Fintech: The Foundation of Emerging Markets
People need access to financial services –– wherever they are based –– to develop their businesses and plan for the general ups and downs of life. Until recently, gaining access to these services has usually involved cumbersome red tape and high costs, leaving whole populations behind.
However, in this era of digitization and decentralization, technology is able to easily provide service options to underserved populations in ways that were never before possible. And they can do it while achieving a significantly better experience with cheaper execution in comparison to traditional financial providers, or in many cases, where there are no incumbent players.
Speedinvest believes technological innovation is not an option but a necessity –– in Europe, the United States, and Emerging Markets (EM). Knowing this and understanding that Financial Services are the veins through which economies live, we decided to tackle this opportunity from the foundation up. And it’s already leading to exciting investments across all sectors. Take a look for yourself!
What is our Fintech Emerging Markets investment thesis?
We focus our investments in five major geographic sub-regions, each with individual characteristics and market dynamics: Latin America (LatAm), Africa, the Middle East, South Asia, and Southeast Asia.
Within each region, we’ve seen only a couple of countries that have been able to rapidly establish themselves as tech-hubs capable of attracting outsized private investment –– whether through a local fund scene or through foreign funds from adjacent countries. Below are some of the countries that have seen or are currently seeing an outsized influx of capital:
- Latin America: Brazil, Mexico, Colombia
- Africa: Egypt, Nigeria, and Kenya
- Middle East: UAE, Saudi Arabia
- South Asia: Pakistan and India
- Southeast Asia: Singapore, Indonesia
What business models are going strong in emerging markets?
We are seeing a great deal of new and alternative business models emerge across the globe, and we at Speedinvest are committed to investing in those that will disrupt the way financial services work for customers. The following is a summary of what we see as the hottest trends in Fintech in Emerging Markets, and how we will be investing in the future.
Financial tools for SMEs and Micro-SMEs:
As income levels change, demand for goods and services is surging in EM and it’s fueling the development and expansion of SMEs and Micro-SMEs (MSME). As a result, they account for a significant portion of the GDP of developing economies. Operating and growing your SMEs operations is no small feat, so new fintechs are cropping up to provide tools that support businesses in affordable ways;
- Open is an Indian SME-focused business bank providing everything from invoicing to banking, payroll and automated accounting in one place. They work to differentiate themselves with their accounting automation and focus on speed when onboarding customers and is India’s only life-time zero balance current account with free bank transfers. All of these featured contributed to Open becoming India’s 100th Unicorn, and Speedinvest’s first Emerging Markets unicorn.
- Lummo is an Indonesian MSME-focused digital bank that offers both a SaaS-based bookkeeping system to replace traditional pen and paper cashbooks. The solution provides sales and expenses tracking, performance reporting, loan record functionality and general accounting.
- Lizza, based in Mexico, is an operating system for MSME social commerce businesses. By offering a suite of products and services, including payments, shipping, marketing and messaging, Lizza enables businesses to sell to their audience directly on social platforms like Instagram.
- Ozé is a Ghanan digital recordkeeping platform that provides small and local sub-Saharan African MSMEs access to business loans based on a data-driven approach to business performance. It captures, analyzes and recommends improvements to the performance of business owners through data collected on their mobile phone.
Lending driven by data
Information is becoming ever more connected and valuable, making data-driven business not just good practice, but necessary to compete in crowded markets. Fintech is no exception with many technologies built around leveraging alternative data points to offer differentiated financing options. Here are a few bets we’re taking in this space:
- Moove in Nigeria, plugs directly into independent drivers’ ride hailing application to capture the driver’s revenue and performance data. In collecting this data, they are able to better underwrite loans for these driver’s to finance the purchase of a car, to be repaid directly to Moove as the drivers earn back on these application. In the end, drivers are offered a more affordable repayment plan based on individuals’ monthly driving income.
- Fairmoney, operating in Nigeria and India, leverages big data to give access to credit to 2 billion people in emerging markets across the world. By using advanced machine learning applied to smartphone data it is able to build credit scores and distribute credit through a mobile application.
- Morgana takes a customer-centric approach to processing mortgage applications in Mexico, from compiling data at the client and property level to aggregating data on mortgages. Morgana offers both a white-label solution to brokers and iBuyers to digitally assess and pre-approve mortgages as well as direct-to-consumer embedded finance and remortgaging. (Read more about why we invested in Morgana.)
The Emerging Markets Fintech team at Speedinvest has doubled down on its conviction in the revenue-based financing (RBF) space with our investments in Fairplay in Mexico and Flow48 from the UAE. RBF allows companies to fund their marketing spend and working capital based on data related to their underlying contracts and predicted revenues. Having discovered the model’s potential with an early investment into Wayflyer (based out of Ireland), we are confident that ecommerce’s growth and globalization can spur similar growth stories worldwide.
- Fairplay mainly focuses on offering traditional e-commerce fast, flexible and friendly financing in exchange for a steady revenue share of their earnings until capital is paid back plus a flat fee.
- Flow48 offers revenue-based financing to online and offline businesses. By embedding in the customer’s payment gateway they can offer businesses upfront lump-sum investment capital to invest in inventory or CAPEX and generate future revenues.
As the nature of work and wages evolve across the world, so do many of the demands and needs of employees working in these markets. Startups aimed at providing the benefits of greater financial freedom to employees are gaining in popularity, and we’ve made our own investments in the space:
- Cobee, the Spain and Portugal-based employee benefits management system provides an automated platform for white collar workers to access and spend their benefits in the way they see fit. Cobee’s app allows employees to access their available benefits, from childcare to coupons, in an easy and accessible way. Expanding into the LATAM market, they are providing companies opportunities to invest into their employees' wellbeing and retain top talent.
Earned-wage-access platforms such as Khazna in Egypt and Abhi in Pakistan are increasingly becoming a major trend in emerging markets. Employees that face cash-flow issues are able to borrow against their “accrued wages” to pay for their day-to-day needs and smooth their income cycles.
- Khazna provides employees, laborers and contractors access to financial services. Starting with a lending and salary on demand offering, they want to become the go-to solution for any Egyptian when it comes to banking and lending solutions.
- Abhi provides Pakistani workers on-demand access to their earned wages all from a single application. With real-time deposits directly into your wallet, they can get access to wages within 30 seconds all while being Shariah compliant.
How DeFi empowers Emerging Markets
DeFi’s decentralized and open-platform nature allows many unbanked or underbanked individuals in emerging markets the opportunity to participate in the international financial system in an affordable way. The ability to transact cheaply (through payments or remittances), invest in or hedge market/currency risks (investing in stocks or holding stablecoins versus local unstable currencies), and inclusivity were all previously unachievable for much of the population under the traditional financial system.
Speedinvest has been investing in the DeFi ecosystem for many years, building expertise within the relevant teams and a portfolio of early winners. For example, our Austria-based portfolio company Bitpanda has been leading the way in enabling retail investors to access tokenized digital assets. Their platform offers fractional shares of both liquid and traditionally illiquid assets, supporting over 30 digital assets.
Given the particular benefits that DeFi has in EM versus developed markets, there is an opportunity for countries to leapfrog traditional technologies and lead the way –– a phenomenon seen in markets like Argentina, Singapore, Brazil and India, just to name a few.
However, DeFi as it currently stands is not without risks. Operating in largely unregulated markets means there may be issues with regulatory conformity once governments slowly catch up.
Emerging Markets infrastructure
We are seeing emerging players looking to provide infrastructure across trading, banking, and embedded finance rails. Whether it's through private-sector or public-sector initiatives, it’s clear that regional markets are looking to replicate the successes of concepts like Open Banking in other countries, and are leveraging local or foreign investment to either create digital rails for the first time or overhaul legacy ones.
The introduction of Open Banking fueled a wave of top unicorns such as Plaid (US), Tink (Sweden), and Cashfree (India). It allows for the interconnection of all the financial services data that banks, payment institutions, or fintechs have. By doing so, they are able to share information (decided by the end customer) to other financial services as well as initiate payments between accounts.
While there have been similar, government-led attempts to recreate Open Banking outside of Europe (with two clear success cases in India’s UPI and Brazil’s PIX), adoption of these government initiatives has generally been sluggish and limited to the country in which it has been introduced. The job has therefore fallen on entrepreneurs and startups to fill that gap.
How do we operate?
By leveraging our fintech experience in Europe and working closely with local partners, we built a global Emerging Markets portfolio of fintechs and fintech-enabled companies. With every new investment and region we enter, we aim to gain greater knowledge and insights to better serve our current Emerging Markets portfolio, which currently holds, along with Open, an additional 4 globally recognized “soonicorns”; Fairmoney, Lummo, ShopUp, and Moove according to Dealroom.
With this thesis, we have raised a dedicated vehicle to continue supporting founders beyond European borders. We focus on backing entrepreneurs from Pre-Seed to Series A stages looking to support their teams with any help we can provide to sustainably grow their business.