Ahead of the Curve: Fintech flies in emerging markets
Fintech is finding a natural home in emerging markets where traditional banks and insurance services are less established. Andrew Ness reports
Fintech – the marriage of finance and technology – has been the subject of considerable commentary in recent years, with some touting it as a mortal threat to traditional financial institutions.
While there is no doubt an element of hype, the growth potential is hard to dispute, particularly in emerging markets (EM) where the penetration of banking and insurance services is typically low.
There are several key themes that would repay watching closely.
More tech savvy populations, the rapid proliferation of mobile phones and improving internet connectivity, make emerging markets ripe for alternative banking solutions.
Despite fast growth in recent years, some two billion adults globally still do not have a bank account – most of whom live in EMs. Importantly, a large proportion of the growth has not been in traditional bank accounts, but in mobile money accounts.
Mobile and cloud technology is also helping solve payroll problems, with solutions that enable emerging market employers to pay their workers electronically even if they do not have a bank account.
Intimately connected to the above is the mobile payments revolution, exemplified by pioneers such as M-Pesa, which has blazed a trail in East Africa. In the past, there was no easy way for a migrant worker in Nairobi to send wages back to their family – now they can do so at the touch of a button.
These remittances have been the catalyst for innovation – $431.6bn (€394bn) was sent home to developing countries in 2015, according to World Bank data. Firms such as TransferWise and Xoom (owned by PayPal) are snapping at the heels of money transfer businesses such as Western Union.
The excitement surrounding fintech extends beyond payments and transfers, with numerous players attacking poor access to credit in many of these countries.
Peer-to-peer lenders have sprung up in many places and fintech appears to have entered a kind of symbiosis with microfinance (another emerging market phenomenon).
Novel credit-checking solutions are being developed to address the fundamental problem of assessing a borrower’s creditworthiness, with no knowledge of their credit history – or indeed financial past.
The insurance market in EMs remains nascent. Fintech players have to jump through hoops given how heavily regulated this area is, but the growth potential is significant.
Affordability is clearly a key challenge, and technology can help by cutting down significant costs – including major items such as operations, customer acquisition, distribution and marketing – which keep a floor under the premiums that insurers charge.
The low-cost and high-volume model of microinsurance (the insurance equivalent of microfinance) is also being catapulted by mobile technology, with efforts to mine mobile data to set premiums and market-bespoke emerging market solutions.
Fintech growth in China is growing at a blistering pace. The Chinese online community is enormous and yet only half of the population is online. The most popular way to get online is using a mobile phone, thus allowing rural populations to leapfrog PC use entirely.
These online users are very active. In 2013, China surpassed the US as the largest e-commerce market in the world and by 2015 there were 413m online shoppers. In addition, Chinese consumers have already accepted using web-based financial products, with about 30% of the country’s vast population using e-payments in 2015 and internet-based wealth management services catching on very quickly.
Key businesses helping drive this acceptance include the large e-finance innovators, Ant Financial and WeBank. Ant Financial (part of the Alibaba group) offers a range of financial services, including third-party payments and wealth management services, and it plans to offer cloud-based services, big data analytics and loan origination. WeBank (owned by Tencent), harbours similar ambitions. It was one of the first challenger banks to receive a banking licence and the first e-finance bank to launch its online presence.
There is undeniable froth in some areas of fintech in China, for example in peer-to-peer lending, which has become a crowded space. However, the longer-term outlook is encouraging.
Andrew Ness is a global emerging markets portfolio manager at Martin Currie Investment Management