Emerging markets are at the forefront of a global change in payment systems. Unencumbered by legacy systems or bricks-and-mortar banking networks, emerging markets can set the pace on electronic payments. A combination of young dynamic populations and governments’ desire to improve financial inclusion is seeing mobile and fintech innovators forge ahead across emerging markets.
The 2018 World Payments Report from Capgemini and BNP Paribas found that developing markets are leading a non-cash boom. The annual growth rates in electronic digital payments were 36.5% in Russia, 33.2% in India, and 25.8% in China.
This growth has a number of drivers. The first is demographic. As PwC points out in its recent “Emerging Markets: Driving the Payments Transformation” paper, nearly 90% of the global population under age 30 resides within emerging markets. It said: “Given the demographics, these markets are currently finding themselves at a ‘sweet spot’ where population trends favour the growth of online transactions, which are in turn curtailing the black economy and stimulating economic growth.”
Digital payments are also receiving strong support from governments who recognise they need to expand financial inclusion. Many countries have relatively high mobile phone penetration and their mobile phone infrastructure may be better than their land and rail infrastructure. This means digital banking is a more practical option than the development of a traditional bricks-and-mortar franchise for banks to reach the “unbanked” or “underbanked” populations. In this way, there is a real social value to the expansion of digital payments, democratising access to finance in a country where many have been disenfranchised. Innovation in financial technology is coming from a variety of sources: in e-commerce, digital payments have evolved from areas such as food delivery and ride hailing. This dynamic is illustrated by Alibaba and its online payment platform, Alipay. Alibaba created Alipay to encourage buyers on its e-commerce marketplace to trust third-party sellers (by allowing Alipay to hold payment in escrow until the buyer is satisfied with the product). These are areas used with high frequency that draw consumers to deposit money into bank accounts and e-wallets.
Kenyan-based low-tech wallet and payment service M-Pesa was born out of South African telecom group Vodacom. The service has now spread to South Africa, India, Romania, and other emerging markets. It is seeking to attract 50 million mobile money users in three years, up from the current 35 million. There are also the fintech companies, which are doing everything from payments and lending to investment management and insurance distribution. QR code technology—a twodimensional version of a barcode—has gained significant prominence in developing countries such as China and India and is allowing instant transfers of information. Widespread adoption is facilitating the growth of some fintech groups.
In many countries, however, the traditional banks still have a role in building digital payments options. In India, for example, Hitachi Payments has partnered with the State Bank of India (SBI) to establish a nationwide digital payments platform.1 It is generally a good option for traditional banks to expand cost effectively. Branch networks are expensive and digital banking is cheap in comparison.
Financial technology will play a key role in the development of emerging economies. They are expanding financial inclusion and democratising access to finance. Providers in emerging markets are forging their own development path.
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- ^“Hitachi and India’s Largest Government-Owned Bank Partner on Major Digital Payments Platform,” cointelegraph.com, October 29, 2018