The Role of Fintech in Emerging Markets

By Frank-Jürgen Richter

October 12, 2020

Fintech has been making noteworthy strides in Asia. Where the incumbent financial institutions have been slow to adapt to changing trends, fintechs with their nimble operations, have been fast-tracking their way. Their competitive edge lies in terms of the reach they offer and the shorter processing times for credit approvals. This is one of the topics that will be discussed at the upcoming Horasis Asia Meeting on 30th November, 2020.

This is especially important for the small and medium enterprises (SME) sector where many are faced with working capital and growth constraints due to funding shortfalls. SMEs are faced with cashflow issues even when times are normal. With COVID-19 added to the mix, the past few months of erratic economic activity has led to many permanent closures. An added downside has been the innumerable cases of lost livelihoods. Meanwhile, large corporations are mostly on firm footing, primarily because of their ability to easily access credit. Funding is the lifeline for any enterprise in distress and it is imperative that small businesses receive the essential shot in the arm to stay afloat.

Uptake of Digital Services

The bulk of fintech activity in Asia during the COVID-19 crisis has been geared towards SME digitization. And while the pandemic ushered in a near shutdown in most sectors of the economy, digitization continued unabated. In fact, digitalization has accelerated owing to the pandemic-induced lockdowns and restrictions.

A large section of the population in emerging markets are unbanked. They have no choice but to operate in the informal economy because formal banking services are unavailable to them. At the same time, mobile connectivity has leapfrogged. Smartphones, coupled with inexpensive data connectivity, has ensured rapid uptake of digital services. This has ensured a widening ecosystem for fintech players to offer their services. Likewise, it is facilitating the onboarding of more individuals into the formal banking system.

Advantages Delivered by Fintech

Without its need for physical branches, when it comes to fintech, the geographical location of a user does not pose a barrier. It has proven its merits over traditional finance by reaching the unbanked in remote areas. More importantly, it has alleviated funding crunches for SMEs, who have been ignored for too long. Across emerging economies, SMEs generate the bulk of employment and contribute substantially to national GDP.

Despite the SME sector making a sizeable net positive impact, their woes have long remained unaddressed. Small business owners are often left in the lurch and their sustainability is threatened when cashflows encounter the slightest irregularities. Their despair is only compounded when they are rejected credit because of a lack of former banking history. The only other channel that they can then resort to are loan sharks. This is an unregulated sector and lenders will typically disburse funds against massive collaterals or predatory interest rates. Unbanked SME owners then find themselves in a vicious debt cycle. Fintech has been the great rescue agent for SMEs, although a lot of work still remains to be done.

A Ray of Hope

Fintech is becoming a critical industry across many developing economies. Singapore is a key example. The city-state is leading fintech development and despite COVID-19, it is on track to register similar levels of investment achieved in 2019. The Singapore government has implemented favorable policies and this has ensured a steady funding inflow for its many fintech startups. Regulatory sandboxes have also been provided for testing fintech products and services prior to their release for public use, and this has all been done with complete participation and encouragement of the government. Singapore is a leading example of how fintech can be done right with all stakeholders of the industry.

Governments across Asia, in general, are supporting the fintech industry through policy and regulatory support as they see the benefits of fintech development. The previously underserved and unbanked population subsets can now become a part of the formal economy and reap the associated benefits.

Legacy financial institutions, for instance, requires the completion of cumbersome formalities before a loan is approved. Besides, it requires an in-person visit, which for a small business owner is a productive day lost. With fintechs, the required user data can even be uploaded onto a smartphone app and algorithms will determine if the applicant is creditworthy. This streamlines the entire application process and business owners can focus on activities that are most crucial to their business.

The Future is Bright

Technology really has been a social reformer. Much as incumbents have tried to ensure banking services in far flung or remote areas, the limitations to brick-and-mortar operations are aplenty. The most glaring obstacle was seen when lockdowns were in place and most physical locations were shuttered temporarily. However, data connectivity saw no such interruption. Access to financial services continued for those who were using technology to access banking services. With COVID-19 protocols to remain in place, such as social distancing expected to remain over the longer term, the remote operability of an online bank account is both easier and safer.

The SME sector must receive added assistance. The success of the SME sector is a measure of economic progress—especially in emerging markets—and even legacy financial institutions must prioritize extending banking services to this sector, either by collaborating with fintechs or revamping their current systems if they have to remain relevant.

Fintech platforms have sure disrupted the payments and lending sphere, and the future is looking bright for the SME sector.

Photo Caption: A view of the business district in Ho Chi Minh City, Vietnam. Fintech will continue to play a key role for SME funding in emerging markets. Photo by Min An from Pexels.