In the wake of COVID-19, fintech platforms have never been more vital for emerging markets – both to consumers and businesses alike. The virus has upended normal life. Uncertainty in the markets coupled with a looming recession (or worse) have traditional financial institutions and major banks pulling back across the globe. The lifeline that fintech platforms afford the underbanked in emerging markets is now threatened. Perhaps the biggest pain point for the underbanked in emerging markets is the connection between lenders and traditional banks and financial institutions as well as the antiquated processes that are ingrained there but which cannot stand in a post-COVID world. Fintech platforms that underwrite lenders and/or update these pre-COVID processes at major financial institutions are helping to fill the gap during these uncertain times and are providing a path forward for those most vulnerable to the pandemic in emerging markets.
Over the last decade fintechs have demonstrated a unique capability to extend financial inclusion into emerging markets, improving the daily lives of people and businesses while also helping to spur growth. The growth of mobile is largely responsible for this as its ascendance and near ubiquity has helped fundamentally change the financial game, particularly in the third world.
“Prior to the pandemic the fintech space was just exploding,” says Scott Schmidt, VP of Growth at Quad Pay, a provider of “Buy Now Pay Later” services in the U.S. “The number of people downloading apps and using them on the fintech side was growing exponentially along with the market size. Most importantly, it was global.”
For emerging markets mobile helps facilitate payments and other financial transactions. It enables commerce and helps effectively bank the underbanked. It unquestionably spearheaded the industry forward. While the pandemic has brought with it unique challenges for those platforms operating in emerging markets it has also brought its fair share of opportunities to more deeply ingrain fintech platforms in these markets, as well.
This is not the first time business leaders in the world of fintech have acted on the old axiom: never let a good crisis go to waste. Prior to 2008, private credit was a $200 BN market. Banks and traditional financial institutions were essentially there to fill the gap between lender and consumer. After the financial crisis hit in 2008, they stepped back dramatically either by choice or for regulatory reasons (keep more cash on the ledger, divest in assets classes that they don’t really understand in terms of underwriting the risk, etc.). Either way, they pared down dramatically. This spurred a demand for private credit, particularly in the US, and the private credit came mainly from non-bank lenders stepping in to fill the spaces where the banks were no longer serving. Fintech platforms answered that need and COVID-19 has presented a similar opportunity to 2008 on the global stage.
“When COVID-19 happened, the banks were the first to pare back on lending,” said Nelson Chu, CEO of Cadence, a fintech securitization platform that specializes in private credit. “Now that we’re in the phase of underwriting 2.0, the tools are all there to do proper underwriting even in times of crisis. Software and solutions like Plaid, Onfido, and Dwolla streamline everything from bank account integrations to identity verification to ACH transfers, all of which facilitate a faster and easier way to capture and analyze data and control the money flow. If you have these integrations in place, then you can be a smarter lender than you ever could even just a few years back.”
While the first wave of fintech platforms post ‘08 were largely focused on consumers, the vanguard of this next wave are rushing to either fill the space left by retrenching banks and financial institutions or rework old processes that are no longer viable. Businesses still need to get capital from traditional means and banking transactions must continue. This is where platforms like Cadence are finding opportunity.
“It’s about focusing on a niche – there’s a fintech lender for every market or asset type,” added Chu. “If you look at our platform, we have lenders that focus specifically on eCommerce and Amazon, we have lenders that focus just on mobile app developers… Naturally when you have a specific target market you’re going after you can become the best in that industry instead of being a generalist like a bank where they lack that focus.”
Fintech platforms are also stepping in to help automate antiquated processes that have become more than just inefficient. In the age of COVID they’re actually dangerous. MonetaGo, a fintech provider deploying blockchain networks that provides its participants platforms to reduce errors and enhance workflows and help businesses to finance their invoices. Their platform allows antiquated financial systems in emerging markets to digitize and modernize and keep capital flowing to SMBs there. One of their first efforts involved transforming the commercial transaction process in India which relied – to an astonishingly large degree – on human couriers, a process that could cripple an economy today trying to deal with the coronavirus and its impact on human interactions.
“People think about their phones and we think about our experiences as consumers and we kind of have this sense that everything out there is automated and computerized and it’s all done electronically in the background,” says Patrick Manasse, Co-Founder of Monetago. “The reality is that it’s not actually how a lot of businesses operate. Nor is it how a lot of markets operate to date.”
In this sense COVID is also helping speed the process of adoption of fintech platforms by major banks and financial institutions. Where adoption could sometimes take as long as 5 years, tech leaders are now seeing exponential decreases in the time it takes between engagement, due diligence and implementation.
“A lot of the emerging markets from UAE to Latin American and Asia reach out to us constantly saying, ‘look we’ve seen you be successful in digitizing this process would you be able to come look at our market,’” adds Patrick Manasse “For us, it’s just a question of ordering which ones to tackle first. The ones that are very quick and forward thinking are the Asian markets. They’re pretty quick at moving forward with implementations.”
More and more fintech providers are seeing an uptick on the part of major global banks in emerging markets to digitize different types of processes. Whether its IPO process, for example, or working with facilities within governments to enable electronic signatures of documents so that the process can be done digitally end to end, banks and financial institutions are starting to show more willingness to use the kinds of communal systems and networks that are the hallmarks of fintechs. While this engagement between 2nd and 3rd world banks and financial institutions and this second wave of fintech platforms are still very much in the early days, it’s still a collaborative effort that very much requires banks to lean in. COVID-19 is making it more and more a necessity.
“As the whole world shifts towards a new reality, there will be an abundance of post-pandemic opportunities for businesses, wrote Bassim Haidar, Founder and CEO, Channel VAS, in a blog post for the World Economic Forum. “There will be new niches and exciting ideas, as people realize that the digital tools on which they have relied during this disruption are in fact providing important services, regardless of the conditions.”
Bill Gates once said, you overestimate the amount of change you’ll see in 2 years and underestimate the amount of change you’ll see in 10. As COVID rages on, we may have to update that quote as fintech platforms and their ability to modernize banking and inject liquidity into markets are being adopted more rapidly and readily to help the global economy weather the economic storm brought on by the virus and emerge stronger from the crisis. As the global economy eventually shifts towards a new, post-pandemic reality, there will be an abundance of opportunities for businesses of every stripe. Providing emerging markets with a robust, digital banking foundation as well as access to liquidity and financial inclusion will not only provide a way forward as businesses try to manage the economic stresses brought on by the pandemic but also a way for them to blossom in the aftermath of these troubled times.