Fintech in Emerging Markets: Payments, Lending & Neobanks Lead

Fintech Investment Surge in Emerging Markets

Investment in technology companies within developing economies has significantly increased in recent years, fostering substantial growth within these ecosystems.

Detailed analyses of individual regions, such as Africa, Latin America, and India, are readily available from various publications and firms, outlining specific trends and investment activities.

However, comparative analyses examining trends and investments across these regions have been notably absent – a challenge understandable given the complexity of such an undertaking.

A New Comparative Report

A recently published report by Briter Bridges, a data research organization, and Catalyst Fund, a global inclusive tech accelerator, aims to address this gap.

The report focuses on providing a comprehensive overview of the fintech sector – a particularly vibrant area of growth – within these three key emerging markets.

Report Objectives and Methodology

The “State of Fintech in Emerging Markets Report” is built around three core objectives: assessing investment levels, analyzing product development, and evaluating inclusivity trends across these developing economies.

Researchers conducted a survey encompassing more than 177 startups and 33 investors operating in Africa, Latin America, and India.

Despite the relatively small sample size, the report’s key findings offer valuable insights.

Key Findings Overview

The following sections will delve into the specifics of these findings, providing a detailed examination of the current state of fintech in these dynamic markets.

Fintech Investment Surges to $23 Billion Since 2017

Emerging markets continue to demonstrate a strong preference for fintech solutions. The sector has consistently attracted the largest portion of investment annually for the last five years.

Africa: A Hub for Fintech Growth

With over 300 million unbanked adults, representing 17% of the global unbanked population, Africa presents a significant opportunity. Consequently, 2019 saw five substantial deals involving Branch, Tala, World Remit, Interswitch, and OPay, totaling over $775 million.

Although investment decreased to $362 million last year, companies such as Flutterwave, TymeBank, and Kuda successfully secured significant funding during this timeframe.

Latin America: Expanding Digital Landscape

Latin America boasts a rapidly expanding digital user base, coupled with supportive regulations and a thriving small business sector. A high percentage of the population, around 70%, remains unbanked.

Fintech companies in the region have capitalized on this situation, attracting substantial investment rounds for companies like NuBank, Neon, Konfio, and Clip. In total, these startups have raised $10 billion over the past five years.

India: A Major Fintech Market

Indian fintech startups achieved a record $4.8 billion in funding in 2019. Last year, the sector secured $3 billion in investment.

Over the last five years, total funding reached $11.6 billion, with prominent companies like CRED, Razorpay, Groww, and BharatPe leading the way.

Key areas driving this growth include payments, lending, and neobanks.

Seed Funding Averages Differ Significantly Across Emerging Markets

Recent data indicates a substantial disparity in average seed round sizes across key emerging markets. Specifically, the average seed funding secured by African startups is $1 million, a figure considerably lower than those observed in India and Latin America.

Growth in African Early-Stage Funding

Over the last five years, early-stage investment activity in Africa has demonstrated consistent growth. Total funding for these deals has surpassed $1.6 billion during this period.

The typical size of seed rounds in Africa has also seen an increase, evolving from $750,000 in 2017 to $1 million by 2020.

Comparison with India and Latin America

In contrast, the average seed deal size in Latin America over the past five years has been approximately $5.7 million. India’s average is slightly lower, at around $4.6 million.

However, the report notes that the Indian figure was somewhat influenced by a particularly large seed round – a $30 million investment in CRED – which skewed the overall average.

Key Takeaways

• Africa: Average seed round of $1 million.
• India: Average seed round of $4.6 million (influenced by a large outlier).
• Latin America: Average seed round of $5.7 million.

These figures highlight the varying investment landscapes and opportunities present within different emerging markets. Seed funding amounts can be a key indicator of investor confidence and the potential for growth in these regions.

Regional Fintech Trends: IPOs in Latin America, Unicorn Growth in India, and Emerging M&A in Africa

The past year saw Stripe’s purchase of Paystack as a defining moment for Mergers and Acquisitions (M&A) in Africa, notable for its scale and the Nigerian startup’s origins.

Significant investment rounds also included WorldRemit’s $500 million acquisition of Wave – the largest deal originating from the continent – and Network International’s $288 million buyout of DPO Group.

Latin America: A Preference for Initial Public Offerings

In contrast to Africa’s growing M&A activity, Latin America’s fintech sector demonstrates a strong inclination towards Initial Public Offerings (IPOs).

The region has witnessed numerous fintech companies securing funding rounds exceeding $100 million, including Nubank, PagSeguro, Creditas, BancoInter, and Neon.

While M&A activity remains limited, several companies, such as Arco Educacao, Stone Pagamentos, and Pagseguro, have recently become publicly listed.

India: The Rise of Unicorns

India currently boasts over 25 companies valued at $1 billion or more, with this number consistently increasing each year.

The country added more than eight new unicorns in the last month alone.

These high-growth companies span a range of sectors, from established players like Paytm to newer ventures such as CRED.

A Comparative Overview

• Africa: Primarily experiencing growth through M&A, with a focus on acquiring homegrown fintech startups.
• Latin America: Favors IPOs as a means of raising capital, alongside substantial funding rounds.
• India: A hotbed for unicorn creation, consistently adding new billion-dollar companies.

Fintech Investment Trends: Payments, Credit, and Neobanks Take the Lead

Recent analysis indicates that companies specializing in payments are currently the most attractive targets for fintech investment across Africa, Latin America, and India.

Specifically, business-to-business (B2B) payment solutions are receiving a significant portion of this funding. Following closely behind are companies focused on credit and digital banking innovations.

Regional Variations in Fintech Funding

Investment patterns differ across the examined regions. In Africa, payment startups have consistently attracted more capital than those in the credit or neobank sectors.

Notable examples of well-funded African payment companies include Flutterwave, Chipper Cash, Wave, Paystack, and DPO Group.

Latin America: A Balanced Fintech Landscape

Latin America distinguishes itself as the only region where neobanks, credit fintechs, and payment companies all receive relatively equal funding – between $2 billion and $3 billion each.

Key players in the Latin American fintech space include NuBank, Creditas, and dLocal.

India's Fintech Focus: Payments Dominate

In India, payment startups currently secure the largest share of fintech investment.

However, the Indian market also demonstrates substantial activity in the credit and neobank segments, with companies like Niyo, Lendingkart, and InCred successfully raising significant nine-figure funding rounds.

Key Takeaways

• Payments are the leading category for fintech investment globally.
• B2B payment solutions are particularly favored by investors.
• Latin America exhibits a more balanced funding distribution across neobanks, credit, and payments.
• Africa prioritizes payment startups, while India sees strong growth in all three categories.

Investor Optimism Surrounds Insurance, Payments, and Digital Banking

A recent survey of investors regarding anticipated trends in fintech over the next five years reveals significant enthusiasm for insurance, payments, and digital banking solutions.

Investment platforms and embedded finance models also garnered considerable attention. Conversely, areas like agriculture and remittances received comparatively less interest, with wealth tech platforms and neobanks also ranking lower in investor priorities.

The apparent divergence in investor sentiment towards digital banking and neobanking remains a point of consideration. The precise reasons for this contrasting evaluation are not definitively clear.

The report highlights the presence of underserved consumer segments within these regions and the role of fintech startups in addressing their needs. It further examines the extent to which these startups contribute to financial inclusion and identifies the features and products necessary to enhance this impact.

A notable observation within the report is the developmental gap between Africa and both Latin America and India. Dario Giuliani, director at Briter Bridges, estimates that Africa requires approximately five years to reach the current level of fintech maturity observed in Latin America and India.

He attributes India’s advantageous position to its unified market structure, contrasting it with the fragmented nature of the African continent. Operational consistency is more readily achieved within a single nation.

“Managing a single country presents fewer complexities than navigating 54 countries in Africa or even 20 in Latin America,” Giuliani explained to TechCrunch. “While ‘Africa’ is often used as a collective term, the reality is that activity is largely concentrated within 4-6 key nations.”

He further noted that Latin America’s growth is primarily driven by Brazil, Mexico, Argentina, and Colombia, while India functions as a cohesive single market.

The report emphasizes a growing trend among fintech companies in emerging markets: diversification into adjacent sectors. This includes areas such as crop insurance, credit facilities for distributors, Know Your Customer (KYC) solutions, e-commerce payment gateways, and medical finance and insurance.

Guiliani anticipates that this trend of sector expansion will persist.