Global Stock Investing | Edition #40 - 10th Oct, 2021
Exploring the world of global stock investing. There's also details on RBI's latest proposals for payment, Cryptocurrency becoming mainstream and the usual SEA Fintech round up.
Hi Insiders, Osborne here.
Welcome to the 40th edition of Fintech Inside. Fintech Inside is the front page of Fintech in emerging markets.
My productivity dipped a lot this weekend which delayed the delivery of this newsletter. Hope you still enjoy it.
This week I explored the world of global stock investing. When I say global, I really mean US. :) There's a lot to consider when building for this market. There's also details on RBI's latest proposals for payments in India, Cryptocurrency becoming mainstream and the usual SEA Fintech round up.
Globally, Facebook had probably the toughest week due to its outage early in the week. Twitch, the game streaming platform, was hacked - everything including the core website code, creator payments, app code and its entire IP was stolen. US DOJ introduced a National Cryptocurrency Enforcement Team.
In other news: A few good folks, led by Nameet Potnis, launched The Token Dispatch - a newsletter on all things crypto. The content is really good and helps me understand this crypto and NFT sector. Go subscribe! (Note: I'm in no way affiliated with The Token Dispatch)
If you’re an early-stage fintech startup founder raising equity or debt, I may be able to help - reach out to firstname.lastname@example.org
🤔 One Big Thought
Global Portfolio Diversification in a Globalised Economy
Let's start today's post with a game. Without looking it up, name at least one company whose stock is listed on a:
Hong Kong stock exchange
Singapore stock exchange
Australian stock exchange
South African stock exchange
London stock exchange
German stock exchange
Indian stock exchange
Brazilian stock exchange
US stock exchange
Canadian stock exchange
How much did you score if you got 1 point per correct answer? If you're 7 and above - you know your markets well. Less than 5/10? You, like me, are probably in the majority of people reading this. It would come as no surprise if you're be able to name 10 or more listed brands in the US alone. And that's what today's post is about.
We've all heard the the saying "invest in stocks of companies whose products you use". Warren Buffet famously champions this by eating at McDonalds and Sees Candy and drinking coke almost everyday. For years, Indians haven't followed this advise and instead relied on friends and family. But this advise is making a come back - largely driven by Indian startups providing US stock investment products. Seeing the growth of NYSE and NASDAQ has prompted many investors to diversify their portfolio with some exposure to US stocks. These platforms also aim to provide global stock investing features. But that's exactly where the "advice" falls apart.
US stock markets account for 65% of the MSCI World Index. The share of the US Dollar to total global assets was 59% in 2020 (lowest in 25 years). The US Dollar was used for 70-80% of all transactions in global trade - a share that's remained stable for 20 years! So, yes - US companies dominate a large part of the global economy. And this has translated to everyone - governments, companies and individuals, wanting to own a piece of the US Dollar or a US company. Participation in the stock exchanges outside the US is limited. This is largely because other markets are very regional and business is also concentrated within those regions. Regional, cultural and language barriers cause brands to be well known locally but unheard of globally.
Moreover, as mentioned, us Indians barely apply this "advice" to our own Indian companies. Ever had Diamond's potato chips? Do you own Prataap Snacks? Ever painted the walls of your home? Do you own Asian Paints? Bought Jockey under garments? Do you own Page Industries? Obviously you have Starbucks coffee, do you own TATA Consumer? In fact, we typically apply stringent filters while buying stocks of these companies. Similarly, it's unlikely that Indians will want exposure to stocks of other markets - outside the US. Does this then reduce the market size of such startups?
How does it work and are these entities regulated? Investors can start investing in global stocks in two ways, i.e. mutual funds or brokers that provide exposure to global stocks. In India, there are several mutual fund schemes that offer exposure to various global markets. One can directly start investing through them. A lot of them are also well diversified. The second method is using apps from fintech startups like INDMoney, Vested, Groww and others. These companies are not regulated because there is no such specific regulation. These startups have to ensure their users comply with outward remittance regulations. For individuals, RBI allows up to $250,000 (INR 1.85 Cr) under the liberalised remittance scheme (LRS). These startups partner with DriveWealth or Viewtrade Securities - US Brokers, in the US for clearing and settlement of the trades. If one invests through the Mutual Fund route, they own units in those fund schemes, whereas if they invest through these startups, they get direct ownership of the stocks. The National Stock Exchange is also working on introducing US stock investing via GIFT City (read more in the August edition)
How much does this cost? This is where global stock investing models break down. Cost structures in India are brutal, especially if investing directly via apps. The apps themselves are free to invest, but everything else is expensive. First, one has to transfer money from the Indian bank account to their US brokerage account. In this leg itself, banks can charge up to 5% of the amount being transferred before the FX conversion. There's a recently introduced Tax Collected at Source (TCS) of 5% for remittances of greater than INR 7 lacs ($9,500) in a fiscal year. Then, when selling foreign stocks, the transaction falls under foreign capital gains, which means stocks sold within 24 months of purchase is considered as short term capital gains and tax as per your income tax bracket. Long term capital gains are taxed at 20%. Dividends are taxed in US at 25% before distribution. Effectively, direct global stock investing makes sense only for larger amounts and if held longer. It sort of makes sense for INDMoney to launch a embedded US stock investing bank account with 0 fees.
Global stock investing is a lucrative opportunity for Indian startups, especially because of how globalised our economies have become. Growing aspirations and rising urbanisation is a huge growth driver. There are several more features that can be built on top of global stock investing. Features like social trading, smallcase-like indexes, rewards, global deposit accounts and many more that enhance the user experience. The challenges for startups in this sector include regulations, low barriers to entry, limited TAM and of course those mentioned above.
Should one own stock of companies whose product they use? There could be infinite ways to evaluate whether to own the stock of a company - sure, consuming it could be one. But if someone doesn't understand how a business works, then it's probably not a good idea. Most importantly, it's important to understand the associated cost and tax structures.
Disclaimer: This post is purely intended for educational purposes. It is not investment advice and should not be construed as such. Please consult your investment advisor for such things.
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workatafintech.com: Search from ~180 open positions at 50+ fintech startups in India and South East Asia.
Decentro, an Indian fintech infrastructure startup, is hiring several positions including a Director of Engineering, a Developer Evangelist and many more. Apply here.
Inai, a no-code/low-code SMB payments startup, is hiring back end and devops engineers and more. Apply here.
Rupyo, an earned wage access startup, is hiring for business development and product roles. Apply here.
Not a part of Work at a Fintech, but good open position: Zerodha is hiring a Product Manager and an Operations Manager for its soon to launch AMC business. Apply here.
3️⃣ Fintech Top Three
1️⃣ RBI is making new proposals to augment India's payments systems
RBI, in its monetary policy meeting this week, announced a few plans for India's payments systems:
It will introduce new guidelines for digital payment systems in offline mode.
It enhanced the transaction limit for IMPS to INR 500K ($6,756) from earlier INR 200K ($2,700).
It proposed to include geo-tagging framework in payment acceptance touch points including POS devices, QR codes and more.
It introduced a new theme of "Prevention and Mitigation of Financial Frauds" as part of the Regulatory Sandbox and made on tap applications for previous sandbox themes.
Takeaways: These are some interesting updates from RBI. Digital payments in offline mode might sound paradoxical but it's been a major focus for RBI. In its first regulatory sandbox i.e. Retail Payments, RBI approved different offline payment experiments for example sound based payments, NFC offline payments, transit payments and more. India is still majority cash economy. Which is also why enhancing the upper limit of IMPS (a payment rail on which UPI was built, but not anymore) transactions makes sense. SMB's also largely prefer cash, because of its inherent liquidity but also because of the regulatory limit. Enhancing IMPS limit enables large ticket transactions to settle instantaneously.
The proposal to geo tag India's payments acceptance network is big. RBI today tracks the active POS devices and ATM machines. Payment cos. I'm sure geo tag all payment acceptance points i.e. QR merchants, POS, Soft POS and others. Centralising this data will bring a bunch of benefits. Most important of all these announcements, to me, is the announcement of the new theme and on tap sandbox applications. The new theme is hugely important. In 2019, RBI launched a Central Fraud Registry (CFR) but that's limited to only Banks and specific regulated entities and the public facing website throws up an error. Few Indian companies or startups are even building solutions for financial frauds. It's typically built in house or integrated from international providers. Lot's to look forward to.
2️⃣ Crypto India is becoming mainstream (a round up)
CoinSwitch, an Indian cryptocurrency exchange, raised $260mm in funding at $1.9bn valuation. The company, launched in India 15 months ago, announced hitting 10mm registered users to “become India’s largest crypto platform". Of this user base, 7mm are active users with a monthly transaction volume of $2bn. In April this year, the company raised a funding round at $500mm valuation. CoinDCX, another cryptocurrency exchange, raised funding in August, 2021 at $1.1bn valuation. Groww's cofounder said it will launch cryptocurrency trading post getting clarity from regulators. Stader Labs, a crypto staking management startup, raised $4mm. All this is happening at a time when India's crypto market grew 641% over the past 12 months.
Some additional stats on CoinSwitch: Over 55% of CoinSwitch users come from Tier-II and Tier-III cities. Average crypto investment is around $121 per month per user: $157 in Tier-I cities, $82 in Tier-II, and $47 in Tier-III cities
Takeaways: The past 12 months have been roller coaster for cryptocurrency - the peaks in Dec-21, lows in Apr-21 and now back to $55K. 2021 has been a blockbuster year for the entire Indian financial market - stocks, mutual funds, digital gold and even crypto exchanges. All platforms have seen record user sign ups, largely driven by user growth beyond Tier-1 cities. Growth of crypto exchanges has puzzled me the most though - nothing seems to have systemically changed (I may be wrong) to indicate that this growth is here to stay. Methinks, when the music stops, crypto exchanges will be the first ones to see withdrawals. I hope I'm wrong. Groww looking to launch crypto as an exchange and CoinSwitch looking to get into stock brokerage talks of a broader trend. Guess we'll have to wait for SEBI to take a stab at regulating crypto exchanges or providing clarity on brokers launching crypto exchanges.
An interesting thing that came out of the funding news this week is the number of registered users:
- CoinSwitch (crypto exchange): 10mm
- WazirX (crypto exchange) : 8.5mm
- Zerodha (stock broker): 7mm
- UpStox (stock broker): 4mm (Jul, 21)
- Entire mutual fund industry: 23.9mm (Jun, 21)
Crypto exchanges have grown much larger (in terms of registered users) than investors participating in India's stock markets. This despite Indian banks momentarily blocking rupee deposits for new users in May/Jun-21 and an informal note by RBI. With GDP per capita and employment rates lower than previous years and inflation at 5-6%, Indians are probably looking for any avenue to make quick returns. There's something to be said about Dream11, an Indian fantasy sports startup, having 110+mm registered users without even being on the Google Play Store in an Android dominated market.
3️⃣ SEA Updates Round up
Singapore's central bank, MAS, will launch COSMIC - a centralised data sharing platform to curb money laundering and terror financing.
DBS, J.P. Morgan and Temasek to form a new JV - Partior, a blockchain-based clearing and settlement technology platform.
Hong Kong's central bank released a technical overview of launching an e-HKD, it's central bank digital currency.
Ajaib, an Indonesian stock investing startup, raised $153mm at $1bn valuation.
Bank Jago, Indonesia's first full digital bank, raised an undisclosed amount from Ribbit Capital.
Takeaways: The pace of Singapore's MAS rolling out new updates could put most startups to shame. Launching a centralised data sharing platform to curb financial fraud has massive benefits. Hong Kong's central bank also indicated that it's thinking of central bank digital currencies (CBDC) i.e. e-HKD. Per the technical overview, Hong Kong's central bank has been developing a wholesale CBDC since 2017 largely for cross border trader. Now it is researching what a retail CBDC will look like. Definitely take time out to read the 50 page overview.
Ajaib, an Indonesian stock broking startup, raised a huge sum of $153mm (after raising $65mm in Mar, 21) to double down on Indonesia's investment market. Out of the 2.7mm stock investors in Indonesia, Ajaib claims to have 1mm (30% market share). Indonesia has a population of 274mm. With this funding, Ajaib will have to focus on expanding the market through education as financial literacy in the capital markets is only 4.9%. Bank Jago, Indonesia's first digital-only universal bank, raised an undisclosed amount from Ribbit Capital. Ribbit is the fintech focused US VC fund and more importantly fintech solution partner to Walmart. The Walmart Ribbit partnership announcement was vague at best but there's still no indication of what it will look like. Ribbit has been investing heavily in India and more aggressively in SEA. Walmart owns PhonePe in India, but I wonder if there are plans for SEA just yet.
Looking for the news digest? Read all the week’s fintech news and updates in India and SEA over at This Week in Fintech - India and SEA Edition. You can also find our US, Global and European coverage.
🏷️ Notable Nuggets
Foolish Fintech Questions: Part II by Alex Johnson
The Fintech 250: The Top Fintech Companies Of 2021 by CBInsights
👋🏾 That's all Folks
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See you in the next edition.