Strategy Note /
Global

The EM fintech sub-sectors seeing greatest investor interest

  • Lending fintechs' shares have outperformed over the past year; their valuations and profitability compare favourably

  • Investech shares have more than doubled, despite regulatory headwinds and high valuations; top line growth has exploded

  • Security/software has underperformed; although highly scalable, these enabling businesses are not yet in vogue

The EM fintech sub-sectors seeing greatest investor interest
Rahul Shah
Rahul Shah

Head of Corporate & Thematic Research

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Contributors
Rabail Adwani
Rohit Kumar
Tellimer Research
19 August 2021
Published byTellimer Research

Tellimer's EM Fintech 50 portfolio consists of listed firms that are active across a wide range of fintech products (such as payments and lending) and employ a broad range of business models (proprietary, platform, service-based and so on). These 50 firms are based in 22 emerging markets and have a combined market capitalisation of close to US$450bn. Further details can be found here.

Performance by fintech sub-sector

In this note, we examine the share price performance of the various fintech sub-sectors in our portfolio. While overall fintech performance has been strong (with shares rising by c80% over the past year, on average), dispersion has been significant; eight stocks have more than tripled, while four have more than halved. Looking at fintech sub-sectors can help us make sense of these numbers: lending and investech have each more than doubled, software has been flat and insurtech has declined.

Tellimer EM Fintech 50: sectoral performance

Lending

Within the Tellimer EM Fintech 50, lending and digital banking shares have performed most strongly. There was almost one-way traffic until the end of June, since when the sector has pulled back by around 15%, driven by Chinese firms. One key factor in the sector's favour is that it is already profitable; median ROE last year was 26% and its margins are superior to other sectors. Another supporting consideration is valuation; despite the strong outperformance, it is cheaper than other sectors on various metrics, including price/revenues. Top line growth has not been too shabby, either, hovering around 30%. Many lenders are targeting a broader digital banking offering to appeal to a wider customer base.

Investech

Investech shares have also more than doubled over the past year, on average. This is despite the sector trending sideways since January. The sector enjoyed explosive growth last year as pandemic lockdowns gave individuals more time to directly manage their finances using digital service providers. For this cohort, top line growth averaged almost 75% last year, while return on equity came in at 21%. However, valuations largely reflect this strong growth, with median price/revenues at more than 14x.

Payments

Shares of payments fintechs have largely performed in line with the broader fintech universe, rising by around 80% over the past year. However, the sector has exhibited much less volatility than both digital lending and investech, perhaps reflecting the underlying attributes of the digital payments business. Although the pandemic has generally been positive for digital payments volumes, our sector constituents saw their revenue growth slow last year, to 16%. This may reflect pricing pressure as operators jostle to establish market leadership. The sector has the lowest net margin within our universe, with ROE coming in at 18%.

Software

This segment includes firms that provide security services to fintechs, which is likely to be a long-term growth area, and software-as-a-service models, which should also benefit from the inexorable shift towards open platforms. Despite positive long-term prospects, the sector's share price performance has been modest over the past year, performing broadly in line with global emerging markets indices. Relative to other fintech sectors, software delivered lower top line growth and weaker operating margins last year. Despite the recent underperformance, valuations are still hefty (eg over 5x forward sales); but this fintech sector is still the second-cheapest (after lending).

Insurtech

Insurtech has a relatively small weight within our portfolio, making it difficult to draw too many aggregated conclusions from the data. It has been the clear underperformer over the past year, however. This weakness is unlikely to shift insurtech's position as one of the smaller fintech sectors globally or lead to a rebound in hitherto weak funding flows. Key challenges to the sector include weak distribution capacity and competition from the informal sector.

Top portfolio performers

Please click here to see the top 10 best performing names in our portfolio. The list comprises four digital lenders, three payments firms, two investechs, and one software company across eight emerging markets. The median performance of these 10 shares over the past year has been 240%.