Page 30 - DIY Investor Magazine | Issue 31

FINANCIAL INCLUSION & FINTECH IN EMERGING & FRONTIER MARKETS Covid-19 has driven financial inclusion and the evolution of fintech. Ross Teverson explains why well-managed emerging and frontier market banks stand to benefit – read time 11 minutes. ‘Out of adversity comes opportunity’ Benjamin Franklin’s famous saying has been used on more than one occasion to describe the way in which the Covid-19 pandemic has accelerated change. Nowhere is this more evident, in our view, than in the emerging and frontier markets1 financial sector. The resolve of governments to continue driving higher financial inclusion2, and the willingness of companies to facilitate a shift to cashless transactions, are stronger than ever. While the pandemic has created multiple challenges for emerging and frontier market banks, we believe that most have managed risk admirably, have continued to innovate, and have weathered the impact of Covid-19 much better than many had expected. The structural opportunity for these businesses remains intact and, in our view, is not currently reflected in valuations, which remain below pre-pandemic levels. View, is not currently reflected in valuations, which remain below pre-pandemic levels. Incumbent was always likely to serve a shorter term in office. FINANCIAL INCLUSION AND FINTECH AS FORCES FOR STRUCTURAL CHANGE Financial inclusion is a structural change that we believe creates opportunities for select emerging and frontier market banks. In recent years, developments in this area have been accelerated by supportive government policies, financial technology (‘fintech’) innovations and, latterly, by the need to minimise contact in a pandemic environment. ‘A BACKDROP THAT, FOR WELL-PLACED FINANCIAL INSTITUTIONS, PROVES CONDUCIVE TO STRONG AND SUSTAINED EARNINGS GROWTH FOR A LONG TIME TO COME’ In much of the world, financial inclusion plays a key role in reducing poverty levels and boosting prosperity, which is why governments around the globe have been getting behind the effort. According to the World Bank, since 2010, more than 55 countries have made commitments to financial inclusion, and more than 30 have either launched or are developing a national strategy. Understandably, fintech is seen by many as a disruptive threat to established banks in developed markets. However, it stands out as an opportunity, rather than a threat, to those incumbent banks in emerging and frontier economies that are driving innovation in their markets. As the shift to mobile banking and cashless transactions accelerates, we believe that our bank holdings offer an attractive proposition as they enjoy the competitive strength that comes from having low-cost traditional deposit franchises, while also benefiting from fintech-driven growth opportunities. Even though many of the world’s unbanked individuals live in remote areas, where the nearest physical bank branch may be prohibitively far away from homes and places of work, rising mobile phone ownership and internet penetration is changing the way the world gains access to financial products. 1A ‘frontier market’ is a stock market that is typically smaller and less-developed compared to an emerging market. 2‘Financial inclusion’ is the process of individuals gaining access to basic financial products and services to meet their needs. DIY Investor Magazine · Nov 2021 30