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Can fintech boost financial inclusion in emerging markets?

People in emerging markets may have historically been shut out 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 are partnering with fintechs in the Middle East and North Africa region.

- Travel recovery is boosting cross-border payments, while emerging market retail spending remains robust.

- The Capital Link Global Fintech Leaders ETF is up 7% over the past six months.

The flow of money across borders is essential to international trade, but lack of access to traditional banking means many people in emerging markets have historically been prevented from participating fully in the global economy.

“Despite near-universal access to financial services in advanced economies, financial exclusion is stubbornly persistent in many emerging markets, leaving huge swaths of low-income populations unbanked or underbanked,” wrote researchers at the International Finance Corporation 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 the Boston Consulting Group and QED investors, published at the beginning of May, fintech revenues will grow to $1.5trn by 2030, up six-fold from $245bn.

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 being key markets in the region.

The likes of blockchain, AI, and mobile and digital payments have the potential to make financial services more accessible and affordable to 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, payments processor giant Visa [V] partnered with Tarabut Gateway, the largest open banking platform in the Middle East and North Africa (MENA) region. Open banking improves financial inclusion for people who can’t access traditional banking services.

Visa and Tarabut Gateway will initially leverage data to carry out credit risk assessments, but will eventually move into offering solutions including cross-border payments and lending.

Visa’s main rival Mastercard [MA] has also been bolstering 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 licence to issue debit and prepaid digital and physical cards.

Back in February, Mastercard teamed up with Bahrain-based Infinios Financial Services to improve the digitisation 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 for MENA at Mastercard, in a press release. The partnership will help “secure growth and improve liquidity”, he added.

Travel recovery drives cross-border payment growth

Both Visa and Mastercard cited international travel recovery as a key reason for recent growth in cross-border payments.

Visa reported a sharp increase in overseas spending in the quarter ending 31 March, with cross-border volume rising 24% year-over-year versus a growth rate of 22% in the previous quarter.

The company has been expanding its cross-border reach thanks to a partnership with payments 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.

Much like Visa, Mastercard has been buoyed by a surge in cross-border volume, which rose 35% in the quarter ending 31 March, up from a 31% increase in the previous quarter. This reflected “resilient consumer spending and the continued recovery of cross-border travel,” CEO Michael Miebach said in remarks released with the earnings report.

Emerging market consumers 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 hosted by PYMNTS, Amnah Ajmal — Mastercard’s executive vice president of market development for Eastern Europe, the Middle East and Africa — said there are plenty of opportunities to be tapped into.

“I see a lot of optimism. Consumers have a lot more openness to embrace new technologies,” commented Ajmal, who cited Mastercard research which found that 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 those new technologies and the merchants are making sure that they're having those seamless payment experiences to scale their business… Those are the trends that I would say are most in demand,” continued Ajmal.

Emerging markets eye blockchain

Blockchain is one technology that is expected to play a big role in shaping the future of financial services and payments in emerging markets, improving financial resilience in the process.

“Blockchain-powered fintech, especially cryptocurrency and non-fungible tokens, offer decentralised exchanges that enable transaction flows despite macroeconomic pressures such as rising US interest rates and inflation on fiat currencies around the world,” noted Oxford Business Group, a research consultancy, in a report on financial service trends in emerging markets, published in January. 

The research noted the rise in central bank digital currencies as countries work on navigating the tricky world of crypto.

Despite blockchain’s promise, there are likely to be plenty of regulatory hurdles that will need to be overcome before people in emerging markets can reap the full benefits of the technology.

Funds in focus: Capital Link Global Fintech Leaders ETF

The ETFMG Prime Mobile Payments ETF [IPAY] holds Mastercard and Visa as its top two holdings as of 13 May. As of 31 March, transaction and payment processing companies accounted for 80.81% of the portfolio and consumer finance accounted for 13.03%.

The fund is down 0.7% in the past year, but up 2.8% in the past six months.

The Capital Link Global Fintech Leaders ETF [KOIN] holds both stocks, but neither are in the top 10 holdings. Though the fund doesn’t provide a sector breakdown, it’s focused on financial solution providers and digital asset providers.

The fund is up 1.9% in the past year and up 6.8% in the past six months.

The Global X Fintech ETF [FINX] doesn’t hold Visa or Mastercard. The portfolio is weighted heavily in favour of information technology (81.5%); financials, industrials and consumer discretionary, and healthcare make up the rest. The fund is down 11.5% in the past year and flat over the past six months.


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