Can fintech increase financial inclusion in emerging markets?
People in emerging markets may have historically been barred from accessing traditional banking services, but fintech promises to improve financial inclusion for those who have been underserved. Cross-border payments are a lucrative growth opportunity.
– Visa and Mastercard collaborate with fintechs in the Middle East and North Africa region.
– Travel recovery boosts cross-border payments, while retail spending in emerging markets remains robust.
– Capital Link Global Fintech Leaders ETF is up 7% over the past six months.
The flow of money across national borders is essential to international trade, but a lack of access to traditional banking means that many people in emerging markets have historically been prevented from fully participating in the global economy.
“Despite near-universal access to financial services in advanced economies, financial exclusion stubbornly persists in many emerging markets, leaving vast numbers of low-income populations unbanked or underbanked,” researchers at the International Finance Corporation wrote last year.
Fintech has been disrupting financial services in the UK, US and Europe for a number of years, but is now beginning to penetrate emerging markets.
According to research by Boston Consulting Group and QED Investors, published in early May, fintech revenues will grow to $1.5 billion by 2030, a sixfold increase from $245 billion.
Growth will be led by emerging markets, which are home to three-quarters of the world’s 1.5 billion unbanked adults and half of the 2.8 billion underbanked adults. Africa alone is expected to grow its fintech revenues at a CAGR of 32% until 2030, with Egypt, Kenya, Nigeria and South Africa as key markets in the region.
The likes of blockchain, artificial intelligence, and mobile and digital payments have the potential to make financial services more accessible and affordable for underserved populations. The payments sector in particular is well positioned to help improve financial inclusion in emerging markets.
Visa and Mastercard focus on the MENA region
Last week, payment processing giant Visa [V] partnered with Tarabut Gateway, the largest open banking platform in the Middle East and North Africa (MENA). Open banking provides better financial inclusion for people who do not have access to traditional banking services.
Visa and Tarabut Gateway will initially utilize data to carry out credit risk assessments, but will eventually transition to offering solutions including cross-border payments and lending.
Visa’s main rival Mastercard [MA] has also strengthened its focus on payments in the MENA region. In March, Mastercard granted Dubai-based Astra Tech, which is backed by AI and cloud computing firm G42, a license to issue debit and prepaid digital and physical cards.
Back in February, Mastercard teamed up with Bahrain-based Infinios Financial Services to improve the digitization of B2B travel payments between buyers and suppliers.
“As consumers regain the confidence to seek out and book travel experiences, legacy B2B payment processes threaten to hold the industry back,” warned Khalid Elgibali, division president of MENA at Mastercard, in a press release. The partnership will help “ensure growth and improve liquidity”, he added.
Travel recovery drives payment growth across national borders
Both Visa and Mastercard cited international travel recovery as a key reason for the recent growth in cross-border payments.
Visa reported a sharp increase in overseas spending in the quarter ended March 31, with cross-border volume up 24% year-on-year, compared with a growth rate of 22% in the previous quarter.
The company has expanded its cross-border reach thanks to a partnership with payment infrastructure platform Thunes, which enables individuals and small businesses in markets across Africa, Asia and Latin America to move money internationally to digital wallet providers.
Like Visa, Mastercard has been boosted by an increase in cross-border volume, which rose 35% in the quarter ended March 31, up from a 31% increase in the previous quarter. This reflects “robust consumer spending and the continued recovery in cross-border travel,” CEO Michael Miebach said in comments released alongside the earnings report.
Consumers in emerging markets want smarter payment solutions
While consumer spending has been weak in developed economies, including the UK and US, retail spending in emerging markets has remained robust.
In a recent roundtable conference organized by PYMNTS, Amnah Ajmal – Mastercard’s executive vice president of market development for Eastern Europe, the Middle East and Africa – said there are many opportunities to be exploited.
– I see a lot of optimism. Consumers are much more open to embracing new technologies,” commented Ajmal, who cited Mastercard research that found 95% of consumers are open to new technologies such as digital wallets and digital currencies, but also QR code payments and even biometrics.
“Consumers are embracing the new technologies and merchants are making sure they have the seamless payment experiences to scale their business… Those are the trends that I would say are most in demand,” Ajmal continued.
Emerging markets eye blockchain
Blockchain is a technology that is expected to play a major role in shaping the future of financial services and payments in emerging markets, improving financial resilience in the process.
“Blockchain-powered fintech, particularly cryptocurrency and non-fungible tokens, offers decentralized exchanges that enable transaction flows despite macroeconomic pressures such as rising US interest rates and inflation of fiat currencies around the world,” it noted Oxford Business Groupa research consultancy, in a report on financial services trends in emerging markets, published in January.
The research noted the rise in central bank digital currencies as countries work to navigate the difficult crypto world.
Despite blockchain’s promise, there are likely to be many regulatory hurdles to overcome before people in emerging markets can reap the full benefits of the technology.
Fund in focus: Capital Link Global Fintech Leaders ETF
ETFMG Prime Mobile Payments ETF [IPAY] has Mastercard and Visa as its top two holdings as of 13 May. As of March 31, transaction and payment processing companies made up 80.81% of the portfolio and consumer finance made up 13.03%.
The fund is down 0.7% over the past year, but up 2.8% over the past six months.
Capital Link Global Fintech Leaders ETF [KOIN] has both stocks, but neither is in the top 10. Although the fund does not provide a sector breakdown, it is focused on providers of financial solutions and providers of digital assets.
The fund is up 1.9% over the past year and up 6.8% over the past six months.
Global X Fintech ETF [FINX] do not have Visa or Mastercard. The portfolio is weighted heavily in favor of information technology (81.5%); finance, industry and consumer discretionary, and healthcare make up the rest. The fund is down 11.5% over the past year and flat over the past six months.
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