Emerging markets may offer financial sector

Emerging markets may offer financial sector

Western financial companies that have traditionally dominated payment markets are facing competition from technologically innovative start-ups in fast-growing emerging markets.

Some are leapfrogging the payment infrastructure of those in the developed world and have adapted to the internet age faster according to Chris Skinner, a financial technology expert and author.

This shift represents an opportunity for fintech companies operating in emerging economies.

Between 2020 and 2024, the number of debit and credit cardholders is projected to rise by 5.8 per cent in the Philippines and by 5.5 per cent in Indonesia, according to Omdia, a technology consultancy. This compares with forecast growth of 0.6 per cent in the UK over the same period.

Philip Benton, senior analyst at Omdia, said that there was a shift from cash to cardholders in emerging markets. They are forming new habits when people start to shift from cash to cards and mobile wallets because of the convenience of paying through digital methods. The rise in payments in emerging markets is due to government efforts to slash access to bank accounts, a drop in cash transactions due to the Covid-19 epidemic, and a shift to mobile payments, according to industry analysts.

The shift has been fuelled by a rising young, aspirational and tech-savvy population and new payment innovations, said Tareq Muhmood, group country manager for regional south-east Asia at Visa, the card payment company.

Such payment technologies include digital or mobile wallets, which securely store payment details and passwords, scannable QR codes that authorise payments, and software that allows phones to facilitate contactless transactions.

The adoption of these technologies has resulted in a global drop in cash use. According to McKinsey's research, cash payments fell 16 per cent in 2020. It forecasts a rebound in cash use this year, as the pandemic lockdowns are lessened.

According to a report by S&P Global Market Intelligence, mobile payments exceeded cash machine withdrawals in India last year, surpassing bank over-the- counter withdrawals for the first time.

While not new, digital wallets grew in prominence during the pandemic, due to a decline in cash and in-store card payments using point-of-sale terminals and a rise in consumers preference for contactless transactions.

In 2020, cash was used for 20.5 per cent of in-store point-of- sale transactions, a one-third less than in 2019 according to research by Worldpay, a payments group.

Multipurpose apps are becoming more and more commonplace in mobile wallets. This type of wallet is used to pay for everyday, low-value transactions such as groceries and food deliveries, taxis, bills settlement and gaming in south-east Asia.

Sampath Sharma Nariyanuri, a fintech analyst at S&P Global Market Intelligence, said that mobile wallets are perhaps the first cashless instrument that people have ever used in emerging markets.

Some of the biggest suppliers of such services include China s Alipay and WeChat and Singapore s Grab. Nariyanuri says that the non-banks are becoming the primary interface for payments and other services for consumers.

Some apps, including Grab s, also include a buy now, pay later option, which allows customers to pay interest-free instalments. Chris Yeo, the managing director and head of GrabPay and GrabRewards, says digital payments and pay later are nascent in south-east Asia.

Governments are playing their part, with India and Thailand s among those who are working on developing national real-time payment systems, called the United Payments Interface UPI and PromptPay. Payments can be made using Facebook's WhatsApp messaging service in India.

In the last year, a central bank settlement system in Ghana introduced a universal QR code that allows payments via a phone or bank account.

Payment markets in emerging economies still have challenges. For example, the income requirement to obtain a credit card can be too high for many and need to be cut. There is scope for growth.

Some 1.7 billion adults in emerging markets don't have a bank account or use a mobile money provider, according to the World Bank, although that figure is falling. Between 2011 and 2017 1.2 billion previously unbanked adults gained access to financial services, according to the bank.

It is now easier to sign up new card customers electronically, says Omdia s Benton. He notes that some banks required new customers to verify their identity by taking a physical document, such as their passport or driving licence, to a bank branch, which could be far from their home.

The outlook for payments in emerging markets is promising due to the combination of more accessible financial services, a proliferation of smartphones and a vibrant fintech market.

Benton says that smartphones are becoming more affordable and financial inclusion is increasing in emerging markets. It has the foundations of a strong payments growth for years to come, coupled with rising incomes and increasing urban populations.