Investor interest grows in ‘on-demand salary‘ apps; rising rates, regulation may cap enthusiasm

VENTURE investors show growing interest in South-east Asia’s young crop of fintechs offering instant access to wages ahead of payday. But the sector, often referred to as Earned Wage Access (EWA), could come under pressure amid rising rates and potential regulation.

On Wednesday (Aug 3), Vietnamese EWA startup Nano raised US$6.4 million in a pre-Series A equity round led by returning investor Openspace Ventures.

A slew of new investors joined the round, including KVision, an investment unit of Thailand’s Kasikornbank, as well as Partech Partners, Tekton Ventures, IT Farma and Sketchnote Partners.

Founded in 2020, the startup had previously raised a US$3 million seed round in May last year, with backers including regional venture firms Golden Gate Ventures, FEBE Ventures and Venturra.

Nano’s fundraise comes as other EWA startups have popped up regionally over the past 2 years and scored venture funding, suggesting investors have some confidence in the business model.

“It feels like the early days of the buy now, pay later market, where the absence of regulations and market supervision led to bullish sentiments,” said Su Lian Jye, research director at ABI Research.

Another EWA startup, Indonesia and Bangladesh-focused Wagely, has raised US$14 million from investors including Indonesia’s East Ventures and the Asian Development Bank. Indonesia’s GajiGesa raised US$6.6 million in a round led by MassMutual Ventures and joined by UK-based EWA giant Wagestream.

But headwinds loom amid worsening macroeconomic conditions and a slowdown in venture funding – or what some have dubbed an upcoming “tech funding winter”. In addition, rising rates could compress the margins of EWA providers – many of whom tap financial institutions for capital to pay out salary advances.

“The impact will be tremendous and likely cause severe strain on these startups, especially those borrowing heavily from the capital market,” said Su.

“Venture monies will become more critical than ever, but the supply of venture funding is expected to decline due to the potential recession, interest rate hikes, stagflation and geopolitical tensions,” he noted.

It remains to be seen, also, how EWA will be regulated, given that the business model is still new. Questions loom over whether limits should be set on how much startups can charge workers for each withdrawal, especially for any players that lend directly to workers.

Experts are cautious of the downside risks, particularly among low-income earners. “There are good reasons to adopt the EWA model, if the fees are fairly low,” said Tan Ern Ser, associate professor at the National University of Singapore’s department of sociology.

“However, I hope that subscribers to EWA apps would not be trapped in a cycle of living from hand to mouth, or worse, in overspending and unable to get out of the cycle.”

Tan reckons that he can’t see a “good answer” to the dilemma of having EWA schemes but ensuring that subscribers are not trapped. One solution could be to get subscribers to demonstrate that they are taking action to upgrade themselves, manage their finances and be in good standing at work.

“In short, the answer to not staying perpetually cash-strapped lies in helping low-income persons do better financially for themselves and families, but having EWA as a short-term, interim, stop-gap measure may be fine,” he said.