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Fintech Companies in Emerging Markets Fintech Companies in Emerging Markets State of Play, Financial Inclusion Potential, And Your Role Gayatri Murthy Financial Sector Specialist, CGAP The Enabling Environment For Fintech Fintech continues to explode globally, and in emerging markets Many services appear as do ecosystems of incubators, accelerators, etc. But things shift fast! Mexico Nigeria India Indonesia 3 © CGAP 2018 The solutions and their scale is dependent on enabling regulation Enabling Regulation CGAP Research Shows 4 Enablers are crucial: • Non-bank e-money issuance • Use of agents • Risk-based customer due diligence • Customer protection Mexico Fintech Law P2P legislation in India and Indonesia M-Pesa enabled by Kenyan E-money issuance 4 © CGAP 2018 Robust financial and physical infrastructure is also key to fintech development Robust financial and physical Account Holders infrastructure: (Findex) 2011 2018 • Mobile phone • Mobile internet connections Indonesia 20% 49% • Reliable electricity India 35% 80% • Digital ID system Kenya 42% 82% • Real-time, interoperable payments • Data sharing regimes (rare) Mobile Internet Penetration (GSMA) 2014 2018 Indonesia 21% 43% India 19% 35% Kenya 16% 24% Mexico “Co-Di” 5 Payments Scheme India Stack © CGAP 2018 These two factors also determine whether these solutions can reach BOP or not Enabling Regulation Robust financial and physical infrastructure: Reach BOP or not: • Example: Nigeria’s BVN number • Example: Most agents, merchants and drivers focused in rural areas 6 © CGAP 2018 Guideline: Understand and support external factors that are crucial Fintech can diversify the Enabling regulation market if allowed to compete Fintech goes mass Financial and physical market where rails exist infrastructure 7 © CGAP 2018 The Nature of Solutions and Services Proliferation so far is uneven, and understandably has focused on payments and credit Platforms B2B Payment e.g: GoJek, Payments Solutions Mercado Libre Insurance Wallets Domestic remittances POS devices Credit Payment processing for merchants P2P versus balance sheet Individual, MSMEs, Agri Factoring, crowdsourcing Digital Service Banks Marketplaces 9 © CGAP 2018 A wide range of products are grouped under the fintech umbrella. Many ways to slice and dice B2B B2C The fintech explosion (Serving banks, MFI) (Serving End customer) is varied and uneven Focus is on classifying services and creating Payments- wallets, taxonomies remittances, POS Pay Payment distribution, machines, payment agent management, processors Many good taxonomies exist- World Bank, the BaaS, Digital Digital credit for Mix and the Cambridge SaaS, Banks Center Borrow Credit scoring, data chatbots SMEs, individuals, analytics, KYC agri, P2P, factoring, asset finance checks Market- places Save Micro-saving Inclusiveor not Literacy tools apps, social- savings Platforms Protect Regtech, Suptech P2P insurance, voucher Cyber-security tools insurance, automated claims, 10 © CGAP 2018 Variations within product groups are also important to understand • Individual • MSME Segment • Agriculture • Asset finance This level of detail is • P2P key to understanding Business Digital Credit Model • Balance sheet viability, innovation lending and inclusivity • Invoice Frontier/ Discounting early- stage • Crowdfunding • Digital ROSCAs 11 © CGAP 2018 Important to connect products with business innovation and with value Product Innovation Value Allows many to pay easily; merchants to digitize; Payments creates digital footprints QR Codes Easy-to-use apps POS Reduces risk to lend; P2P lenders connect connects unused funds funds with borrowers; with lenders take on risk. Credit Alternate credit scoring using phone data and bank Creates creditworthiness transactions to assess people where it didn’t exist before and firms 12 © CGAP 2018 Maturity of products is a key factor in determining impact in markets Payment Remittances wallets Large variations in Digital consumer models and their credit maturity by market. Payment processors Replicability Digital SME credit chatbots P2P credit Digital Banks Payment aggregators P2P insurance Automated claims Asset finance Marketplaces Insurance Micro-savings marketplace Financial literacy tools Voucher insurance Invoice discounting Early Stage Growth Stage Mature Stage Model validation Customer use & behavior Financial inclusion effects Concerns Customer risks Scalability and market effects Seed Series A-C Series D+ Funding Large variations in capital availability. 13 © CGAP 2018 Funding Flows & Gaps The funder community sees benefit in engaging with fintechs Fintech could improve access for the underserved POTENTIAL FOR IMPACT 15 © CGAP 2018 According to the latest data from CGAP Funder Survey, “Digital Finance” was the third most funded project theme globally with a total of $1.59 bn commitments in 2018. “Micro and Small Enterprises”, and “Women” were the two project themes that received more funding than “Digital Finance”, in that order. © CGAP 2018 Public Funding for Digital Finance: The Big Picture--2018 212 PROJECTS $1.59bn COMMITMENTS 18 ACTIVE FUNDERS 17 © CGAP 2018 But lack of data on funding flows, that combine public, private and venture funding Private funding Global VC-Backed fintech deals by continent, numbers Q3'18-Q3'19 US Asia Europe Africa Australia South America Q3'18 Q4'18 Q1'19 Q2'19 Q3'19 Source: CB Insights Report 2019 Source: Pulse of Fintech H1’19, KPMG (2019) So hard to assess gaps in market-making when full picture is not evident 18 © CGAP 2018 Africa is often excluded from global funding numbers • Total African venture investments reached a record high in 2019: USD 1.340 Bn in investments through 427 deals in equity and debt financing and a total of 203 investors • Funding is uneven within the continent. More than 75% of the deals were concentrated in Nigeria, Kenya and South Africa creating a funding gap in francophone. In 2018, only 1% of the $1.16 billion raised in equity by African Tech Startup in 2018 was allocated to francophone Africa. • Fintech retained its top position as the sector with most funding: USD 678.73 Mn, a 138.48% increase compared to the previous year 19 © CGAP 2018 Stable fintech products attract more funding Over the past years, a handful of sectors and products (e.g. payments and credit) attracted more funding than other sectors Example: Payment and Credit in India Source: Microsave Insurtech Deals and Dollars $10.0 160 133 139 $9.0 125 140 $8.0 120 $7.0 94 $6.0 100 Funders are now beginning to 71 $4.6 $5.0 63 80 invest emerging models like $4.0 47 60 $3.0 $2.5 40 $2.0 $1.4 $1.4 $1.2 Insuretech, but in select markets $0.7 $1.0 $0.2 20 $0.0 0 2013 2014 2015 2016 2017 2018 2019 20 Source: CB InsightsInvestments Report 2019 ($B) © CGAP 2018 There is lack of early-stage funding Quarterly Deal Share by Stage to Global VC-Banked Fintech Companies 100% 10% 12% 10% 11% 17% 90% 4% 2% 3% 2% 5% 3% 4% 2% 3% 80% 6% 3% 7% 6% 8% 7% 13% 70% 14% 15% 15% 20% Other 60% Series E Series D 50% 28% 26% Series C 22% 29% Series B 23% 40% Series A Seed/Angel 30% 20% 37% 34% 35% 30% 31% 10% 0% Q3'18 Q4'18 Q1'19 Q2'19 Q3'19 Source: CB Insights Q3’19 Report 21 © CGAP 2018 In emerging markets, lack of early-stage financing leads to inefficient innovation Broad source of Constant Active pipeline: Market disruption, funding pipeline for Large valuations, influencing Developed available: angel VC maintained follow-on equity incumbents, M&A investors, rounds, debt activity friends/family, capital markets own funds accessible Seed Mature Venture Growth (prototype, (Pilot, iterate, companie (sales, founding marketing, impact) s (expand, team) sales) diversify) Small set makes Constrained Scarce funding: Little or no it this far. Focus pipeline: Few Little to no angel pathways to scale is mostly on larger follow-on Emerging investing. Small and exit for proven models equity rounds, grants are very ventures like credit and focus on markets competitive (acquisitions by payments demonstrated incumbents are rare) models, little debt financing available Valley of death 22 © CGAP 2018 We haven’t yet connected capital with evidence At all levels of maturity, we are not sure of our effects. Insight buried within firms, investors and few actors. No one sees the whole picture. Mature Stage Growth Stage Early Stage Low Public-Funder Participation Medium Public-Funder Participation High Public-Funder Participation E.g.: Digital credit in E.Africa Experiments at the frontier New models: savings, pension, etc that don’t break even early. Copycats New variations Harder-to-reach segments like Big payment wallets P2P agritech MSME Asset • Do maturing products • What is the viability and risks • What innovations in see cost reductions and in growing models? early models can work secondary effects and scale? among the poor? 23 © CGAP 2018 Fintech’s Effects on the Underserved We assessed fintech activity against four key inclusion criteria Cost Access Fit Experience Makes services more affordable Makes financial services more Makes financial services better Offers an improved user accessible: suited to the needs and wants experience: Lowers operating costs of underserved customers. Expands eligibility through Has product features that are Lowers end user fees innovative means of CDD Addresses a customer need not easier to access, understand and served by typical products compare Offers more flexible payments Expands eligibility through innovative means of risk Aligns better with the needs and Has an interface easier for most Reduces the need for expensive assessment wants of underserved
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