Fintech providers are able to fill gaps in a market that has primarily catered to wealthy individuals while overlooking the needs of those less well off. It therefore comes as no surprise that emerging markets, which have traditionally suffered from a limited availability of financial services, are benefitting greatly from new technologies in the financial sector.
‘Fintech is finding a natural home in emerging markets, where the penetration of banking and insurance services is typically low,’ says Gonzalo Pángaro, portfolio manager, emerging markets equity strategy, at T. Rowe Price. Including previously underbanked individuals into the financial system, however, is no mean feat.
According to Pángaro though, the rapid proliferation of mobile phones and improving internet connectivity make emerging markets a fertile ground for alternative banking solutions.
Fintech growth is accelerating at a blistering pace
Emerging markets are eager to embrace new technologies, which represents a vital ingredient when unlocking the potential of fintech tools. A report by Ernst & Young suggests that China and India are leading the way with a fintech adoption rate of 87%, closely followed by Russia and South Africa, both with 82% adoption.
Key businesses that help drive the access to fintech include large e-finance innovators such as Ant Financial and WeBank. Ant Financial, an affiliate of the Chinese e-commerce giant Alibaba, offers a range of financial services, including third-party payments and wealth management.
On top of that, the company plans to offer cloud-based services, big data analytics and loan origination. Tencent’s WeBank harbours similar ambitions. The firm was among the first challenger banks to receive a banking licence and is China’s first online-only bank.
Both Ant Financial and WeBank demonstrate that the lack of a traditional financial infrastructure, which is based on brick-and-mortar banks and conventional payment methods, can be a blessing in disguise in the fintech space. After all, integrating the latest technological advances into the financial system is considerably easier if it is not necessary to break down existing structures first.
Low levels of credit and debit card penetration, for example, can be a trailblazer for digital innovation. They paved the way for the rise of digital wallets, which have become increasingly popular in emerging economies.
Companies like Alibaba or Tencent benefit greatly from that development and are currently growing at extraordinary rates. This becomes particularly obvious during Chinese New Year when a rising number of hongbaos – monetary gifts that are given for special occasions – are exchanged virtually via mobile apps. In 2019 alone, 823 million people, more than twice the population of the US, used WeChat’s hongbao feature during New Year’s week.
‘Historically, credit card penetration has been low in emerging markets, but now many consumers are leapfrogging straight to mobile payments,’ Pángaro explains. ‘Mobile payments account for around 75% of total online payments in China. In the US, it is only 20%.’
Redefining the rules of the game
Mobile and cloud technologies can also help address payroll problems. Firms such as M-Pesa, a mobile money transfer service based in Kenya, have been at the vanguard in that regard: employers now have the possibility to pay their workers electronically, even if they do not have a bank account.
Africa is the global leader in mobile money, which has become an important component of Africa’s financial services landscape. Mobile network operators have dominated mobile money services in Africa for the past decade. More recently, however, fintech companies have established a solid footing in the market, and a number of banks are beginning to compete aggressively for the mobile banking customer.
While some banks have chosen to ‘go it alone’, others are forming partnerships in hopes of reaching the market faster. These companies span the full spectrum of financial services, from payments and current accounts, to savings, loans, investments, and insurance. Just over half of the 282 mobile money services operating worldwide are located in sub-Saharan Africa, according to the GSMA, an industry organisation that represents the interests of mobile network operators worldwide.
McKinsey suggests that there are 100 million active mobile money accounts in Africa. This far exceeds customer adoption in South Asia, with 40 million active mobile money accounts the second-biggest region for mobile money in terms of market share.
‘Up until recently, it has been incredibly difficult for migrant workers in Nairobi to send wages back to their family who are living in the countryside. Now, they can do so at the touch of a button,’ says Ernest Yeung, portfolio manager, Emerging Markets Discovery Equity strategy at T. Rowe Price.
He adds: ‘The world economy continues to enjoy a long runway on its steady transition from cash to digital payments. Like much of the fintech revolution, this represents a significant potential for disruptors with newer technologies and innovative product offerings.’
In general, the potential of software-enabled payments is vast and could cause an upheaval in the payment industry. Up to now, the first step in a merchant’s life consisted of a trip to the bank to seek financing to start their venture. A payment-processing product was therefore a natural cross-sell for banks.
Today, merchants start their journey by choosing a software that will help them manage their new business. That change is driving a shift in payment distribution, away from banks and toward software-enabled payment providers.
But the payments industry has more room to grow. In addition to software-enabled payments, it is also business-to-business (B2B) payments that will cause a stir in the fintech sector.
B2B is a multi-trillion-dollar market that rivals the consumer payments industry in size. According to Yeung, it is just beginning to gravitate towards more modern payment technologies and away from manual processes. This could drive growth for the payments industry for many years to come. As Yeung put it: ‘The fintech revolution is here to stay.’
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