Strategy Note /
Global

Emerging market fintech: Ten trends from 2021 that will shape the sector in 2022

  • Strong investor appetite will drive more funding round records, adding to unicorns' ranks. IPO activity will stay strong

  • Sub-sectors seeing massive growth include cryptocurrency, BNPL, remittances. Super app ambitions are fuelling innovation

  • Financial inclusion has gained importance. China fintechs' tough year creates opportunities, but steer clear of the ADRs

Emerging market fintech: Ten trends from 2021 that will shape the sector in 2022
Rahul Shah
Rahul Shah

Head of Financials Equity Research

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Contributors
Rabail Adwani
Rohit Kumar
Tellimer Research
24 December 2021
Published byTellimer Research

2021 has been an eventful year for emerging market fintechs. On one side, venture capital funding and IPO activity have been strong, sectors like BNPL and remittances have come under the spotlight and cryptocurrencies have moved further mainstream. On the other hand, regulatory risk and heightened tensions with the US have cast a shadow on China fintechs, while investor appetite for listed payments firms has waned as easing lockdowns have broadened the growth investment opportunity set.

In this note, we highlight 10 developments over the past year that will continue to shape the industry's development in 2022.

  1. Fintech funding will keep growing but become more diversified by sector and geography

  2. High IPO activity will persist but with greater discrimination of strategy and pricing

  3. More unicorns will be announced, with a greater diversity of business models and markets

  4. Financial inclusion will increasingly become an investment goal for mainstream investors

  5. China's regulatory crackdown and US tensions will continue; avoid the ADRs

  6. Digital payments; the divergence between stock price and fundamentals will persist

  7. Cryptocurrency will keep growing despite regulator efforts to stem the tide

  8. BNPL has great potential in emerging markets; deal flow will rise

  9. Remittances: Fintechs will disrupt banks' fee streams

  10. The goal of achieving super app status will drive investment and innovation 

Tellimer fintech library: most-read topics

1. The strong surge in fintech funding has legs. Expect a broadening of activity

2021 has been a stellar year for fintech funding; H1’s global total is 24% higher than the whole of 2020, with Europe and Latin America seeing the strongest growth. In emerging markets, growth has been even stronger, with H1 2021 exceeding FY 2020 by 69%. Payments fintechs and Brazilian fintechs dominated the top EM funding deals in that period. India has also been generating great investor interest and attracted 50% more funding than China in H1, while Pakistan, Egypt, Saudi Arabia and UAE are picking up pace in small EM.

The story in H2 21 has been similar, with Brazil (Nubank) and India (Paytm, PB Fintech) seeing landmark deals. Looking ahead to 2022 and beyond, we believe the shift in investors’ focus from China to India should broaden to bring in other large EMs such as Indonesia. We also expect interest in Africa to keep rising, albeit from a low starting base. We project a steady shift away from payments-focused IPOs to encompass a broader cross-section of the fintech space.

Global fintech venture capital funding

 

Further reading:

Fintech funding is growing strongly in 2021: Key emerging markets trends

The best-funded African fintech start-ups of 2020

Africa fintech: Start-up funding trends – Nigeria tops the list

Why Nigeria is the favourite market in Africa for fintech investors

2. The listed fintech universe will keep growing, with the IPO boom looking set to continue

Many emerging market fintechs have achieved considerable scale, and after funding growth through private investors in their early stages, these businesses are turning to public markets to raise money and turbocharge their growth trajectories. 2021 has seen a strong surge in fintech IPOs; investors in listed emerging market equities now have over 100 fintechs they can own across a wide range of jurisdictions, covering the full suite of fintech products and services, with a variety of business models and strategies to choose from. We expect more businesses to follow this route in 2022, but investors will increasingly become more discerning, with a greater focus on business strategy, the path to profitability and valuation.

Earlier this year we launched our Tellimer Fintech 50 portfolio, which has substantially outperformed its opportunity set.

Tellimer EM Fintech 50: geographical split

Further reading:

Introducing Tellimer's Emerging Market Fintech 50 portfolio

Tellimer EM Fintech 50: Our performance matrices highlight key sector hotspots

The EM fintech sub-sectors seeing greatest investor interest

EM digital payments universe set to grow as a dozen firms plan to IPO

7 upcoming Emerging Market fintech IPOs worth waiting for

Five EM fintech stocks that have more than doubled this year

Digital payments infrastructure: 10 listed EM companies to watch

10 best Emerging Market tech stocks in 2021 so far

3. The number of EM fintech unicorns will continue to multiply

Fintechs are continuing to make inroads across the full range of financial services, also frequently venturing into other activities, such as e-commerce, ride-hailing, deliveries and messaging. Investors are increasingly waking up to their potential for massive disruption. Indeed, in many markets, fintechs are now worth more than the incumbents whose businesses they are targeting. While most EM fintechs unicorns (those firms worth more than US$1bn) are in the larger countries like China and India, we are likely to see a more geographically-diversified cadre of fintech unicorns emerge in 2022. Similarly, while payments has attracted the most investment to date, there is good potential for unicorns to also emerge from other sub-sectors, such as investech and lending, or firms offering a broad portfolio of services, such as digital banks and super apps.

Global fintech unicorns: Mix by segment

Further reading: 

Fintech unicorns versus peers: What sets them apart

Chipper Cash's success highlights the global fintech opportunity in remittances

e-finance: A key enabler of Egypt's digital payments revolution

OPay's lesson to Africa's budding unicorns: find strong sponsors and a big pond

Financial Services holds the key to Grab's super app ambitions

4. Financial inclusion is increasingly a key goal for mainstream fintech investors

ESG firmly entered the lexicon of mainstream institutional investors last year. And financial inclusion was one of the most sought-after topics in our fintech research. Due to their innovative product offerings and low-cost operating models, fintechs can play a key role in tackling financial inclusion. Safaricom's M-Pesa can be considered a poster child in this context; the firm has played a key role in the rapid reduction in Kenya's financial exclusion rate over the past decade. But more needs to be done. In China, India, Pakistan and Indonesia there are around 650mn adults who suffer some form of financial exclusion. This represents a huge market that fintechs will continue to target in 2022.

Many of the world's basic needs are still unmet

Further reading:

How technology can boost financial inclusion and which markets will benefit

Egypt fintechs can boost financial inclusion, helped by favourable regulation

Why Pakistan's low financial inclusion is a huge opportunity for fintechs

How fintechs are solving Pakistan's credit access problem

Philippines fintechs are well placed to help drive financial inclusion

Vietnam ranks first on our Fintech Financial Inclusion Scorecard

Mexico's fintechs are well placed to drive financial inclusion

5. China's regulatory crackdown opens up opportunities, but steer clear of the ADRs

Chinese equities have experienced a torrid year, particularly relative to the positive market trends elsewhere. For technology firms, key headwinds have included lofty starting valuations, rising discount rates and increased regulatory scrutiny. US-listed Chinese firms have found themselves caught in the crossfire as China and the United States continue to size each other up economically, politically, and militarily. While it is difficult to call the turn, we note that global investors' exposure to China continues to lag, even as the country continues to position itself as a high-skilled economy with a strong presence in strategic growth areas. For investors with a long time horizon, recent weakness could open up an attractive entry point to build up positions in world-beating firms.

Alternatives to China ADRs have outperformed

Further reading:

Didi sounds the death-knell for China ADRs, but not for investment in China

US-listed Chinese firms are getting squeezed: We pick out some EM alternatives

How to mitigate the regulatory risks of US-listed Chinese firms

China fintech success under threat; why investors' best days may be behind them

China takes another swipe at Ant Group: Credit and data assets split out

Waterdrop’s post-IPO collapse highlights Chinese fintechs' regulatory woes

Jack’s back! But regulators still have Ant, Alibaba and Tencent in their sights 

6. Digital payments sector will remain under pressure, despite healthy fundamentals

EM digital payments shares are more than 20% off their February peak and relative to global equities, the sector has declined over 30% since then. The opening up of economies as vaccines were rolled out and lockdowns eased gave investors a broader set of growth companies in which to invest. More recently, the prospect of higher interest rates has lifted the discount rate investors are applying to these high duration stocks. Egypt's e-finance, Uruguay's dLocal, and India's Paytm all listed at very lofty valuations in 2021 but have subsequently badly underperformed. We remain positive on the long-term growth prospects for the sector, and the transformative effect these companies can have on emerging economies. But investors will likely need to take a more discerning approach in future, and carefully weigh the trade-offs between growth, profitability and valuation. 

EM digital payments shares have underperformed global equities since February

Further reading:

EM digital payments: Paytm’s IPO woes reflect a broader sector malaise

Spectacular start to Egypt’s privatisation programme; where next for e-finance?

WhatsApp payments finally gets the green light in India. We see big losses ahead

Raast: Revolutionising Pakistan’s digital payments ecosystem

7. Cryptocurrency will continue its rapid rise to the mainstream, despite regulator angst

With cryptocurrency market cap touching US$2.5tn, global tech giants such as Microsoft, Paypal, Square allowing the use of crypto and El Salvador officially approving Bitcoin as legal tender, cryptocurrencies have become more mainstream in 2021. Transaction volumes have surged ten-fold in 2021. With inflation and government deficits continuing to rise, demand for this asset class is likely to climb further in 2022. 

Growth in cryptocurrency value received

Further reading:

Cryptocurrencies are moving mainstream: We compare global adoption levels

The global cryptocurrency boom: Trends by region

The top 10 crypto trends

Cryptocurrency moves further mainstream; emerging markets could benefit most

El Salvador moves to make bitcoin legal tender; other countries may follow suit

How regulators are striving to turn back the cryptocurrency tide

8. Emerging market Buy Now Pay Later adoption is taking off; expect more deal flow

High-profile deals like Square-Afterpay and PayPal-Paidy have brought the huge potential of the BNPL sector to the limelight. Though BNPL is still largely a developed markets product, emerging markets will likely prove to be an even happier hunting ground given a large, young and tech-savvy population with limited access to traditional credit products. The rapid growth of e-commerce and digital payments are key tailwinds that will keep this sector on investors' radars in 2022.

 

Further reading:

Buy Now Pay Later to revolutionise consumer credit in emerging markets

The Buy Now Pay Later opportunity in EM: Lessons from the Square-Afterpay deal

India's massive BNPL opportunity

Buy Now Pay Later: 5 companies to watch in emerging markets

ZoodPay: Central Asia & Middle East's innovative market leader in BNPL

9. Remittances fintechs are gaining traction. Huge untapped potential. Banks should be wary

International remittances are key for many emerging economies, in recent years typically exceeding foreign direct investment (FDI). For most migrant workers, the cost of sending money home is still well above the United Nations' 2030 Sustainable Development Goal of 3%. For low and middle-income countries, the situation is even worse; we estimate an average transaction cost of 5.3%. Fintechs, like Chipper Cash, are exploiting this opportunity as their costs are much lower than traditional remittance providers. There is a huge untapped potential; out of the total remittances fee pool of US$31bn, we estimate that US$14bn is excessive and therefore open to disruption. By geography, remittances to India represents the biggest disruption opportunity

Markets with the highest excess remittances fees

 

Further reading:

The biggest fintech disruption opportunities in international remittances

The countries that could benefit most from introducing digital currencies

Chipper Cash’s success highlights the global fintech opportunity in remittances

10. The super app race will intensify next year. The cash burn could spook some investors

Super apps offer a closed ecosystem of products and services that are used regularly. The benefits for the customer are ease and convenience; product quality and cost competitiveness are typically high. For the super app provider, they gain from superior customer loyalty, a broader revenue base, and richer data gathering.

Many emerging market tech firms (fintechs and otherwise), after achieving scale in their primary area of operation, are looking to expand into other areas and create a closed super app ecosystem. Probably the two best super app examples hail from China, namely Ant Group's Alipay and Tencent's We Chat. But other firms, such as India's Paytm, ASEAN's Grab, Kenya's Safaricom and Brazil's Nubank have super app ambitions of their own.

We think the super app model should work better in emerging markets than in developed markets. A key reason is the high volume of cash-based transactions in many of these countries; super apps' in-house digital wallets allow for fast, secure and low-cost digital transactions. Secondly, super apps can take up less phone memory than having a wide range of separate apps for different purposes, and therefore may be more suited to cheaper devices.

India's super app contenders

Further reading:

India’s super app race is about to heat up: Meet the contenders

Financial Services holds the key to Grab’s super app ambitions

Jumia shines brightest in the battle of the aspiring super apps

Ovo deal places Grab on a pedestal in ASEAN super-app battle