FinTech frontiers: evaluating emerging markets

April 2024  |  FEATURE | BANKING & FINANCE

Financier Worldwide Magazine

April 2024 Issue

During and in the aftermath of the coronavirus (COVID-19) pandemic, business sectors met with mixed fortunes. Some took a hit, while others, such as FinTech, generally weathered the storm and are set to grow.

Certainly, the pandemic’s impact caused a seismic shift across the financial services (FS) sector and acted as catalyst for rapid digital transformation. Consequently, FinTech companies are now witnessing an explosion in demand for digital financial services.

From mobile banking to online payments and digital lending platforms, the appetite for seamless and contactless financial solutions appears insatiable. Innovations in artificial intelligence (AI), blockchain and digital identity verification systems are servicing this appetite – a clear signal of the way ahead for the FS industry.

“A key trend in the FinTech space is AI, and we expect the momentum in this area to continue apace,” contends Martin Cook, a partner and head of FinTech at Burges Salmon. “Payments will also continue to be a focus of innovation and we are seeing some interesting payments propositions being brought into new market segments.”

Testifying to this focus is the Boston Consulting Group’s (BCG’s) ‘Global Payments Report 2023: Investor Scrutiny Provokes a Moment of Truth’, which reveals that payments-focused FinTechs now number more than 5000 globally and account for about $100bn of total industry revenues. Moreover, by 2030, the FinTech space could command a revenue pool worth $520bn.

“There is also the work FinTech companies are doing to help deliver net zero,” adds Mr Cook. “Wealth and lifetime savings continue to be a busy area. Opportunities are widespread and at different points in the product and wealth management chain.”

This potential for growth is especially acute in emerging markets, particularly low- and middle-income markets, where, according to the BCG, there are 1.5 billion adults unbanked and an additional 2.8 billion underbanked – this combined total amounts to over half of the world’s population.

“We are seeing plenty of activity in such markets, especially Africa and southeast Asia,” concurs Mr Cook. “FinTech companies are increasingly looking beyond their home markets to have a regional or global impact.”

Key challenges

While a significant area of opportunity and innovation for FinTech companies, expanding into emerging markets is not without its challenges, funding and regulatory in particular.

According to the Center for Financial Inclusion’s 2023 report ‘Inclusive Fintech Funding in Times of Uncertainty: Lessons Learned and Challenges Ahead’, while FinTechs have expressed their commitment to continue serving low-income and vulnerable segments, their ability to sustain that commitment depends on funding.

“Funding, or lack of funding, was a big issue for FinTech companies in 2023,” notes Mr Cook. “While capital availability as such is not a problem, capital deployment has been an issue. There is much greater focus on the pathway to profitability – although there is of course some degree of polarisation in the market.

“Businesses with a strong track record, a good market presence or impressive and proven teams found – and still find – funding,” he continues. “Others have had a harder time but have made tough decisions and, assuming they are still in the market, will likely come back more focused. We anticipate a funding uptick overall in 2024.”

And in terms of regulatory issues, the burden is increasing for FinTechs. “In general, authorised FinTech firms have been implementing their Consumer Duty strategies, but the work is ongoing,” asserts Mr Cook. “Even for non-regulated firms, the regulatory net is expanding indirectly – consequential impacts around the Consumer Duty building on top of operational resilience requirements. AI regulation is also on the way.”

There are also more sub-sector regulations which will face increased regulatory oversight, for example relating to cryptoassets and ‘buy now pay later’ agreements. In addition, payments firms are facing new regulatory requirements in relation to authorised push payment fraud.

Evolving momentum

The potential for FinTech companies to transcend geographical and physical barriers and enable consumers and providers to access tailored and more affordable financial products is profound. Although not without caveats, it is an opportunity to enter an immense untapped market and contribute to a more efficient and inclusive global financial system.

“A key issue is whether regulatory requirements place too great a burden on FinTech companies,” says Mr Cook. “Of course, for those who can deal with the requirements, the opportunities afforded can be significant, including as a defensive advantage against others.”

Helping to facilitate opportunities is coalition activity such as programmes overseen by the UK’s Centre for Finance, Innovation and Technology, as well as research programmes funded by Innovate UK and the Economic and Social Research Council, which includes the ‘Future Finance’ research collaboration.

“I am a big believer in the opportunities available to FinTech and created by FinTech,” concludes Mr Cook. “Awareness of environmental, social and governance (ESG) is allowing ‘FinTech for good’ to prosper with a really interesting focus on societal impact by for-profit businesses and unlocking the problems of the underserved in financial services.”

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Fraser Tennant