In emerging markets a whole generation of technology is being quickly bypassed through superior and cheaper innovation, which has disrupted multiple industries. The telecommunications (straight to mobile) and energy (solar and wind in remote locations without grid infrastructure) industries are the most well-known examples. In finance it’s having a particularly rapid impact with mobile telecommunications enabling new payment networks, while access to basic banking services has become easier, and costs have fallen. This in turn has positive macroeconomic effects, bringing more of the population into the organized economy, reducing transaction costs, and potentially increasing the tax base, making this a powerful tailwind for emerging markets in general.
Figure 1: The leapfrog effect in finance and retail
Source: Robeco
Can fintech scale more rapidly in EM?
There is evidence that digital leapfrogging is enabling EM fintech to scale faster than DM peers, which typically face stronger competition from traditional finance incumbents. A good illustration is to compare Nubank, now Brazil’s fourth largest bank with over 90 million customers which recorded its first transaction in 2014, with Revolut, a similar online ‘neo-bank’, which entered the UK market in 2015 and now offers banking services across Europe.
Figure 2: Nubank versus Revolut growth trajectory (in millions of customers)
Source: Revolut, Nubank. Data to end of June 2023.
Leapfrogging to growth
There are some important reasons why Nubank has been able to grow faster. In emerging markets, the rise in internet connectivity combined with a lack of pre-existing offline commercial infrastructure is leading to exponential leaps in technology adoption and business model growth. Many new internet users have access to smartphones and mobile internet, but do not have access to traditional offline banking services. These users are either unbanked, or do not have access to physical bank branches that can provide services comparable to those in the US and Europe. As a result, these new users tend to be rapid adopters of mobile money and electronic banking services, never needing to use an ATM or write checks. This is reflected in the data on financial inclusion. Brazil, Nubank’s core market, had much lower financial inclusion than all developed economies. Thereby, a large underbanked community was waiting to be tapped, especially in younger demographics. According to World Bank data from 2014 to 2021, the percentage of adults (defined as older than 15 years old) with a bank account rose from 68% to 84% in Brazil. In contrast, developed economies were all above 95% in the same data set.
Furthermore, the entrepreneurial spirit and innovation ecosystem in emerging markets play a crucial role in driving tech leapfrogging. Local entrepreneurs and startups are often at the forefront of developing and implementing innovative solutions tailored to the specific needs and constraints of their markets. This agility and adaptability enables emerging market economies to quickly adopt and integrate new technologies into their societies.
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Not an isolated example
Nubank is not an isolated example of an EM fintech startup moving rapidly to scale. For example, Mercado Libre, which offers payments and ecommerce services across South and Central America, listed back in 2007 and now has over USD 10 billion in annual revenues. In China, Alibaba’s AliPay and Tencent’s WeChat Pay power a structurally different but equally disruptive wallet-based closed-loop model. In Central Asia, Kaspi is attempting to extend its dominant position in payments and online banking in Kazakhstan into neighboring economies. Similar trends are unfolding for other daily activities beyond fintech, such as buying groceries, looking for employment, consuming media, moving to new cities, and access to healthcare. Online adoption is faster, local solutions become smarter, and internet economies are booming.
Where will the next winners be found?
Robeco’s EM team works with the thematic financials team who manage the Robeco Next Digital Billion strategy to discover and analyze the best fintech companies in emerging markets. There are gaps to fill in financial inclusion in other fast growing EM economies with high mobile penetration rates like India (where 78% of adults had a bank account in 2021, according to the World Bank), Indonesia (52%) and the Philippines (51%). Every opportunity is different depending on the market, the regulatory framework and the macroeconomic backdrop, but in our view it’s likely that more regional, or potentially even global, fintech winners will come from EM in the coming years.
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