Mobile payments, digital wallets, and other forms of financial technology (fintech) have seen widespread adoption in the West, but fintech has a whole new meaning for the developing world.
Because of the largely unbanked populations in emerging markets, fintech companies serving those markets are facing a unique opportunity (and challenge) to entirely skip a whole generation of financial services (i.e., banks, cards) and rethink the payments ecosystem as it moves away from cash.
Take Africa, for example. As much as 80 percent of the continent is unbanked and up to 90 percent of retail payments are made using cash, meaning that the disruption opportunity for fintech startups is massive.
Here are a couple of key trends the fintech industry will likely see in 2017, particularly in emerging markets.
1. India will see a fintech boom, following in China’s footsteps
China was the first emerging market to experience rapid fintech growth in the last five years and quickly reached adoption levels that are, in many segments, higher than those we see in North America and Europe. For example, KPMG’s 100 Leading Global Fintech Innovators Report 2015 lists two China-based companies in the top five — ZhongAn, an innovative online insurance player backed by Alibaba and Tencent, and Qufenqi, a large online installment plan provider.
To understand the rise of Chinese fintech players, we need to look at the key enablers. A recent McKinsey article mentioned several factors, including a highly-developed e-commerce sector and latent demand for inclusive finance.
India seems to be in a similar position to where China was few years ago. The e-commerce market is the fastest growing in the world (51 percent annual growth), largely due to the competition between Amazon and several local players. There is clearly a large latent demand for financial services and a big push from the central government to increase financial inclusion. Just between 2011 and 2014, bank account penetration increased from 35 to 53 percent, and we will likely see much higher penetration rates next year due to the government’s demonetization measures. However, almost 60 percent of these accounts show negligible or no transactions, so there is clearly a significant opportunity for fintech companies to build consumer and business applications on top of this infrastructure.
If India follows China’s innovation pattern, we will likely see successful businesses in the following categories:
- Mobile payment (e.g., widely accepted solution similar to Alipay)
- Wealth management (e.g., allowing low-cost access to global stock markets)
- Online consumer and SME lending (e.g., enabling access to credit using innovative risk scoring mechanisms)
Looking beyond India, the next big opportunity for fintech companies is surely in Africa, with the primary focus on the large markets of South Africa, Nigeria, and Egypt, which account for about half of the continent’s economy. That said, it is unlikely we will see rapid growth and mass market adoption similar to China and India in this region in 2017, because the above-mentioned enablers are not in place yet. However, the situation is slowly starting to change. Governments are making financial inclusion a key priority, and big banks are finally partnering with fintech companies after years of very passive reception.
In the long run, African fintech solutions and services will look completely different from their Western counterparts and will play a crucial role in the future economic growth of the continent.
2. Growth in fintech will drive innovation in regtech
Among the key challenges of doing business in emerging markets is the fact that fintech companies cannot rely on the same payments and banking infrastructure that exists in developed markets. For example, fintech companies in emerging markets can’t depend on credit scores, unified bank infrastructure, or even more basic requirements such as having IDs to verify identity (KYC) or a reliable database of addresses. The broad availability of cloud computing, machine learning, and big data services have allowed companies to tackle these challenges in a much more cost effective way. Many people now refer to this segment of services as “regtech.”
The dependence of fintech companies on regtech services is clear: Fintech companies constantly need to improve and automate regulatory and other compliance processes as well as streamline customer onboarding and monitoring. The first wave of regtech companies has certainly helped companies in the US and Europe to become more efficient and reduce costs, but I would argue that there is a much bigger opportunity in India, Nigeria, or Egypt, where fintech companies desperately need these tools to operate. How do you identify Nigerian customers when adoption of the National Identity Card is still sparse? How do you score the risk of a loan to an Egyptian customer in the absence of an official scoring mechanism?
At the same time, regtech companies cannot build these tools and models without rich datasets, which have to come from fintech and other financial institutions. This really creates a case for a broad partnership between fintech, regtech, and potentially even governments to back such a large undertaking. The true opportunity for regtech in emerging markets goes beyond simple cost saving. Regtech has the potential to enable new solutions and products that serve new cohorts of customers traditionally ignored by incumbent financial institutions. Regtech companies can play an important role in figuring out how this can be designed as a shared service that any fintech company can turn to.
The global fintech industry is on the rise and shows no signs of slowing down. In fact, a study from Accenture found that global fintech investments increased 75 percent in 2015, exceeding $22 billion. A continued focus on emerging markets and close collaboration with regtech companies will set the fintech industry up for continued success and growth in 2017.
Tomas Likar is Vice President of Strategy and Business Development at Hyperwallet, a global payouts provider to independent workers. He joined Hyperwallet after six years with McKinsey & Company, where he advised payments firms in emerging markets strategy, mobile payments, corporate strategy, and M&A.