June 20, 2024

Advancing Digital Growth

Pioneering Technological Innovation

Responsible fintech spurs financial inclusion in emerging economies

3 min read

As fintech firms in emerging economies mature, they need the right regulatory frameworks to protect consumers, the right systems to reduce cybersecurity threats, while facilitating tailor-made products that enforce customer-centric values and that are adapted to suit local conditions.

Maritza Cabezas

Triodos Investment Management invests in fintech solutions in emerging economies as part of its financial inclusion strategy. Our investments in fintech firms target un(der)served small and medium enterprises (SMEs) and embedded finance companies that use financial technology to better deliver their products or services, including improving access to energy, healthcare or providing smallholder farmers with tailor-made agricultural advice.

Proper regulation a priority

Digital finance has been growing in systemic importance in emerging economies over the past few years, moving into a wide range of activities, including mobile payments, card issuance and loans, and increasingly reaching out to clients with limited financial literacy. The rise of mobile and digital banking has, for instance, helped millions of Africans gain access to finance in areas where traditional banking networks are unavailable. Africa’s share in the use of mobile money amounts to a staggering 65% of the world’s total and potential demand remains large. This rapid shift in fintech and inclusive financial access calls for proper regulation, seeking accountability from fintech firms and coherence in regulatory frameworks across countries.

In several emerging economies, regulation focuses on allowing the monitoring of fintech firms’ developments from the start. Asia has been particularly active with regulatory sandboxes, including in Malaysia, Indonesia, China, Thailand and India. In other countries where fintech firms have become systemic, regulation focuses on competition among firms, as in the case of Mexico and Brazil. And although frameworks like that in Mexico were frontrunners, the dynamism of the sector puts pressure on regulators to adapt to an industry that is rapidly evolving. In some countries it is not only about regulation, but also about launching public awareness against risks, including cyber risks.

Additionally, there is now increasing recognition that fintech firms in the financial inclusion space require tailored risk management compared to the mandates of traditional banks. For instance, credit scores when nonexistent are being substituted by transaction footprints or a data trail using other platforms. Additionally, risk management makes more sense when it is proportional to size. Mobile money agents penetrating rural areas, in many cases require guidance more than regulation given their small size.

Fine-tuning fintech services to local conditions

As competition increased, fintech firms surpassed the phase of experimenting, scaling across geographical frontiers and reaching the largest number of clients. They are now in a new phase where they must evolve and focus on niche opportunities. This means they must deepen their knowledge of the customers they serve and of the technologies that are best suited to local conditions.

This is a critical step in an emerging markets context. Simply importing foreign technology or products that are not customised to local conditions may lead to shortcomings in terms of impact, while increasing risks. Fintech firms only succeed when they become reliable for users and suited for purpose. India, one of the leaders in digital technology and financial inclusion, takes over western models and adapts them to local needs. For example by combining large language models (LLM) with speech recognition to enable illiterate famers to ask for government loans the barriers to use digital technology in finance are lowered.

Changing finance to change the world
When it comes to changing finance to change the world, the ongoing digitisation of finance creates enormous opportunities to stimulate financial inclusion and development in general. Investors looking for impact can enable these trends, allowing fintech firms to do more for fast growing populations with tailor-made products, while offering safe financial innovation and adoption. And when these fintech firms sustainably achieve scale, their returns will also scale with the impact they make.


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