Fintech

Our travels in emerging markets (EM) have made us acutely aware of the vast opportunity this sector presents but have also made us cognizant of the unique contextual factors that bode more sober and situational evaluation of all the investment opportunities.

The success of fintech in China has provided enthusiasm to investors and companies around the world but applying a “China template” to all fintech circumstances in EM is overly simplistic.

Variations in three broad factors make us question the conventional false analogues between China and EM fintech today.

Catalysts

The driving force of fintech adoption comes from transactional use cases, which differ in intensity and characteristics across EM.

For example, ecommerce penetration in many EM countries, for example India and Brazil, is much lower than it is in China.

Elsewhere, ride hailing and food delivery, rather than ecommerce, are the more common catalysts in areas such as South East Asia.

Competitive intensity

Fintech is no longer the surprise no one saw coming.

The China story is well known to challengers and incumbents alike.

This implies a longer competitive tussle in many parts of EM, and a more agile response from incumbent banks, as rival platforms vie for supremacy.

China’s fintech explosion

Mobile payment adoption in China has led to spectacular expansion in related services.

For example, nearly a billion people use Tencent’s WeChat Pay – a keystone payment method for businesses wanting to reach Chinese shoppers, both home and aboard – and over 700 million people use Alibaba’s Alipay – a third-party mobile and online payment platform.

Both companies own a bank licence and offer insurance distribution, credit scoring and technology services and Alibaba are held in the Invesco Developing Markets Strategy.

Latin America – rising transactions

Simply put, Latin America is a largely cash-centric region where many citizens still do not have bank accounts but instead rely on cash to conduct daily business.

However, Brazil is unique in that over 60% of purchases are made on credit, and of that, over half are routed through multiple monthly interest-free instalments.

This indicates selling merchants must wait for cash, and a thriving pre-payment business (i.e. factoring of receivables), where fintech companies have created profitable beachheads.

Annualized yields on this business can range from 20% at the lower end to nearly 40% at the upper end, depending on the bargaining power of the merchants.

While ecommerce penetration in Latin America remains low by international standards it is rising.

This should be supportive for companies that own both an ecommerce and fintech platform, for example Mercado Libre (held in the Invesco Developing Markets Strategy).

In its Q3 2019 report, the company reported that off-platform payments exceeded those from on-platform ecommerce payments.

a cash-heavy region, we believe this is a positive sign for MercadoLibre as it shows that they are building a disruptive foundation that could solidify its future place as a leader in payment processing.

South East Asia (SEA) – land grab

We believe that the biggest opportunity in SEA is Indonesia, a US$1 trillion economy, where the drive to acquire customers pushes from the two front-running fintech platforms, Ovo, backed by Grab (held in the Invesco Developing Markets Equity Fund), and Go-Jek, have expanded the fintech market significantly.

As of July 2019, Grab/Ovo had covered 110 million users. (Source: www.entrepreneur.com/article/330561).

Grab/Ovo has been the payment of choice for Tokopedia, the largest ecommerce platform with 30% market share in Indonesia, and the Lippo group, the largest offline retailer in the country.

As a result, Grab/Ovo has on-boarded 400,000 retailer outlets (versus 300,000 for Go-Jek) and is now available in 90% of shopping malls, department stores, coffee shops, cinemas, and food and beverage outlets.

"The race to payment ubiquity is relentless".

Grab/Ovo’s willingness to partner - rather than doing it alone - helped put it ahead of their closest rival. That said, card penetration - including both debit and credit - in Indonesia is still less than 10%, and about 60% of local people don’t have access to banks.

The multilateral relations among SEA countries allow for development of regional apps, like Grab’s ride hailing.

Leveraging their customer traffic, these apps have been able to nurture their own fintech platforms, first as payment solution providers and subsequently as a channel to cross-sell additional financial products.

Final thoughts

While we believe in the potentials of fintech to bring about significant changes in the EM financial sector, we think there are a very wide variance of outcomes.

Even within each emerging country, outcomes can differ significantly between companies which have the right ingredients to succeed and those which don’t.

The fintech battles are far from being over, and the winners are most often not decided yet.

Moreover, it’s important to see how traditional banks evolve in response to the rising competition in fintech.

As fundamental, bottom-up investors, we will continue focusing on understanding the business models of fintech and banks alike and we place our trust in companies which we believe have superior economics potentially protected by a wide moat in the long run.

Ultimately, the best predictor of long-term performance is earnings, which are dictated by microeconomics and not short-term trends.

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