Strategy Note /

Why emerging market incumbents allow fintechs to win new business

  • Incumbents recognise that fintechs are eating their lunch, but often struggle to respond, partly due to short-termism

  • Regulatory risks, conservative culture and customer acquisition costs are major reasons that leave incumbents trailing

  • Chinese incumbents see themselves as too conservative; Indian ones can’t stomach product development costs

Why emerging market incumbents allow fintechs to win new business
Rohit Kumar
Rohit Kumar

Global Financials/Thematics

Rahul Shah
Rahul Shah

Head of Financials Equity Research

Tellimer Research
4 March 2021
Published byTellimer Research

This report, part of our series on the risks and opportunities in the emerging markets fintech space, focuses on the reasons why incumbents allow fintechs to capture new business, despite having access to superior financial, branding, infrastructure and human resources. Our survey of 50 incumbent firms (across BrazilChinaIndonesiaIndiaKenyaMexicoSouth Africa) provides some insights into this issue.

The top reasons why incumbents allow fintechs to win new business

Our survey, which asked incumbents to comment on their incumbent peers rather than their own firms, gives an incumbent’s perspective on why they are ceding space to fintech upstarts. Top justifications given by executives include:

Newcomers are taking on higher regulatory risk

Many fintech firms are subject to less regulation than deposit-taking banks, for example. We think the regulatory environment could get tougher for fintechs in the future, as regulators catch up with business innovation to better safeguard consumers. But for now, some incumbents clearly feel the regulatory playing field is not level, or that start-ups with less to lose are happy to push the regulatory envelope. Incumbent firms citing this issue include Banco Inter (Brazil) and Santander Mexico.

Incumbents have a more conservative culture

Incumbents tend to be focused on safeguarding their relationships with larger customers and protecting existing revenue pools, and hence may take a more conservative view in relation to new customer acquisition, product innovation, or other business development risks. This leaves gaps in the market for fintechs. Companies that cite this factor include Hundsun Technologies (China), and Safaricom (telecom, Kenya).

Developing new products and acquiring new customers will depress profits

Our survey suggests that only 43% of EM fintechs are currently profitable. Fintechs have high customer acquisition costs, and typically require substantial investment in marketing, research, personnel, and technology to become viable. Listed incumbents tend to be more focused on near-term cash flow or profit generation, which limits their appetite to invest in growth. Companies that mentioned this issue for other incumbent firms include America Movil (telecom, Mexico) and Kotak Mahindra (financial, India).

Reasons why incumbents allow fintechs to win new business

By country, incumbents in Brazil and Indonesia are most likely to think that fintechs are taking on higher regulatory risks to capture new business, while those in China and Kenya think that the conservative culture of the incumbent firms is a bigger factor. Indian and Mexican incumbents are most concerned about high costs of developing new products/ acquiring customers that could depress the profits.

Reasons why incumbents allow fintechs to win new business By country

By incumbent industry, financial companies attribute incumbents ceding new business to fintechs’ higher willingness to take on regulatory risk and high product development/customer acquisition costs.

Telecom companies cite the conservative culture of their peers and high product development/ customer acquisition costs as key reasons for ceding space to fintechs. Technology companies think that their peers’ culture is too conservative, and the segments targeted by fintechs are too small.

Reasons why incumbents allow fintechs to win new business By industry