New, innovative financial technology (fintech) can be the solution to financially include people at the bottom of the pyramid and to improve lending to micro, small and medium-sized enterprises in developing countries. Setting up a traditional banking network through bricks and mortar bank branches in developing countries is too expensive. It is therefore unlikely that such a network would get off the ground.
Investors, however, find it difficult to include fintech in their investment strategies to create impact and to deliver on the Sustainable Development Goals. The fintech climate differs widely across developing countries. For example, one country could have a good fintech business climate that supports innovation and entrepreneurship, but might be lacking a proper fintech infrastructure regarding internet and mobile coverage or the reliability of the electricity grid. In other instances the reverse may be true. These scenarios clearly require a different investment approach. While certain countries should give priority to improving the fintech business climate, others need to invest in their telecom infrastructure.
ING’s Economics Department recognises these difficulties and has developed a fintech index that assesses a country’s fintech environment. The index covers three broad aspects that can influence and drive FinTech investment decisions. In total 73 developing and emerging economies are included. The index is built on three key concepts:
- The (potential) demand for fintech-led financial inclusion which considers the urgency for fintech to financially include individuals as well as MSMEs, especially those located in rural areas far away from bank branches.
- The market supply side of fintech technologies. This is an assessment of a country’s supportive environment for FinTech.
- The political and regulatory risk environment. This is a proxy for a country’s investment climate. A country could have a high urgency for fintech, good infrastructure and ecosystem, but may be less attractive due to an unstable investment climate. As such, it might not fit the investment mandate.
The index points out that many low and some lower-middle income countries are trapped in a situation where the need for financial inclusion is highest but the enabling elements for fintech are missing and political and regulative institutions are weak. In particular, least developed economies find themselves still at a stage where they need to heavily develop the reach and reliability of their fintech infrastructure. Coupled with a high-risk environment, there is a need for international development agencies to step in to attract private investment.
From a regional perspective, the conditions for fintech to thrive look promising in East Asia . Mobile penetration and the reliability of the electricity grid are high in this region. So is the general innovation climate. While this is also the case in Europe and Central Asia, the urgency for fintech led financial inclusion is much higher in East Asia, as many more people and businesses are unserved, poverty rates are higher and more people live in rural areas. East Asia seems to offer investors the attractive combination of a high need for financial inclusion coupled with a supportive fintech environment.
Whether these investments are attractive largely depends on the investors themselves, their view on responsible business, goals and the instruments they employ to reach these results. Donor organisations are more concerned about the social return of their investments rather than the financial return that is leading motivation for commercial investors. As such, donor organisations might look for countries where the need for financial inclusion is highest due to poverty rates and might not shy away from capacity building investments that are less attractive to commercial investors. In this way, the FinTech index provides investors insights that helps them to answer the question: in which countries do I want to develop the FinTech sector in order to stimulate financial inclusion?
The report can be downloaded here and is accompanied by a separate document with 73 country infographics that give more detailed information on a country’ fintech environment.