February 2023 / MARKETS & ECONOMY
Fintechs: Evaluating the Threat to Emerging Markets Banks
After a closer look at the emerging markets banking sector, we’ve concluded the success of fintechs there is yet to be tested.
- Some financial technology firms, known as fintechs, may present a competitive threat to banks in emerging markets.
- After taking a closer look at the emerging markets banking sector, we’ve concluded that the success of fintechs in emerging markets is yet to be tested.
- In our view, major tech companies may present a more meaningful threat to traditional banks in emerging markets than fintechs.
Some financial technology firms, known as fintechs, may represent a competitive threat to banks in emerging markets. Just as in other parts of the world, the pandemic greatly accelerated the expansion of e-commerce and digital channels in emerging markets. More fintech-friendly regulation—particularly in Latin America—has also boosted these upstarts, driven by the desire to support financial inclusion.
Fintechs have grown very quickly over the last three years. More than 20% of the fintechs in the world are based in Latin America, primarily Brazil and Mexico. However, after taking a closer look at the emerging market banking sector with my colleague Lyris Xu in Singapore, we’ve concluded that the success of fintechs in emerging markets is yet to be tested.
First, regulations in most countries prevent fintechs from accepting deposits, exposing them to rising interest rates to fund their lending operations. Also, the fintech sector has been active in mergers and acquisitions as firms strive to generate more revenue from their existing client base or gain scale, potentially straining their finances by moving into riskier products.
Most importantly, most of the emerging market fintechs have been around for five to seven years on average and therefore have a limited track record of navigating full credit cycles. Their credit portfolios tend to be riskier and unsecured by collateral, leaving them more exposed to downturns in credit.
Emerging markets banks are defending their market share against fintechs by boosting their investments in technology to enhance their digital offerings. Despite fintechs’ rapid client base growth, their share of emerging market loans and deposits remains very small.
Banks remain the most trusted providers of financial services in emerging markets, particularly for consumer deposit taking. Moreover, regulators in major emerging markets, such as Brazil, have imposed tough capital requirements on fully digital banking companies, perhaps motivated by concerns about maintaining financial stability.
Over the medium term, we think that the major technology companies with established customer bases and ecosystems, including China’s Ant Financial and Singapore-based Sea, could represent a larger threat to banks than fintechs, particularly in Asian emerging markets.
These big tech players have access to data that can provide greater opportunities to provide financial services as well as a better-quality experience in their lending products. They also currently have digital banking licenses and are already active in digital payments and credit products.
While we are closely tracking the inroads made by fintechs in emerging markets banking, we anticipate that traditional banks will vigorously defend their market share. In fact, major tech companies may present a more meaningful threat to traditional banks in emerging markets than fintechs.
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