Alexander Dunaev
According to a recent study by Accenture, investments in fintech hit $5.3 billion in the first quarter of this year (having grown 75 percent in 2015, exceeding $22 billion). These are staggering figures for a still nascent industry, which can have a monumental impact on all sectors, from lending and investments to savings and payments.
Hitherto, most of the investments have occurred in the U.S. and Europe, with a marked exception this year when China’s Ant Financial completed a staggering $4.5 billion raise at a $60 billion valuation, making it one of the highest-valued private companies in the world.
This recent raise may draw to emerging markets attention from the world beyond London, New York and Silicon Valley, which importantly house more than 90 percent of the world’s under-30 population. Countries other than the U.S. and U.K. have collectively spawned a range of visibly successful companies in search (Yandex, Baidu), e-commerce (Alibaba, Rocket Internet’s portfolio) and media (Naspers) by mostly applying tried and tested Western strategies to the local know-how.
Reviewed below are some of the emerging market contenders across the fintech space.
Lending
The field drawing perhaps most of the press attention in the West is undoubtedly alternative lending. Marketplace consumer lending (Prosper, Lending Club, SoFi), SMB lending (Funding Circle, Kabbage, OnDeck) and merchant installment plans (Klarna, Affirm, Financeit) have all generated traction by rapidly growing loan books and raising large funding rounds.
There has been no similar traction in emerging markets (excluding China, which has a mature marketplace lending industry) as the companies frequently have limited access to capital (alternative lending is highly capital-intensive), low-quality data (low penetration of credit histories) and scarce infrastructure, while the level of consumer sophistication is not on par with the U.S. or Europe.
Nonetheless, there is a roster of very successful companies in the field. These include Philippines-based PawnHero (the first online pawn shop in Southeast Asia), which is addressing the issue of expensive credit in a country where only 20 percent of the population have bank accounts and less than 5 percent own a credit card.
There is a range of balance sheet lenders across Eastern Europe, including Kreditech, 4finance and ID Finance, which are solving the issue of credit access for the underbanked using innovative data sources. There is Brazilian Nubank (with funding from Tiger Global and Peter Thiel), which has brought a mobile-first bank to a country with 90 million WhatsApp users, complex regulations and one of the highest APRs on credit cards in the world.
Payments and remittances
No emerging market payment discussion can avoid talking about M-Pesa. This Kenyan company has created an enormously successful phone-based payment network, which has taken over East Africa like wild-fire. The company tapped into the local availability of mobile phones (not surprising, given that it was incubated at Vodafone) and virtual complete lack of banking infrastructure, enabling consumers to pay for services and transfer money. This is clearly one of the best examples of combining the limitations of the emerging markets with a fundamental consumer need to bring a market-shifting solution.
Russian QIWI addressed the issue of high cash usage in the country by rolling out a franchise-based system with kiosks to process cash payments for telecom, credit utility and e-commerce payments. The company grew to become the largest payment service provider in Russia, added its own e-wallet and expanded across other emerging markets to address similar needs.
Contrariwise, companies that tried to blindly replicate Square’s mobile POS processing have faced headwinds driven by low credit card penetration, high interchange charged by the largest PSPs (read Visa and MasterCard) and thin margins.
Investments
The new crop of tech companies is meant to transform the world of investments for millennials. We see companies that promise commission-free equity trading (Robinhood), robo-advisory (Wealthfront, Betterment), saving yield optimization (Raisin, previously SavingGlobal) and social-based investments (eToro).
Emerging markets’ concerns with investments in general include very low savings rates driven by low incomes, lack of a social safety net and developed institutions, frequently arcane legislation, limited liquidity in both equity and credit capital markets and associated high transaction fees.
One of the most striking examples is obviously the previously mentioned Ant Financial with its money market fund, Yu’e Bao. The company has accumulated more than US$110 billion in assets under management in only three years, becoming the fastest growing mutual fund in the world. Among other issues, this ascent was driven by the cap imposed by the People’s Bank of China on the deposit rate that the local banks can offer their clients.
A much smaller example is ZeroFlows, which is trying to solve the liquidity issue in frontier markets like Nigeria and Bangladesh by offering a simple solution for asset managers in monitoring equity flows.
Takeaways
In the world of financial technology, simple replication of the proven Western winners does not work. As opposed to e-commerce, which may have more ubiquitous business drivers, successful fintech companies in the emerging markets will have to address local legislation, which vary radically country to country; work around structural macroeconomic issues; tackle sometimes complete lack of infrastructure, from credit bureaus to bank accounts; and address consumers with limited financial literacy.
Successful companies will blend the advanced technology with the local know-how. The base is still very low, but the upside is significant, with much yet to be achieved.
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