Unlocking fintech in emerging markets: 3 funding bottlenecks

Fintech investment and innovation in emerging markets has long been trending upwards, but 2021 was the year it exploded. African fintech broke the $1 billion funding barrier, a feat that the rest of the continent’s tech sector is yet to achieve combined, with $1.6 billion invested across 153 deals. Elsewhere, LATAM saw greater year-on-year funding increase than anywhere else, with the $13 billion raised representing a 269% increase on the 2020 total. And it was a breakout year for individual markets like Pakistan, Indonesia, and Nigeria, to name but three.  

Clearly, fintech is flourishing beyond traditional financial centres, and investors are taking notice. But for the pace of investment to continue, structural barriers that limit investor activity in certain regions must be understood, and in some cases, challenged.  

The qualitative barrier: changing perceptions 

With these numbers, and the dominance of consumer fintech offerings today, it's easy to forget how different the landscape was just a decade ago. Investors invest in what they know, and this often manifests as the markets they live in, studied, understand, and crucially which have a large pool of historical data with which to form decisions.  

Emerging markets, particularly in the context of fintech, have historically failed to meet these conditions, with the biggest VCs and their portfolios typically situated in established centres. Just five years ago, fintech funding in emerging markets made up a small fraction of total global VC dollars. In 2017, India, LATAM, and Africa attracted just $2.4 billion of funding, less than 10% of the global total. But since then, we have seen a steady acceleration of investment, culminating in over $20 billion of funding across these three regions last year. Perceptions are changing, and each successful year that passes brings more reasons for investors to enter these markets.  

Crucially, we are seeing relative parity, and in certain cases significant outperformance, between emerging market and developed market fintech stocks. Confidence in public markets, and their ability to provide a viable exit, translates to confidence in private, as perceived risk is reduced. As investors wake up to the opportunity in emerging markets, they are treating them as a focus, driving investment into these regions. 

Local issues: the importance of proximity 

Fintech is global, but the importance of geographic proximity, especially historically, should not be underestimated. Major investors often have a light presence in emerging markets. VCs like to engage in proactive outreach which is much easier when a start-up that catches your eye is a subway or tube journey away. In emerging markets, the onus on the start-ups to attract attention themselves is much higher. A recent study has shown that faith in the entrepreneur as an individual, and contextual business suitability are the two most decisive factors behind VC investment, and these are both highly contingent on interpersonal relationships and contextual knowledge. Such attributes are difficult to convey in an email or spreadsheet. 

Recent factors have helped alleviate these hurdles. Covid-19 limited in-person networking, and a reduction in in-person meetings persists to this day for many firms. VC relations going online helped even the playing field, with multiple raises in 2021 completed purely on the back of remote due diligence. Even as the world opens back up, new digital processes remain in place. Secondly, as the fintech opportunity in emerging markets has become harder to ignore, we have seen some of the biggest players launch funds dedicated to these markets.  

Data matters 

Investors invest in a vision- but a good vision is also a good roadmap. That means rigorous data reporting standards, clear evolution of KPIs whether operational or financial, and actionable scalability plans. If an investor is to be convinced that this vision can become a profitable reality, it can’t be smoke and mirrors. They will see right through it.  

A lack of parity in data quality against developed market firms remains a common dealbreaker, but it is the role of a financial advisor to help compile and present this data in the best way possible. The situation is improving, and as infrastructure improves, technology becomes more affordable, and governments invest in their domestic fintech ecosystems. Information on standards that must be met are increasingly codified and accessible, and specialist advisory firms and consultancies are expanding into these markets. As emerging market fintech's implement enhanced operating procedures, the information gap between emerging and developed markets will continue to narrow- and with it, the funding gap. 

Looking forward 

These bottlenecks persist, but they are loosening. By working with specialist advisors, emerging market fintech’s can connect with global investors, and tell their story in a way that meets the standards of their developed market counterparts and resonates with investors. 

2021’s astounding emerging market fintech funding will drive further investment, competition, and talent into these markets. As performance in these companies rise, perceptions change, and regions develop the infrastructure and standards conducive to success, this will only continue. The future is bright for these regions, and the rewards are great for investors who make these regions a priority, and the firms who can tell their stories to the top global players.