only local-based company among the eight licensed virtual banks.

WeLab founder Simon Loong Pui-chi has said earlier this month they may launch the services at the beginning of next year and are in talks with industry partners with big customer bases, including online payment and retail companies.

The operator will separate its online lending platform WeLend with virtual banking services, Loong says, mentioning the collaboration of WeLend with local telecoms to explore the financial demands of their clients.

"Virtual banks earn their advantages over their traditional competitors with lower operating costs, such as lower payment for real estate," says Chan, and more profits can be reinvested to improve customer experience, or broaden the width of financial services like underwriting business.

Apart from being licensed by the government, there is also rising demand from virtual banking start-ups for talent with cross-sector experience in both financial services and technology development, says Chan.

Chan forecasts more Southeast Asia countries will issue virtual banking licenses, which would open up more opportunities for fintech innovation in this region.

Venture capital investment in Asia remained subdued in the third quarter amid growing concerns surrounding the US-China trade war and a declining Chinese economy. The total value of Asia venture capital transactions fell by nearly 20 percent from the previous quarter to US$14.92 billion (HK$116.38 billion), worse than a global quarterly drop from US$64.96 billion to US$55.71 billion, according to KPMG's report.

Investors have slowed down activity in Asian markets and are being conservative despite the interest, focusing their investments on late-stage companies with proven technologies and business models, large sales, or well-defined paths to profitability, says the consulting firm.

While Chan and Palm Drive still see potential in enterprise software development, e-commerce and health care IT sectors, which are less impacted by the Sino-US trade tensions and altogether account for 65 percent of its investment portfolio.

Healthcare IT has been a focus for their fund, says venture partner Nick Hsu.

"The problems that the US healthcare system is facing are also faced in Asia, such as the aging population in Hong Kong, mainland China and Japan." Hsu believes healthcare software will help address the increasing costs by improving the network.

The majority of the firm's investments are in the United States, or companies selling services in the US, Hsu adds, while they have entered Asian markets with three projects in mainland China, and two projects in Hong Kong, but with a higher total dollar value.

In terms of talent, Chan sees the Greater Bay Area as a pool of fintech start-up personnel, the area could also become a market itself with a growing population.

Co-founded by Chan with a team of fellow Stanford University alumni, the start-up supporter has added 13 projects during the past 12 months, faster than an average speed of 10 investments a year in the past, according to Chan.

Also, as a company focusing on early stages, including seed stage, Series A and Series B investments, the company mainly targets US$1 million to US$5 million projects, says Hsu.

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