Accenture has warned local banking communities in Asia to wake up: It took just nine months for investment in the region’s non-banking fintechs to quadruple from 2014’s $880 million to $3.5 billion.
While in developed markets, fintech disrupts financial models by exploiting service gaps between provider and consumer, in emerging markets, fintech is on its way to becoming the financial industry.
But a green field of opportunities also comes with significant growth killers for the burgeoning fintech industry, including bureaucratic strangulation and government indifference. These five countries illustrate the most promising opportunities and limitations on the road ahead.
Nigeria: Physical Wallets Versus Digital Wallets
Nigeria is one of Africa’s economic success stories. However, 95 percent of Nigerians’ transactions are still cash based. More surprising still is that most cash in Nigeria is handled without the use of banks, because typical current accounts have prohibitive minimum opening balances. Cash payments are frequently insecure and even sometimes illegal. Fintechs like Paga and Ready Cash step in to allow unbanked people to make payments via SMS, and have quickly built multi-million user bases.
However, the creation of alternative unified-banking channels remains a problem, as digital wallets are fragmented across the continent. This means that while SMS-based banking provides a short-term solution, it will not ensure the growth of finances, nor will it provide wealth management.
Connecting local wallets to a global network will have to be overcome if Nigeria wants its citizens to realize longer-term financial plans.
Connecting local wallets to a global network will have to be overcome if Nigeria wants its citizens to realize longer-term financial plans. Cash Envoy is one company that is working on unifying wallets across Nigeria, with its email payment service working through a single Cash Envoy wallet. If it can succeed in internationalizing, it will go a long way in helping Nigerian consumers grow their finances.
China: Innovation Versus Control
China’s planet-sized economy is not issue-free, and the financial industry is riddled with inefficiencies. With a centralized and command-based economy, China puts fintech in a delicately placed position: encouraged to innovate, but only to address inefficiencies in the traditional industry. Nevertheless, there is an air of cautious optimism in financial and political circles that fintech can help change an ageing system.
One of the largest areas of inefficiency is simple, everyday payment. And with the world’s largest number of mobile and Internet users, the country presents a monumental opportunity for fintech. But the question remains, will fintechs succeed, given their limited-play area? Alibaba’s Alipay service handles nearly 80 percent of all Chinese mobile payments and is being prepared for a 2016 IPO. Together with Tencent, the other giant in the Chinese netspace, Alipay handles the majority of all transactions in the country.
However, risk-averse administrators may enforce payment regulations, severely capping its potential worth. In Hong Kong, the administration is hoping the Chinese government can capitalize on fintech, with Financial Secretary John Tsang promising in November to release policy recommendations for Hong Kong to become a global fintech leader.
India: Information Versus Bureaucracy
With more than half of Indians unbanked and 90 percent of small businesses without links to formal financial institutions, the Indian market is ready for a fintech explosion. Eighty percent of Indians own mobile phones, and 32 percent are projected to own smartphones by 2017; fintechs are thus bound to capitalize on the information gap between producers and consumers, like Catalyst Labs does.
Catalyst Labs enables farmers to connect directly to bulk buyers, minimizing the spread of false information through more reliable data-driven networks. This means they know what buyers want, minimizing waste and inflation; this has been backed up by a report by Vodafone this year.
India needs to actively create an environment where tech can truly make a difference.
However, the underlying legal framework has to change for producers to truly benefit. India is bound by old regulations and laws, which it has to rethink if it wants people to prosper. For example, producers cannot simply purchase land to expand their farms if profits grow. Prime Minister Narendra Modi has been courting Silicon Valley as of late, but tech alone will not solve the problem of overgrown bureaucracy; India needs to actively create an environment where tech can truly make a difference.
Philippines: Enthusiasm Versus Awareness
In the Philippines, a quarter of the population owns smartphones, and there is more than 50 percent Internet penetration. Yet only 20 percent of Filipinos are banked and roughly 98 percent of all transactions are cash based. To exploit this, the government, USAid and mainstream banks have teamed up to create the E-Peso, an e-payment system that is not only B2C, B2B and C2C, but also in the public space.
Aiming to create a cash-lite society, the project emphasizes its benefits of financial inclusion, greater security and tracking — limiting corruption in the public space. While the government is pushing for the success of the project, widespread use depends on a change in everyday behavior. Filipinos need more accessible technologies, fewer barriers to accessing tools and educational awareness programs to overcome the cultural shortage in knowledge.
Mexico: Inequality Versus Power
Mexico’s deep social inequalities have prompted a number of socially aware fintechs to develop, including Kiwi, which is a platform enabling low-income families to plan and pay for products and services incrementally, while allowing merchants to increase sales. Kiwi is helping to reduce health inequality, but other kinds persist, including geographical inequality.
The National Institute of Entrepreneurship (INADEM) is a government project aiming to foster a self-sustaining startup environment. While the $658 million distributed to entrepreneurs in 2014 has triggered an enormous boom, problems remain.
Based in Mexico City — as are most fintechs — INADEM provides local entrepreneurs with access to officials, funding and support. But what about people without connections to INADEM? What about fintechs and people based outside of Mexico City? Decentralizing this structure will allow a greater pool of people to enter the fintech industry, and make it more competitive and creative — Mexico is almost there!