Strategy Note /

Digital payments: Scale is driving sector-beating operating margin expansion

  • Digital payments leads the fintech scene in Egypt, Indonesia and Vietnam. The sector in China is already consolidating

  • Operating margins have widened more than for other fintech sectors, particularly in Egypt, China and Mexico

  • Payments fintechs should gain market share in card payments. But profitability lags other fintech sectors

Digital payments: Scale is driving sector-beating operating margin expansion
Rahul Shah
Rahul Shah

Head of Corporate & Thematic Research

Rabail Adwani
Rohit Kumar
Tellimer Research
25 July 2022
Published byTellimer Research

Digital payments firms lead the emerging markets fintech scene. It is the largest segment, accounting for one-quarter of all fintechs. In this report, we investigate over 800 payments firms across 14 emerging markets. Egypt, Indonesia, and Vietnam have the highest proportion of such companies, while their presence in China is at the lower end of the range.

Our proprietary global survey of 215 emerging market fintechs (including 56 payments firms) helps us to position digital payments in a broader sector context. And our survey of 900 emerging market consumers gives us a demand-side perspective on the industry. We summarise some of our key findings in this report.

Our analysis of key performance metrics shows that payments fintechs have witnessed strong growth in operating profit and users, but their revenue growth has lagged other fintech sectors, which points to pricing pressure in their core products. Nevertheless, digital payments have surpassed all other sectors in relation to operating margin improvements, which points to the significant scale and network effects of this product. At the country level, payments fintechs in Egypt have outperformed in relation to operating margin widening, while average revenue per user (ARPU) has fallen most for payments fintechs in India.

According to our profitability survey, over half of the EM digital payments firms are profitable, with another quarter anticipating break-even in the near future. However, these figures are lower than for other fintech sectors (except blockchain).

Digital payments is a more mature sector than other fintech segments and consequently may experience slower growth. But certain product areas, such as card payments offer better potential. Improving financial inclusion will also provide support.

Egypt, Indonesia and Vietnam have the highest weights of payments fintechs

Within emerging markets, c25% of fintech firms provide payment services, which is greater than any other sector. Egypt, Indonesia and Vietnam have the highest proportion of payments firms in their fintech ecosystems, while China and India lie at the lower end of the range.

Emerging markets fintechs: product mix

We think that payments acts as a gateway product for fintechs; many firms in this sub-sector, once they have achieved scale, seek to broaden their offerings with the goal of becoming a next-generation super app. Along with payments, super app products can encompass credit, insurance and investment, in addition to non-financial services such as travel/restaurant bookings, mobility or communications. Some examples of such apps in emerging markets are Alipay (China), WeChat (China), KakaoPay (South Korea), GoTo (Indonesia), Paytm (India) and Grab (Indonesia).

In comparison with our previous industry survey (in 2020), the weight of payments fintechs in China has fallen by 11 percentage points as other product segments have grown. The dominance of Alipay and WeChat Pay has also likely played a role. In fact, Indonesia is the only country out of our seven previously surveyed emerging markets that has witnessed a slight (4ppts) increase in the proportion of payments firms within its fintech ecosystem. This signals to us that the sector is increasingly coalescing around the biggest players in each market.

Weight of payment fintechs in emerging markets

Payments firms continue to grow strongly

Our survey of 215 emerging market fintechs across 14 emerging markets allows us to compare performance metrics across different product specialisations and geographies. At the aggregate level, payments firms have enjoyed similar growth in user numbers to their peers. But revenue growth has lagged, reflecting a sharp decline in ARPU. Despite this, operating profit growth has been in line with the broader fintech space; payments fintechs have been able to boost their operating margins, likely reflecting the important scale/network benefits that characterise this product.

Emerging market fintech growth rates

There is also some interesting divergence in sub-populations. For example, the data show unlisted payments firms focusing on enhanced scale via user number growth, while listed companies have shifted attention to monetising their user base.

By country, digital payments in India outperforms for growth in users, Nigeria for revenue growth and Russia for operating profit. 12 out of 14 emerging markets witnessed a decline in payments fintech ARPUs, with South Africa and Kenya remaining unchanged. Egypt’s payments fintechs experienced the biggest expansion in operating margins.

On the other hand, digital payments in the Philippines underperformed other emerging markets in user growth, those in Indonesia and China for revenue growth, and those in India for operating profit. The decline in payments fintech ARPUs and operating margins is most pronounced in India.

EM payments fintech growth rates

Fewer digital payments firms are profitable relative to other fintech sectors

According to our survey, over half of payments fintechs already have a positive bottom line. This is, however, a lower proportion than other fintech sectors (except for blockchain). However, it is above the level indicated in our 2020 survey, when slightly more than one-third of the surveyed payments fintechs were profitable.

EM fintech profitability survey

Payments fintechs are likely to gain market share, notably in card payments

We asked 900 consumers in 14 emerging markets about the types of providers meeting their current financial services needs, and the provider types they expect to use in three years. This data allows us to estimate the current market share of the different industry players and likely future shifts. Note that the survey responses are unweighted; we think traditional financial institutions would have a much higher share if our survey were value-weighted.

Based on responses across three products (mobile payments, domestic money transfers and card payments), payments fintechs account for 40% of the retail payments market (up by 4% points from our 2020 survey). This is more than the 31% market share fintechs average across our 11 surveyed retail financial services products.

In the next three years, payments fintechs will likely gain market share from traditional financial institutions and bring more users under the financial services net. However, the expected gain of 3ppts is lower than the average market share gain of 7ppts that consumers expect for other types of fintechs, suggesting that the digital payments segment is much closer to maturity. Notably, fintechs’ share of mobile payments is anticipated to remain unchanged. The top product beneficiary within payments fintechs is card payments, with market share expected to increase by 7ppts over the coming three years.

EM payments provider market shares

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