Growing up, my grandparents often shared stories about their work as United Nation diplomats in countries across the Middle East and South Asia. Their collective experiences working on economic development helped spark my interest in sustainable finance and underpinned the importance of financial empowerment in improving the living standards for citizens. While macro policy remains the primary tool for enacting top-down change, recent trends in social, demographic, and regulatory behavior have created opportune conditions for fintech startups in developing countries to drive bottom-up change in the economic lives of millions. In the coming decade, the largest fintech opportunities will exist in global markets with large underbanked populations and increasing rates of technological and financial literacy.
Why It Matters
According to the World Bank, 1.2 billion people in the past decade gained access to financial services for the first time in their lives. Developments in fintech have played a key role in creating financial inclusion, a fundamental step toward lifting people out of poverty and reducing social inequality for marginalized communities.
For instance, mobile-money services such as M-Pesa have led 194,000 households, 2% of Kenyan households, out of extreme poverty. Financial inclusion is also intrinsically tied with gender inclusion: the same Kenyan mobile-money services have transitioned 185,000 women from farming to business jobs.
Although venture capitalists have invested billions into fintech startups, most of the investments have remained highly concentrated in the U.S. and developed economies. The global fintech market is far from saturated and demand for such services remains high. Today, 1.7 billion adults are unbanked, and many people live in developing countries. Nearly half of all unbanked adults live in China, India, Indonesia, Pakistan, Nigeria, Bangladesh, and Mexico.
Among the world’s unbanked population, the following chart illustrates the primary reasons stated as barriers. Although 30% of adults without an account stated the lack of need, only three percent cited it as the sole reason for not having an account. As such, the majority of these individuals may still be open to using financial services if the services are accessible and relevant to their lives. In particular, fintech startups are well-positioned to address the issues of cost, convenience, and reputation.
1. Increasing Mobile Penetration within Developing Countries
By 2025, Latin America will become home to 424 million mobile internet users. For comparison, 447 million people live in the European Union. Two countries within Latin America, Brazil and Mexico, are ranked in the top five for countries that spend the most time on mobile apps daily. Indonesia, the country that spends the most amount of time on mobile applications, is home to the world’s fourth largest unbanked population (95 million people). Strong mobile penetration creates favorable conditions for fintech startups, many of which will be digital-native and consumer-centric to address existing pain points (too expensive and inconvenient) of traditional finance.
2. Demographic Trends Increase Potential for Fintech Adoption
Underbanked adults are disproportionately young. Globally, 30 percent of unbanked adults are aged15 to 24. Even in countries like Kenya, with a small proportion of unbanked adults (only around one in five Kenyan adults are unbanked), the unbanked tend to be even younger than in economies with large unbanked populations.
On average, developing countries have significantly more young adults than older individuals. According to the United Nations, developing countries will be home to 90% of the world’s 10- to 21-year-olds. The World Bank has stated: “In many countries, especially in East Asia and Latin America, youth populations are at or near their peak.” As demonstrated below, the stark differences in the demographics of developed and developing nations is pervasive. Though many European countries like Germany have decreased birth rates, shrinking populations, and aging populations, developing countries have high concentrations of young people not attached to traditional modes of financial services.
High mobile penetration rates in developing countries, coupled with younger demographics, could unlock a new paradigm in which the adoption of new fintech services in these regions is primarily driven by young adults who are digital-native and/or more willing to adopt digital solutions.
3. Favorable Regulatory Conditions
While the effect of COVID-19 on increasing digital adoption of financial products is unequivocal, the pandemic’s impact on regulatory conditions in fintech across the world is not commonly discussed. Since the pandemic, 45% of central banks and financial regulators have increased prioritizing fintech work.
Despite the stigma of regulation stifling innovation being pervasive across all industries, attention toward fintech can be beneficial as regulators work with fintech players. Razaq Ahmed, co-founder of Cowrywise, a YC-backed Nigerian-based wealth management platform, once said: “There seems to be a contradiction between their [regulators and innovators] objectives. In reality, both parties have a shared vision. Because we operate in a private sector-led economy, innovation is a contributor towards economic growth and development. Regulators need to provide an enabling environment for that innovation to thrive.”
For instance, in 2021, the first phase of Brazil’s Open Banking project went live. The Open Banking project requires large banks to provide the APIs necessary for third party developers to build applications with consumer data. This initiative serves to increase market competition by encouraging newer startups to develop new business models and services for Brazilians to receive access to financial services. In addition, given that 16% of unbanked adults cited distrust in the financial system as a barrier, a close relationship between regulators and entrepreneurs would build the trust and reputation necessary to bring unbanked individuals into the fold.
The past decade of technological advancement and adoption has showcased the ability of fintech to serve the lives of hundreds of millions. The following decade will showcase the ability of fintech to serve the hardest to reach. While systemic changes in economic structures and governance can eradicate poverty, a combination of market tailwinds makes the current moment an opportune time for fintech startups to democratize access to financial services across the world. I am incredibly bullish on this space and excited to see the full impact of global fintech startups — not only on accelerating economic growth within developing countries but also on bringing millions into the middle class and empowering women to receive greater economic opportunities.