The Benefits of Fintech Partnerships in Emerging Markets

Keyboard with graphics

By Andrés Abumohor

In many emerging market economies, individuals cannot fulfill banking requirements, such as providing a credit history or collateral, in order to access lines of credit. This is true for a majority of small businesses in emerging markets as well. Inadequate access to financing is a problem facing small businesses around the world, limiting their ability to survive and thrive.

According to an IFC report, there are a few key challenges that have long limited the digital transformation of financial services in emerging markets, relative to more advanced economies. These challenges include:

  • Low access to formal financial services
  • Low income and financial literacy levels
  • Underdeveloped technology solutions
  • Weak infrastructures

Not all of these challenges exist equally across all emerging market economies; however, they are crucial factors that determine the types of financial services both banks and fintechs are able to offer. Additionally, these factors heavily dictate how these two types of financial service providers interact with each other.

Due to these challenges, a World Bank report indicated that a high proportion of financially-constrained SMEs (Small and medium-sized enterprises) refrain from applying for credit entirely; approximately 28% of SMEs in middle-income countries and 44% of SMEs in low-income countries have not sought credit from a traditional financial institution. Some of the SMEs in the report believed that they lacked profitable projects, while others thought their credit applications would fail because they’d be unable to provide all of the required information or the appropriate collateral.

Fortunately, more and more traditional financial institutions are changing their mindsets and collaborating with mission-driven financial technology (fintech) companies in order to achieve greater financial inclusion for all. Here’s a look at a few ways traditional financial institutions are partnering with fintechs and the benefits of these partnerships for SMEs in emerging markets.

New ways to evaluate creditworthiness

Many traditional financial institutions in emerging markets fail to provide SMEs credit because they lack enough information to determine a business’ creditworthiness. To solve this problem, fintech companies are leveraging the growing aggregation of data about businesses that exists in other places in order to help banks evaluate creditworthiness in alternative, and sometimes more accurate, ways.

For instance, Alibaba overcame the lack of reliable credit information about SME borrowers in China by evaluating transaction and payment data collected by Alipay, its proprietary payment system. This allowed the company to create a predictive model for evaluating an SME’s credit risk.

In India, nearly 50 million SMEs do not have access to formal credit. Fintech companies such as CapitalFloat use information collected from public sources, such as social media and government data, to offer financial institutions in India alternative solutions to assess a company’s creditworthiness.

In Latin America, a popular method used by fintech companies is to combine data collected from an SME’s electronic invoices and electronic tax filings to help banks assess the creditworthiness or risk of a loan.

Strategies that mine user data from nontraditional sources are increasingly being used in emerging markets as the availability of data continues to increase and the cost to harvest and evaluate it continues to fall.

Faster, more beneficial regulatory change

In March 2018, Mexico passed a bill to regulate fintech companies, becoming one of just a few countries in the world to do so. The primary objective of Mexico’s new fintech law is to provide legal frameworks for companies that offer alternative financing and electronic payment solutions. Implementing regulation in this area is expected to help solve the problem many Mexicans face – the lack of access to traditional financial services, such as a bank account. The World Bank estimates that 61% of Mexican adults not own a bank account.

With over 300 fintech companies, Mexico is the largest fintech hub in Latin America. The mission of these companies to provide accessible and affordable financial services to both individuals and businesses in Mexico gained government support relatively easily, which likely helped the bill pass so successfully.

The increasing presence of fintech companies in emerging markets like Mexico is also helping drive competitiveness, forcing traditional banking systems to adapt their services to meet new age consumer needs, or risk falling behind. The good news is that many traditional financial institutions have already adapted their strategies to the rise of fintech companies, mostly viewing them as opportunities for collaboration rather than a threat.

Both sides of the table have realized that it’s in their best interest to work together in order to guide the development of regulations that will push the financial industry forward. Any hesitation from traditional financial institutions to “wait and see” what happens, especially in emerging markets, can be dangerous and put them at high risk of losing market share. More so, a lack of collaboration with fintech companies can lead to slow regulatory changes for all, stifling the innovation that is needed for the companies to survive.

The financial future for SMEs in emerging markets

Collaboration between traditional financial institutions and fintech companies is shaping the future of the finance sector. These partnerships have a number of benefits in emerging markets, including the ability to offer customers better and less expensive financial services, as well as the ability to drive institutional innovation forward for the benefit of all.

Andrés Abumohor is the Co-Founder and COO of OmniBnk, a neobank that provides financial services to SMEs in Latin America.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.