How new technology is transforming finance in emerging markets
Even as the global economy struggles with inflation, supply chain constraints and high commodity prices, new payment solutions are helping billions in emerging markets access and spend much-needed capital.
Driven by a decline in cash payments during the Covid-19 pandemic, digital payments skyrocketed in tandem with the growth of e-commerce, as the financial technology (fintech) sector expanded to provide consumers with a wider range of payment options.
Digital payments growth has been strongest in emerging markets, where non-cash retail payments grew at a compound annual growth rate (CAGR) of 25% between 2018 and 2021, compared to 13% globally for the same period. A young, tech-savvy population and demand for access to financial services are driving growth.
Digital payments are expected to continue to expand globally, with a projected CAGR of 15% for 2022-26.
Fintech in emerging markets has also attracted significant investment. Fintech operators accounted for 37% of the record $4.85 billion in funding African startups received in 2022 – the largest share of any sector.
This growth, evident in the uptake of cryptocurrency and microcredit models such as “buy now, pay later” (BNPL), is serving to expand financial inclusion while reshaping the way consumers leverage the supply of capital.
Increase financial inclusion
According to the World Bank, around 1.4 billion adults remained unbanked as of July 2022. However, banking penetration has increased significantly in recent years, with 76% of adults having access to a bank account globally, compared to 51% a decade ago.
The digitization of financial services has been integral to expanding financial inclusion, as well as diversifying the sector. The popularity of digital payment methods has also benefited non-traditional financial players, with non-banks owning the dominant front-end payment application in countries such as India, Kenya, the Philippines and Vietnam.
One such mobile-enabled system, India’s Unified Payments Interface (UPI), has helped digital payments in the country grow by 50% in each of the past five years. In March, the Reserve Bank of India debuted a UPI for feature phones, a development that could potentially bring financial services to an estimated 400 million people in rural areas.
Another popular mobile money system, M-Pesa, allows users to make payments and store and receive money via their mobile phones, providing access to financial services in areas where banks do not have a presence. The service is used by 51 million people in seven African countries and is set to expand to Ethiopia following a license approval in October 2022.
Innovative payment methods are even helping to provide more accessible and affordable healthcare to consumers in emerging markets. Nigeria’s Soso Care, for example, accepts recyclable waste such as scrap metal, plastic or car batteries in exchange for health coverage, seeking to bridge the care gap and tackle waste management in a country where 23% of the population has health insurance.
Digital currency development
Blockchain-powered fintech, particularly cryptocurrency and non-fungible tokens (NFT), offers decentralized exchanges that enable transaction flows despite macroeconomic pressures such as rising US interest rates and inflation of fiat currencies around the world.
Because of these advantages, emerging markets are leading cryptocurrency adoption despite the global bear market: 10 of the top 20 countries on the 2022 Global Crypto Adoption Index published by blockchain data platform Chainanalysis were classified as low-middle income countries, while eight were upper middle income.
Vietnam ranked first on the index, partly due to the popularity of cryptocurrency-based gaming platforms that use play-to-earn models. The Philippines, Ukraine and India held the second, third and fourth places respectively.
NFT marketplaces such as FanCraze, a platform that sells cricket NFTs and has financial backing from US venture capital firm Sequoia Capital, are credited with India’s rise on the index.
Despite sharp declines in value, Bitcoin was adopted as legal tender by the Central African Republic in April 2022. Egypt, Kenya, Nigeria and South Africa, Africa’s four largest economies, also have the largest number of cryptocurrency owners on the continent.
The use of central bank digital currencies (CBDCs) has also grown as governments attempt to navigate the burgeoning digital currency landscape. As a digital form of cash issued and regulated by central banks, CBDCs are seen as less volatile than cryptocurrency assets. More than 100 CBDCs were in development stages around the world as of mid-2022, with Nigeria’s eNaira debuting in October 2021 and the Bahamas’ sand dollar launching the year before.
Hoping to expand their fiscal reach and compensate for funding shortfalls, a number of African nations have levied taxes on digital transactions.
In May 2022, Ghana launched a 1.5% tax on the transfer amount for electronic transactions. Despite consumer criticism and a resurgence of cash-based transactions, the measure could encourage formalization by getting businesses to register with the Ghana Revenue Authority, thereby expanding the country’s tax base.
Financing resilience
Alternative payment solutions play a key role in building financial resilience in emerging markets, where conflicts, inflation and natural disasters can have an overall economic impact.
Long seen as an obstacle to growth and a drain on public funds, the informal economy can play an important role in economic resilience.
The International Labor Organization estimates that around 2 billion workers over the age of 15 spend at least part of their working life in the informal sector.
Informal enterprises, usually micro, small and medium enterprises (MSMEs), contribute to the formal economy in a number of ways, such as VAT on purchases or additional costs of running a business.
The informal economy represents a highly dynamic form of employment, providing jobs, skills and income to large sections of the population in many emerging markets, where it accounts for roughly a third of economic activity.
For many MSMEs, limited access to credit remains a major obstacle to growth and formalization.
According to the International Finance Corporation, around 65 million firms – roughly 40% of all MSMEs – face an annual funding gap of $5.2 billion, indicating a significant opportunity for fintech operators.
A recent fintech innovation, BNPL, is already unlocking the e-commerce potential of emerging markets and has the potential to reduce the credit gap for MSMEs.
BNPL companies offer retail loans that can be repaid in installments, often with little or no interest. The system helps retailers access markets with limited access to finance and can increase the purchasing power of both consumers and MSMEs.
Several markets in the Asia-Pacific region are keen to see a BNPL boom, with a 2021 Google report estimating that digital lending balances in the region will reach $116 billion by 2025.
In mid-2022, GoTo, Indonesia’s largest startup, announced plans to add a BNPL service to its extensive portfolio, which includes e-commerce and ride-hailing.
Fairbanc, another Indonesian firm, offers business-to-business BNPL services to MSMEs, allowing them to purchase inventory using BNPL credit, reducing the technological and financial barriers to participating in the digital ecosystem.
Money is another important source of income for many in emerging markets, with volumes on the rise in recent years. According to the United Nations International Fund for Agricultural Development, an estimated 800 billion people globally benefit from remittances, which help increase economic resilience in the face of inflation and natural disasters, such as this year’s floods in Pakistan and West Africa.
Global remittances to low- and middle-income countries grew by 5% to $626 billion in 2022, lower than the 10.2% increase in 2021, but still significant given global macroeconomic pressures.
By Oxford Business Group
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