Skip to main content
Jennison Associates logoJennison Associates logo
  • About Us
  • Equity

    • Large Cap Growth
    • Global
    • International
    • Emerging Markets
    • Mid Cap Growth
    • Small Cap Core

    Equity

    • SMid Cap Core
    • Large Cap Value
    • Global Equity Income
    • Rising Dividend

    Thematic Equity

    • Health Sciences
    • Utility Equity
    • Global Infrastructure
    • Global Natural Resources
    • MLP (Master Limited Partnerships)
    • Financial Services

    Thematic Equity

    • Technology Equity
  • Fixed Income
    • Active Long Duration
    • Active Core
    • Active Intermediate
    • Stable Value
    • LDI
  • ESG Overview
    • Integration
    • Proxy Voting
    • Engagement
    • Corporate Citizenship
  • Perspectives
  • Contact Us
jennison swoosh_1290x842.jpg
Article

The Fintech Opportunity in Emerging MarketsTheFintechOpportunityinEmergingMarkets

By Sara Moreno, Albert Kwok, CFA & Zachary Gill, CFA — Dec 1, 2022

5 mins

Share
  • Mail
  • LinkedIn
  • Twitter
  • Copy URL

Share

Highlights

  • Many people and businesses in emerging markets have little—or no—access to financial services. In many countries, fintech companies have stepped in to meet these needs.
  • China is a strong example of fintech’s potential. In little more than a decade, much of the population has gained access to internet-based digital payment systems.
  • We believe similar opportunities exist in other Asian and Latin American emerging markets, which are at an earlier stage of fintech development.
  • Investors, however, should be aware of idiosyncratic risks, including each country’s regulatory environment.

China's Example

Fintech companies use new technology to compete with traditional financial services, making them simpler, faster, cheaper, and more convenient. This is a fast-growing area of the emerging markets, where many individuals and businesses have no access to a checking account or a credit card. Even in areas with financial services, many banks overcharge and underserve their customers while relying on old information technology architecture. Fintech companies have been quick to seize this opportunity.

Fintech’s potential for widespread adoption has a powerful example in China. Just a decade ago, consumers had few options except for state-run banks. Salaries were commonly distributed as stacks of paper bills; e-commerce companies fulfilled orders via bike delivery, who took payments in cash. Seeing an opportunity, Chinese tech companies developed digital payment systems based on internet technology, offering their hundreds of millions of users access to convenient, low cost, and secure financial services.

The result has been revolutionary. Encouraged by the need to seamlessly transact online payments, the new financial players leapfrogged developed market banking systems and were able to meet the financial needs of their customers through smartphones. The total transaction value of online payments in China rose more than 30x between 2013 and 2020 to 295 trillion yuan, roughly equivalent to $44 trillion (Exhibit 1).1 Today, a strong majority of the Chinese internet population uses digital payments. The digitization spread from online payments to offline payments (through smartphones and QR codes) and then to virtually all financial services—making China effectively, in our view, the world’s first cashless economy. This is the fastest mass adoption of technology that we have witnessed in our 25 years of global growth investing.

Chinese regulators, however, have recently intervened in the local fintech industry, primarily to avoid a concentration of services in just a few firms. They have been especially focused on preventing “closed loop” financial systems in which a single company owns and manages end-to-end financial transactions. This new scrutiny has become an overhang for the Chinese tech industry, making it much more challenging for investors to confidently identify growth opportunities. This example illustrates both the explosive growth potential and some of the inherent risks for the fintech sector in emerging markets.  

This growth potential is based, in part, on the fact that the companies running established e-commerce payment platforms are typically well positioned to expand into new business areas. Because they combine e-commerce with social media, they have compiled relatively sophisticated user profiles. Using technology based on artificial intelligence, these companies can mine customer data to sell additional financial services, including credit scoring, lending, and asset management.

An Expanding Opportunity

We believe several emerging markets—especially Indonesia, India, and Brazil—are at an early stage of fintech development and have large underserved and unbanked populations, as well as SMEs (small- and mid-sized enterprises) that can benefit substantially from improved access to financial services.

Each country is developing its fintech industry according to its needs and within its particular regulatory framework. In some countries, such as India, regulators have allowed incumbent banks to develop and roll out fintech services. India has also introduced a Unified Payments Interface (UPI), which facilitates quick and cheap transfers of funds. These decisions have made the huge growth opportunity in Indian fintech likely to be less profitable for investors and highlight the need for careful bottom-up analysis of the companies in the emerging markets fintech space.

In other markets, such as Brazil and Indonesia, regulators have lowered the barriers to entry, thus encouraging tech companies to acquire bank licenses and offer fintech services. Brazil has also established a government-owned and government-run transaction system, PIX, which replaces a slow and expensive process with instantaneous and virtually free transactions. Some regulators have allowed fintech firms to offer a range of banking services. Indonesia, for example, permits channel partnering—where internet platforms are able to originate loans and offload the risk by selling the loan to a bank. This model can be very profitable but has a notorious reputation—off-balance-sheet mortgages almost brought down the global economy in 2008. Brazil’s regulators, in contrast, require that loans stay with the originator. However, the secular trend to replacing cash transactions with digital payments has a long growth runway in these markets.

Another area that appears especially ripe for fintech disruption across emerging markets is in credit creation. Significant parts of LatAm and ASEAN adult populations have no bank account and therefore little access to credit. Evaluating the financial resources provided by financial corporations to the private sector (as a percent of GDP) is one way to measure a population‘s access to banking. In key Latin American markets, this figure remains below 75% compared to the more than 140% in developed markets such as the United States and the United Kingdom (Exhibit 2).2 In the ASEAN region, financial credit to the private sector can also be low. Moreover, most credit loans are held by large, incumbent banks, which have directed resources to their most profitable pool of consumers and businesses. The resulting financial system is characterized by low credit penetration and a concentration of outstanding credit with traditional financial institutions—an opportunity, in our view, for fintech companies who can meet this enormous need.

Risk Awareness

Investors, however, should be aware that these opportunities also carry risks. The importance of regulators cannot be overstated. Sudden, unexpected changes to regulations can negate long-term company plans, undermine competitive advantages, and make it virtually impossible for investors to model earnings and revenue growth.

Another risk is credit quality. Rapid growth in the fintech industry can result in lower-quality loans, which is a risk in emerging market economies as their credit markets are highly cyclical. With war, inflation, and economic uncertainty weighing on global investor sentiment, we are paying close attention to any evidence of credit deterioration. Where the fintech company is the offshoot of an e-commerce company, we would expect the company to leverage the data and credit insights gleaned from the e-commerce platform in the form of superior credit quality compared to local banks that may not have this information.

These risks notwithstanding, we see fintech in emerging markets as a significant investment opportunity, offering exposure to three secular growth themes: technological innovation, financial services for the unbanked, and the strong growth of the middle class within the emerging markets. However, given the complexity of fintech investing and the multiple levels of systemic and idiosyncratic risk, we believe investors should combine a thorough understanding of the local regulatory and market environment with fundamental, bottom-up analysis of individual fintech companies. 

1One yuan equals approximately 0.16 U.S. dollars and 0.13 euros (as of June 2020). 

2Most recent data available.

Contact Us
Jennison Associates

Jennison's investing approach is rooted in our fundamental research and security selection; all of our portfolios are built from the bottom-up, security by security.

Contact Us

  • By Sara MorenoManaging Director, Jennison Associates
  • By Albert Kwok, CFAManaging Director, Jennison Associates
  • By Zachary Gill, CFAPrincipal, Research Analyst, Jennison Associates

The views expressed herein are those of Jennison investment professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice and should not be considered investment advice. 

Certain third party information in this document has been obtained from sources that Jennison believes to be reliable as of the date presented; however, Jennison cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. Jennison has no obligation to update any or all such third party information. There is no assurance that any forecasts, targets, or estimates will be attained. 

  • About Us

    • About Jennison
    • Firm Profile
    • Our Approach to Investing
    • Contact Us - Form
  • Other Resources

    • Form CRS
Jennison Associates logo
  • Terms & Conditions
  • PGIM Privacy Center
  • Accessibility Help
  • Cookie Preference Center

Jennison Associates LLC. All Rights Reserved.

This website is intended for Institutional and Professional Investors only. All investments involve risk, including the possible loss of capital.

Important Disclosures

Jennison Associates is a registered investment advisor and a Prudential Financial company. Jennison Associates LLC has not been licensed or registered to provide investment services in any jurisdiction outside the United States. Certain investment vehicles are distributed or offered through Prudential Investment Management Services LLC (also a Prudential Financial Company) or other affiliated entities. Additionally, vehicles may not be registered or available for investment in all jurisdictions.

Please click on this disclosure link for important information, including information on non-US jurisdictions.

This web site is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services. It does not constitute investment advice, should not be used as the basis for any investment decision, and does not purport to provide any legal, tax or accounting advice. This is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation in respect of any products or services to any persons who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence.

Any views or opinions expressed on this website reflect the opinions of Jennison investment professionals at the time they are made and are subject to change.

Your investment objectives, risk tolerance, and liquidity needs must be reviewed before suitable programs can be recommended. Asset allocation and diversification strategies do not assure a profit or protect against loss in declining markets. Investors should consult with their attorney, accountant, and/or tax professional for advice concerning their particular situation.

Please remember that there are inherent risks involved with investing in the markets, and your investments may be worth more or less than your initial investment upon redemption. There is no guarantee that the investment managers’ objectives will be achieved. Further, there is no assurance that any strategies, methods, sectors, or any investment programs herein were or will prove to be profitable, or that any investment recommendations or decisions we make in the future will be profitable for any investor or client. Professional money management is not suitable for all investors.

There is no guarantee our objectives will be met. All investments contain risk, including possible loss of principal. The strategy may vary significantly from the benchmark in several ways including, but not limited to, sector and issuer weightings, portfolio characteristics, and security types.

Information for persons in the United Kingdom and various European Economic Area jurisdictions
In the United Kingdom, information is issued by PGIM Limited with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR. PGIM Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom (Firm Reference Number 193418). In the European Economic Area (“EEA”), information is issued by PGIM Netherlands B.V. with registered office: Gustav Mahlerlaan 1212, 1081 LA  Amsterdam, The Netherlands. PGIM Netherlands B.V. is authorised by the Autoriteit Financiële Markten (“AFM”) in the Netherlands (Registration number 15003620) and operating on the basis of a European passport. In certain EEA countries, information is, where permitted, presented by PGIM Limited in reliance of provisions, exemptions or licenses available to PGIM Limited under temporary permission arrangements following the exit of the United Kingdom from the European Union. Jennison Associates LLC, PGIM Limited & PGIM Netherlands B.V. are wholly owned subsidiaries of PGIM, Inc. the principal investment management business of Prudential Financial, Inc. (‘PFI’).  PFI of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. These materials are issued by PGIM Limited and/or PGIM Netherlands B.V. to persons who are professional clients as defined  under the rules of the FCA and/or to persons who are professional clients as defined in the relevant local implementation of Directive 2014/65/EU (MiFID II).

Links to third-party sites are intended for informational purposes only and should not be considered investment advice or recommendation to invest. These links do not constitute endorsement or confirm their accuracy, and we are not responsible for any third-party guidelines, security, or accuracy of information.

You are viewing this page in preview mode.

Edit Page