- Overall market dynamics are the main constraint for EM fintechs, followed by informal sector competitors, funding access
- Fintech unicorns' growth is more limited by smartphone/ mobile data penetration and slow customer adoption behaviour
- Incumbents regard regulation as the biggest brake on their growth, followed by market dynamics and distribution capacity
In this report, we look at the key factors that are limiting the growth of emerging market fintechs and incumbents. We also separately analyse the main constraints on fintech unicorns, and highlight key differences in the challenges they face relative to the broader fintech population. Our findings are based on the results of proprietary surveys that collected detailed responses from 101 fintechs and 50 incumbent firms across seven emerging markets (Brazil, China, India, Indonesia, Kenya, Mexico, South Africa).
Our key findings
The size and growth dynamic of the overall market is the top constraint faced by emerging market fintech firms. Other important challenges include competition from the informal sector and access to funding/capital.
Breaking down our survey results by country, fintechs in both Indonesia and Mexico regard market dynamics as their biggest challenge. Funding access is the main constraint for Indian fintechs. For Chinese fintechs it is competition from the informal sector.
Looking at our survey results by product, market dynamics are an important constraint for almost all fintech segments, but digital lenders also regard funding access as a key challenge, while regulations are a particular concern for payments fintechs.
For incumbent firms (such as banks and telcos) regulation is their biggest growth constraint, followed by market dynamics and distribution capacity.
Considering our incumbent survey results by country, regulations are the biggest challenge for companies in India, Kenya and Mexico. Chinese incumbents cite market dynamics as the top constraint to their growth.
By incumbent sector, regulation is the key constraint for both financials and telecoms sector incumbents, while distribution capacity and market dynamics are the most important headwinds to tech firms.
On a relative basis, fintechs place more emphasis on access to funding/capital and competition from informal channels as hurdles to their development. For incumbent firms, regulations and their own in-house skill set are viewed as more important challenges.
Unicorn fintechs are more concerned about limited smartphone/mobile data penetration and slow customer adoption as growth constraints compared to their non-unicorn peers.
Key growth constraints cited by some of our surveyed companies
Source: Tellimer Research
Emerging market fintech firms regard the size and growth of the market as the main constraint on their development; it can be difficult for early movers to outgrow the overall market, particularly as the number of competing fintechs rises. Other important growth challenges include competition from the informal sector and access to funding/capital.
By country, Indonesian and Mexican fintechs both regard market dynamics as their key challenge. Brazil's fintechs are impacted by market dynamics and the implications of Covid-19. Funding access is the main constraint on Indian fintechs, for Kenyan fintechs it is regulation and for Chinese fintechs it is competition from informal channels. By product, overall market dynamics are important for almost all segments, but lending fintechs also regard funding access as a key challenge, while competition from the informal sector has a large impact on blockchain firms and regulation is the major concern for payments fintechs.
Turning our attention to incumbent firms, they cite regulation as the top growth constraint followed by market dynamics and distribution capacity. By country, regulation is the key challenge for incumbents in India, Kenya and Mexico. Market dynamics and competition from informal channels create the biggest hurdles for Indonesian incumbents, and the staffing skillset is a key constraint for Brazilian fintechs. By sector, regulation is a key issue for both financials and telecom sector incumbents. For technology sector companies, distribution capacity, together with overall market dynamics, are the major challenges.
On a relative basis, fintechs place more emphasis on access to funding/capital and competition from informal channels as growth hurdles. For incumbents, regulations and their in-house skill set appear to be more important constraints on their growth.
Comparing unicorn fintechs with their less highly-valued peers highlights some interesting contrasts. Unicorns are much more concerned about limited smartphone/mobile data penetration and slow customer adoption while non-unicorns find funding access and regulations to be more relevant challenges to their growth.
Fintech firms’ top growth constraints: Market dynamics, competition and funding
Size and growth of the market. It can be difficult for early movers to outgrow the overall market, particularly as the number of fintechs rises. For the insurtech and blockchain industries, we think market size is impacted by customer awareness; insurance is a less penetrated product in low-income countries and blockchain is still an area where companies and individuals have very limited understanding. Some fintechs facing this constraint include Ant Group (China, payments), Akulaku (Indonesia, lending) and Billdesk (India, payments).
Competition from the informal sector. Informal enterprises can benefit from lower operating costs, which gives them a pricing advantage over fintechs, and they are also subject to less/zero regulatory oversight. For example, M-Pesa is facing challenges from informal networks of virtual currency dealers that convert cryptocurrency into cash. Fintechs highlighting the informal sector as a growth constraint include The Sun Exchange (South Africa, blockchain), Gojek (Indonesia, payments) and Duobaoyu Insurance (China, insurtech).
Funding/capital. Funding is the lifeblood of fintech startups, notably for lending companies but it is also important for fintechs active in payments, investech and insurtech. We note that fintech funding is highly concentrated in developed markets (the US alone receives about 50% of total fintech investment flows), leaving little room for emerging markets (particularly if we exclude China and India). Fintechs citing funding access as a growth constraint include Savart (investech, India), Konfio (lending, Mexico) and Zebpay (comparison platform, India).
By country, Brazil’s fintechs (eg Spin Pay) are most impacted by market dynamics and Covid-19 implications. Indian fintechs (like Savart) regard funding access as the key constraint; although some fintechs have recently successfully raised large amounts of fresh capital, for the bulk of the sector funding still appears to be falling short of requirements. Informal channels competition is a key concern for Chinese fintechs like PingPong, while regulation appears to be the main growth-limiting factor for Kenya fintechs (eg Tala). Fintechs in Indonesia (such as Cashlez) and Mexico (eg Clip) regard market size and growth as their key growth constraint while those in South Africa (like Jumo) are most concerned about competition from informal channels.
By product, most fintech segments (excluding investechs) regard market size and growth as one of the key limiters of their growth. For lending fintechs (eg Konfio), funding access is also important, informal channels competition plays a key role for blockchain (eg Pundi) and regulations are a concern for payments fintechs (like M-Cash). Investechs (eg Savart) regard funding access and their in-house skillset as the key restraining factors.
Incumbents’ biggest growth constraints: Regulations, market dynamics and distribution capacity
Turning to listed incumbents, such as Kenya’s Safaricom and South Africa’s Standard Bank Group, the top growth constraint is regulation. Incumbents like banks and telcos operate in a highly regulated environment, which can limit their ability to innovate and grow. Other important concerns include the size and growth of the market (as highlighted by Bank Rakyat in Indonesia, for example) and distribution capacity (eg Axis Bank, India).
By country, regulation is the key challenge for incumbents in India (like ICICI Bank), Kenya (for example Equity Bank) and in South Africa. The staff skillset is a key growth constraint for Brazilian incumbents like Banco Inter. Market dynamics and competition from informal channels creates the highest hurdles for Indonesian companies (example Bank Rakyat). For Mexican incumbents (like Santander Mexico) competition from informal channels is the biggest growth constraints. Chinese incumbents (e.g. China Telecom Group) cite market dynamics as the main limiter of their growth.
By sector, regulation is a key issue for both financial and telecom sector incumbents; financials companies (like Kenya’s Co-operative Bank) also emphasise the long-term impact of Covid-19, while telecom companies (eg Telefonica Brasil) are also concerned about the size and growth of the market. For technology sector firms (such as Indonesia’s Anabatic Technologies), distribution capacity and market dynamics are their major growth challenges.
Comparing the constraining factors of fintechs and incumbents
On a relative basis, fintechs place more emphasis on both access to funding/capital and competition from informal channels. We think this is because start-ups are more cash-constrained and fintechs are more likely to target the financially underserved population. For incumbents, regulations and their in-house skill set are more important constraints on their growth than for fintechs.
Growth constraints of fintech unicorns: Limited connectivity and slow customer adoption
Fintech unicorns, defined as firms with >US$1bn valuations, typically identify different growth constraints relative to their less valuable peers. They are more concerned about limited smartphone/mobile data penetration and slow customer adoption. In contrast, for non-unicorns, funding access and regulations are more challenging.
Some non-unicorn fintechs that highlight same main growth constraints as unicorns include Snapscan (South Africa, payments), Cobo (China, blockchain), Tala (Kenya, lending) and Acko (India, insurtech).
Some unicorns that are facing different challenges from their highly-valued peers include Gojek and Yeahka (competition from both financial institutions and informal channels, and distribution capacity, are key concerns for each firm).
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