Strategy Note /

The regulations that are holding back emerging market fintechs

  • Regulations are key brakes on fintech growth, notably capital requirements, consumer/data protection and KYC/AML

  • Client fund segregation is a key issue in Nigeria, consumer protection rules in Brazil, deposit insurance in China

  • Consumer protection is a constraint for lenders, financial hurdles for software fintechs, data protection for investechs

The regulations that are holding back emerging market fintechs
Rahul Shah
Rahul Shah

Head of Financials Equity Research

Rohit Kumar
Rabail Adwani
Tellimer Research
21 June 2022
Published byTellimer Research

Regulation is one of the biggest constraints on fintech growth, together with funding/capital shortages and competition. These are some of the findings of our detailed proprietary survey of 215 fintechs across 14 emerging markets.

Focusing on the different types of regulations that fintechs face, the most problematic include capital requirements, data and consumer protection rules, and know your customer (KYC)/anti-money laundering (AML) legislation.

The problem areas differ by market. Client fund segregation rules are most taxing for fintechs in Nigeria. Deposit-insurance rules cause the biggest headaches in China. Consumer protection requirements are an issue for fintechs in Brazil.

By product area, the main issues for lending fintechs relate to consumer protection. Financial software fintechs find that financial hurdle regulations are holding them back. For investechs, data protection rules are their biggest bugbear.

The main growth constraints faced by emerging market fintechs

Fintech firms’ biggest regulatory growth hurdles

We have previously highlighted that our surveyed fintechs cited regulations as their second most significant growth hurdle (after funding/capital access). Since regulation comes in many shapes and sizes, we dig deeper below to unpack the key regulatory issues that are holding fintechs back.

The biggest regulatory hurdles for emerging market fintechs

Capital requirements

Capital requirements can create significant entry barriers for new players and limit the long-term growth potential of incumbents. For these reasons, in general, fintechs tend to favour capital-lite business models. However, some fintechs find that, having achieved considerable scale, regulators subsequently move in; this can lead to enforced business model changes and can level the playing field with traditional financial institutions.

In March 2022, Brazil’s central bank announced exacerbated capital requirements for payments institutions based on their size and complexity, effective from January 2023, with full implementation taking place from January 2025. The new framework will likely impact large fintechs like Nubank, PagSeguro, StoneCo, and PicPay.

Ant Group’s lending business, which had become more profitable than its higher-profile Alipay payments arm, was also slapped with much higher capital charges once the firm’s IPO was postponed.

Fintechs that cite capital requirements as their main regulatory hurdle include Curacel (Insurtech, Nigeria), MoMo (Payments, Vietnam) and Foxbit (Investech, Brazil).

Data protection

The collection and utilisation of users’ data are key fintech assets. For example, data can provide important insights into evolving customer preferences, allowing fintechs to tailor their products and services accordingly.

Data protection regulations play a key role in determining the extent to which companies can collect and use such consumer data, and the processes they must build to protect privacy. Such regulations may reduce the utility of such data and increase the cost burden.

Fintechs citing data protection regulations as a hurdle to their growth include Yeahka (Payments, China), Spenny (Investech, India) and Tameeni (Insurtech, Saudi Arabia).

Consumer protection

Fintechs possess large amounts of financial and non-financial data about their customers, allowing them to conduct KYC checks, perform digital identity verification, access credit scores, and make use of alternative data.

This vast availability of user data also carries risks, however, notably in relation to cybercrime. Understandably, regulators are heavily focused on protecting consumers, but this can limit fintechs’ ability to work with their customers.

Fintechs citing consumer protection regulations as a hurdle to their growth include Airtel Africa (Payments, South Africa), CreditMantri (Lending, India) and OnOnPay (Payments, Vietnam).

Fintech regulatory hurdles vary by country

In the chart below, we highlight how the regulatory hurdles cited by fintechs vary by market.

Nigeria: Capital requirements and client funding account segregations are significant regulatory hurdles impacting fintechs in Nigeria. Firms that cite these obstacles include Fairmoney (Lending) and Trove Investing (Investech).

Mexico: Transparency requirements and financial hurdles are the main regulatory hurdles encountered by Mexican fintechs. Specifically, client funding account segregation and deposit insurance. Firms citing these issues include Zenda.Ia (Insurtech) and Mozper (Payments).

Brazil: Transparency requirements and consumer protection are the main regulatory hurdles faced by fintechs in Brazil. In particular, KYC/AML laws and data regulations. Firms that regard these as regulatory issues include Hallo (Lending).

Russia: Capital requirements and data protection regulations are the main regulatory constraints for Russian fintechs. Firms citing these regulatory hurdles include SpeechPro (Regtech).

China: Consumer and data protection laws are prominent regulatory obstacles to growth for fintechs in China. Deposit insurance as a financial hurdle is also an issue. Fintechs citing these as regulatory hurdles include G-Banker (Investech) and iBoxPay (Payments).

India: Consumer protection, focused on cryptocurrency regulations, and capital requirements causing financial constraints, are the biggest regulatory barriers to the success of fintechs in India. Firms highlighting these issues include Coindust (Blockchain).

Indonesia: Fintechs cite cryptocurrency and consumer protection regulations as key regulatory hurdles in Indonesia. Firms mentioning these issues include Tunaikita (Lending).

Philippines: Consumer protection, data protection and cryptocurrency regulations are significant regulatory hurdles for fintechs in the Philippines. Firms that regard these directives as problems include Starpay (Payments) and Akulaku (Lending).

Regulatory hurdles for emerging market fintechs

Fintech regulatory hurdles by product segment

We highlight below how the regulatory hurdles that fintechs face differ according to their primary product focus.

Fintech software solutions: Financial hurdles and transparency requirements create the biggest obstacles for fintech software solution firms – in particular, capital requirements, taxation, KYC/AML laws and client funding account segregations. Firms citing these issues include Tigerobo (China) and Autosoft Dynamics (Pakistan).

Insurtech: Within transparency requirements, KYC/AML laws are the most crucial regulatory hurdle for insurtechs. Data protection regulations are also stringent. Firms that cite these regulatory issues include Tameeni (Saudi Arabia).

Blockchain: Client funding account segregation and consumer protection regulations are key regulatory hurdles for blockchain firms, for example, (China) and Coinage (Philippines).

Payments: KYC/AML and data protection regulations are the most significant constraints imposed on payment fintechs. Firms that consider these hurdles include Zoop (Brazil).

Investech: Data protection regulations are a key regulatory hurdle faced by Investechs. Within transparency requirements, capital and disclosure requirements impact the most. Firms citing these regulatory obstacles include Spenny (India) and FinPocket (Pakistan).

Lending: Consumer protection and KYC/AML regulations are the key hurdles faced by lending fintechs. Firms considering these as issues include Geru (Brazil) and Khazna (Egypt).

Regulatory hurdles for emerging market fintechs