There is no doubt that the rise of fintech has helped bring people into the financial ecosystem who would have previously been excluded. This is especially true of developing countries – regions of the world that face greater financial inequities and often require more inward investment, two problems that fintech can help address.
According to Jon Frost, Head of Economics for the Americas at the Bank for International Settlements, “fintech adoption, especially in the developing world, is being driven by an unmet demand for financial services”. So how successful has fintech been in reaching underserved markets, and what does current penetration look like?
What impact has fintech had on developing countries?
“Fintech has, relatively speaking, improved the financial fortunes of developing countries,” says James Cope, SVP – Head of Product Management at Crown Agents Bank. “Fintech gives less affluent people in emerging markets access to financial services they wouldn’t get from traditional banks. From a payments’ perspective, it makes it easier and cheaper to send development sector payments, remittances, and trade payments, all of which benefit emerging market economies.”
This has largely been sparked by an uptick in the number of smartphones used in developing markets, which has enabled new opportunities for financial prosperity. According to GSMA Intelligence, smartphone adoption in sub-saharan Africa was already 49% in 2021 but is expected to reach 61% by 2025. Likewise, in Latin America, smartphone adoption stood at 76% in 2021 and could reach 83% – more than four in five people – over the same period.
To put those figures into perspective, the smartphone adoption rate in the world’s largest economy, the US, is currently reported to be about 85%, but that too will grow by 2025.
Karen Jordaan, from digital cross-border payments company WorldRemit, says: “Globally, there are now over 6.5bn active devices, and this number is growing as they become increasingly affordable in developing countries. These smartphones – and access to the fintech services that are available on them – have led to the rise of online payments and other services improving the financial fortunes of developing countries.”
Access to a smartphone is not just about the services that are available to those consumers on the ground – like digital payments or current accounts. It opens emerging economies up to new opportunities for inward investment: access to new marketplaces, fresh ways to connect with development aid, and, importantly, remittances from loved ones abroad. WorldRemit surveyed 3,000 international money senders and found that the main reason for their use was to help recipients cover the cost of education, healthcare, and utility payments back home.
Karen Jordaan says there are still challenges with fintech adoption – including inconsistent regulation, mistrust in technology, the high cost of internet access, and the challenge of connecting large, rural communities. But people are still coming online regardless: “Last year, the World Bank recorded a 30% rise in the number of adults using financial accounts to 71% of the global population, something it attributes to fintech developments such as mobile money,” Jordaan says.
What financial inequities still need to be addressed?
There are two stories to most statistics, of course, and the World Bank reporting that 71% now use financial accounts is no exception. On the one hand, it demonstrates a remarkable rise in financial participation – spurred on by the pandemic and the way in which governments around the world chose to deliver relief and support digitally. However, it still shows that nearly 30% are disconnected from the financial system – more, no doubt, in emerging markets, with developed economies likely dragging that statistic upwards.
“In short, a lot of developing countries still have a lot of people – frequently the majority of the population – who are unbanked or underbanked. Fintech has helped plug that gap and will continue to do so,” says James Cope from Crown Agents Bank.
Karen Jordaan adds: “Through the use of emerging technologies, the unbanked can build financial security for themselves. Remittance platforms, like those within [WorldRemit’s parent company] Zepz Group, have already established a strong relationship of trust with migrants, playing an indispensable role in onboarding the unbanked and underbanked, building trust towards fintech and facilitating financial prosperity through innovation.”
Despite improvements in smartphone adoption and financial participation, one of the challenges that persists is that payments into and out of emerging markets are still dependent on traditional correspondent banking, which is generally dominated by dollars.
“This penalises countries with volatile local currencies and restricted access to dollars,” explains James Cope. “Over time, improved cross-border payments technology, based on DLT, and the availability of digital currencies should break down these payment barriers.”
Cultural factors at play around fintech adoption
For each region, there are also cultural considerations that affect what fintech solution might be appropriate for the market, or what obstacles exist to greater adoption.
“Developing countries face many challenges, perhaps the most pertinent of which is the development of robust regulation to support services which must be secure and efficient to be trusted by users,” Karen Jordaan elaborates.
“Africa, for instance – a hotbed for fintech innovation – is faced with a fragmented financial regulatory framework that is particularly problematic for a region with high levels of migration. A functional regulatory framework requires stability and clarity, which can help accelerate the direction and growth of fintech companies.
“When it comes to the appetite of the people to use digital services to manage their money, remittance companies play a pivotal role as, for many, it’s their first experience of using financial technology. The responsibility to build trust falls on these companies’ shoulders, and failing at this task can have far wider consequences when it comes to advancing the uptake of digital financial services.”
James Cope concurs that sub-Saharan Africa is one of the most exciting and rapidly growing fintech hotspots globally: “In a region where the vast majority of people do not have a bank account, fintech – and particularly mobile payments technology – has allowed a lot of African consumers to ‘double jump’ to mobile payments.”
Brazil has also seen a massive surge in fintech participation, which initially served as a response to the country’s outdated banking system before becoming a fully-fledged acceleration of financial technology. In the last year, six of the world’s most downloaded mobile banking apps originated in Brazil – including Nubank, C6 Bank, and Inter – accounting for more than 130mn downloads in the space of just 12 months. Again, the way the Brazilian government administered COVID-19 relief packages may have something to do with that resurgence, as those apps were already doing well beforehand.
The world in 2050, according to Goldman Sachs
Top five economies in 2050 | Source: Goldman Sachs
- ▲ China (Current GDP: $17.7tn)
- ▼ United States (Current GDP: $23.3tn)
- ▲ India (Current GDP: $3.1tn)
- ▲ Indonesia (Current GDP: $1.1tn)
- ▼ Germany (Current GDP: $4.2tn)
Emerging markets have the potential to completely disrupt the future of fintech and reshape the economic world order. According to predictions from Goldman Sachs, we are set to witness a gradual slowdown in economic growth – but emerging markets will retain twice the rate of growth between now and 2075.
After a year of underperformance, Latin America is expected to accelerate over the next decade before growth cools off in subsequent decades. The changes will drastically rearrange the list of the world’s top five economies.
By 2050, China will have replaced the US at the head of the table, with Indonesia appearing inside the top five. By 2075, Nigeria, Pakistan and Egypt will be the fifth, sixth and seventh largest economies respectively, Goldman Sachs predicts. Germany and the UK will be pushed down to ninth and 10th, while France will be down in 15th, behind high-growth emerging markets like Mexico and the Philippines.
Are local fintech solutions the answer to boosting adoption?
Given that so many different cultural factors affect the rate of fintech penetration in any single market, it begs the question whether local innovators are better placed to provide financial services than giant tech unicorns, who might be interested in expanding to new regions.
“Where companies offering these services often get it wrong when moving into new markets is not focusing their efforts on building a service that responds to different demographics’ needs,” Karen Jordaan explains.
“It has long been the case that attitudes to banking and in particular payments are informed by national and cultural factors,” James Cope says. “In more developed markets, this explained the vastly different rates at which cash usage has declined – much faster in Scandinavia and the Netherlands, much slower in Germany and Japan.
“The same applies in emerging markets with the adoption of fintech. Sometimes, the success of a particular financial technology – MPESA in Kenya being a classic example – has been hard to replicate elsewhere because it is the result of a collision of multiple local factors.”
One thing that our experts agree on is that these idiosyncrasies make it difficult for established unicorns in developed countries to expand their product to emerging nations. Instead, local founders should address specific problems and fintech unicorns should seek to take a stake in successful startups as a means of entering developing markets.
“Rather than big players starting from scratch in other markets, we’re probably more likely to see them take stakes in fintechs in markets with a similar, but locally-specific, business model – the way Ant Financial has invested in lots of other digital payments apps in other EMs is an obvious example,” James Cope says.
“Each country will adopt a different strategy to help serve the needs of its citizens,” Karen Jordaan concurs. “Typically, we will witness smaller fintech companies being acquired by larger multinationals, which are keen to remain true to the needs of each market. Together, the two can understand the different challenges and needs within their existing and potential customer base by working with the people on the ground.
“As an example, in 2020 WorldRemit acquired an Africa-focused remittance company, Sendwave – which had achieved success in Nigeria, Kenya and Ghana – to help serve the needs of the continent. In 2022, Sendwave reported to have sent over US$15bn from 50 countries to recipients in 130 countries. Sendwave, which operates under the Zepz Group brand, has enabled the company to bolster its coverage of Africa whilst benefiting from increased investment.”
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