Even as the global economy grapples with inflation, supply chain disruptions and high commodity prices, new payment solutions are helping billions in emerging markets access and deploy much-needed capital.
Due to the decline in cash payments during the Covid-19 pandemic, digital payments have risen in line with the growth of e-commerce, as the financial technology (fintech) sector has expanded to provide consumers with a variety of payment options.
Growth in digital payments has been strongest in emerging markets, where non-cash retail payments grew at a compound annual growth rate (CAGR) of 25% between 2018 and 2021, compared to 13% globally for the same period. A young, tech-savvy population and demand for access to financial services are driving growth.
Digital payments are expected to expand globally, with a CAGR of 15% predicted for 2022-26.
Fintech has also attracted significant investment in emerging markets. Fintech operators accounted for 37 percent of the record $4.85 billion in funding that African start-ups will receive in 2022 – the largest share of any sector.
This growth is evident in the adoption of cryptocurrencies and microcredit models such as “buy now, pay later” (BNPL), to expand financial inclusion while redefining the way consumers access capital assets.
Increasing financial inclusion
According to the World Bank, as of July 2022, 1.4 billion adults remained unbanked. Banking penetration has increased significantly in recent years, however, with 76% of adults worldwide having access to a bank account, compared to 51% a decade ago.
Digitalization of financial services has been integral to expanding financial inclusion, as well as diversifying the sector. The popularity of digital payment methods is also benefiting non-traditional financial actors, with non-banks having the dominant pre-payment application in countries like India, Kenya, the Philippines and Vietnam.
One such mobile-enabled system, India’s Unified Payments Interface (UPI), has helped digital payments in the country grow by over 50 percent over the past five years. In March the Reserve Bank of India launched a UPI for feature phones, a development that could potentially bring financial services to an estimated 400 million people in rural areas.
Another popular mobile money system, M-Pesa, allows users to pay and store and receive money through their mobile phones, giving access to financial services in areas where there are no banks. The service is used by 51 million people in seven African countries and is expected to expand to Ethiopia after approval of a license in October 2022.
Modern payment methods also help to provide more efficient and affordable healthcare to consumers in emerging markets. For example, Nigeria’s Soso Care accepts recyclable waste such as iron, plastic or car batteries in exchange for health coverage, bridging and addressing the care gap in a country where 23% of the population has health insurance.
digital currency developments
Blockchain-related fintech, particularly cryptocurrencies and non-fungible tokens (NFTs), offer decentralized transactions that enable transactions to move around the world despite macroeconomic pressures such as rising US interest rates and inflation in fiat currencies. .
Because of these advantages, developed markets are leading cryptocurrency adoption despite the global bear market: 10 of the top 20 countries on the 2022 Global Crypto Adoption Index published by blockchain data platform Chainanalysis are classified as lower-middle-income countries, while eight are upper-middle income.
Vietnam ranked first, due in part to the popularity of crypto-based gaming platforms that use game-for-profit models. The Philippines, Ukraine and India ranked second, third and fourth respectively.
NFT markets such as FanCraze, a platform that sells cricket NFTs and has financial backing from US venture capital firm Sequoia Capital, is credited with India’s rise on the index.
Despite a sharp drop in value, Bitcoin was adopted as legal tender by the Central African Republic in April 2022. Egypt, Kenya, Nigeria and South Africa, Africa’s four largest economies, also boast the largest number of cryptocurrency holders on the continent.
As governments try to navigate the burgeoning digital currency landscape, adoption of central bank digital currencies (CBDCs) has also grown. As a digital form of money issued and regulated by central banks, CBDCs are seen as less volatile than cryptocurrency assets. More than 100 CBDCs were in development stages around the world as of mid-2022, with Nigeria’s eNaira launching in October 2021 and the Bahamian sand dollar a year ago.
Hoping to expand their financial reach and bridge funding gaps, A number of African nations have imposed taxes on digital transactions.
In May 2022, Ghana introduced a 1.5% tax on the amount of electronic transactions. Despite consumer criticism and the resurgence of cash-based transactions, the measure is likely to encourage formalization by driving businesses to register with the Ghana Revenue Authority, thereby expanding the country’s tax base.
Financing resistance
Alternative payment solutions play a key role in building financial resilience in emerging markets, where conflict, inflation and natural disasters can have a major economic impact.
Long seen as an obstacle to growth and draining public funds, The informal economy can play an important role in economic resilience.
The International Labor Organization estimates that some 2 billion workers over the age of 15 spend at least part of their working lives in the informal sector.
Informal enterprises, usually micro, small and medium enterprises (MSMEs), contribute to the formal economy in various ways, such as value added taxes on purchases or incidental costs of running a business.
The informal economy represents a highly dynamic form of employment, providing jobs, skills and income to large segments of the population in many emerging markets, accounting for approximately one-third of economic activity.
For many MSMEs, limited access to credit remains a major constraint to growth and formalization.
According to the International Financial Corporation, some 65 million companies – about 40% of all MSMEs – face an annual financial shortfall of $5.2 billion, indicating a huge opportunity for fintech operators.
One recent fintech innovation, BNPL is already unlocking the potential of e-commerce in emerging markets and has the potential to narrow the credit gap for MSMEs.
BNPL firms offer point-of-sale loans that can be repaid in installments, often with little to no interest. The system helps retailers reach markets that have limited access to finance, and can also increase the purchasing power of consumers and MSMEs.
Many markets in the Asia-Pacific region are likely to see a BNPL boom, with a 2021 Google report projecting digital lending balances in the region to reach $116 billion by 2025.
In mid-2022 GoTo, Indonesia’s largest startup, announced plans to add a BNPL service to its extensive portfolio, which includes e-commerce and ride-hailing.
Fairbanc, another Indonesian company, offers BNPL business services to MSMEs, enabling them to purchase goods using BNPL credit, and reducing technological and financial barriers to participating in the digital ecosystem.
Remittances are another source of income for many in emerging markets, with volumes that have increased in recent years. According to the United Nations International Fund for Agricultural Development, an estimated 800 billion people worldwide benefit from remittances, which help increase financial resilience to inflation and natural disasters, such as this year’s floods in Pakistan and West Africa.
Global remittances to low- and middle-income countries increased by 5% to $626 billion in 2022, lower than the 10.2% increase seen in 2021, but still significant. global macroeconomic pressures are considered.
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