Strategy Note /

The profitability of emerging markets fintechs

  • As macro challenges intensify, we see fintech investors placing greater emphasis on profitability over growth

  • 60% of EM fintechs are currently profitable, with lending and investment fintechs leading blockchain and payments

  • Larger fintechs are more profitable. And those in LatAm and Africa show better returns than those in China

The profitability of emerging markets fintechs
Rohit Kumar
Rohit Kumar

Global Financials/Thematics

Rabail Adwani
Rahul Shah
Tellimer Research
1 July 2022
Published byTellimer Research

The ‘growth at any cost’ approach that some fintechs have taken is now likely a thing of the past, as access to funding becomes tougher. In our view, profitability has moved up the pecking order of performance metrics that investors track. Companies with strong bottom-line performance and self-sustaining business models should be much better placed to navigate the more challenging investment environment than their loss-making peers, even if the latter are growing rapidly.

In our survey of 215 fintechs in 14 emerging markets, we asked fintechs about their growth trajectories and profitability situations. 60% of the companies we surveyed are currently profitable, with lending and investment fintechs, and those operating in LatAm and Africa, having the highest proportion of profitable companies.

Our survey also points to the importance of scale; larger fintechs tend to be more profitable than their smaller counterparts. Operating profit growth appears encouraging across almost all the sectors, with lending fintechs witnessing the highest growth within our sample.

The majority of EM fintechs are profitable

The profitability of fintechs improves with scale

Our survey results, segregated by the size of each firm’s customer base, highlights the importance of scale for fintechs; larger companies tend to be more profitable than their smaller counterparts. This is likely because unit costs are higher during firms’ initial phases of operation, while revenue generation is still ramping up. As fintechs scale, the network benefits and higher usage levels increase average revenue per user (ARPU), while the cost of servicing customers also falls due to economies of scale.

Fintechs' profitability situation improves with scale

Lending and investech fintechs are the most profitable

By product segment, lending and investment fintechs are the most profitable; more than 70% of companies in these segments are currently profitable, while a further 20% should become profitable soon. In contrast, blockchain and payments firms are the least profitable sectors.

These findings are consistent with our earlier study on fintech economics, which mainly focused on listed emerging market fintechs. However, we note that the financial performance of lending fintechs could deteriorate if the tougher macro environment leads to an increase in defaults; we have warning signs already; for example, in the BNPL space.  

EM fintechs' profitability position

LatAm and African fintechs have better profitability positions

Latin American fintechs, particularly those in Brazil, have a higher proportion of profitable fintechs, at c85%, while the remaining 15% are expected to become profitable within one year.

African fintechs also have a strong profitability position. In contrast, fintechs in China are struggling; competition and regulation are likely to be the key challenges.

EM fintechs' profitability position

Profit growth for EM fintechs is encouraging

We also asked emerging market fintech companies about their operating profit growth rates over the past few years; the average across our sample was  27% per annum, with lending fintechs posting the highest growth rate (32%).

EM fintechs' operating profit growth