The Frontier Markets’ Fintech Revolution

Amazon kicked off its first-ever “FinTech Africa” accelerator program earlier this month, selecting 25 companies for funding. The focus of the program is indicative of a broader trend: 90% of all new internet users now come from the emerging and frontier markets, and the AWS summit itself was a clear sign of changing global fintech and e-commerce dynamics.  

To date, the U.S. and China have been home to many of the fast-growing internet companies over the past 15 years—think Meta or Alibaba—but those markets are seeing saturation, as the locus of real growth is moving to other parts of the world.  

While e-commerce penetration in the U.S. in terms of total retail sales stood at 16% by the end of 2022—well behind China’s impressive 46%—e-commerce penetration in Latin America is estimated to be 11.7% and India’s around 8.5%.  

Fintech Theme 

Whereas most Americans have relationships with multiple banks, financial inclusion in developing countries remains a problem.  

According to Bain & Company, around 70% of the adult population of Southeast Asia is either “unbanked” or “underbanked.” A separate report found a similar percentage in Latin America: Approximately 70% of adults remain unbanked, with no checking account, or underbanked, with no access to credit.  

They are turning to the ease of fintech. Last year, six of the world’s most downloaded mobile banking apps originated in Brazil, accounting for more than 130 million downloads in just 12 months. 

ETF Options 

U.S. investors seeking exposure to emerging and frontier market internet companies may want to consider the following ETFs: the Global X Emerging Markets Internet and & E-commerce ETF (EWEB), the Emerging Markets Internet & Ecommerce ETF (EMQQ) and the Next Frontier Internet & Ecommerce ETF (FMQQ).  

Whereas EWEB and EMQQ offer substantial exposure to China’s heavy weights, FMQQ avoids the mainland, seeking opportunities in Latin America, South Korea and Southeast Asia. A breakdown of the holdings makes this explicit. 

Of EWEB’s top 10 holdings, half are Chinese tech titans that are well-known to American investors: Tencent, Alibaba, Pinduoduo, Baidu, Meituan and NetEase. EMQQ has a similar lineup. 

By comparison, most names in FMQQ may be new to US investors: Naver, a Korean search engine; Nu Holdings, a Brazil-based digital banking platform; Coupang, a South Korean e-commerce company; Reliance, an Indian conglomerate with streaming interests; Kaspi.kz, a Kazakh payments and e-marketplace player; Kakao, a South Korean messaging and ride-hailing company with a big footprint in Indonesia; or Nexon, a gaming company that operates in 190 countries.  

FMQQ’s top holdings are Sea Ltd. and Mercado Libre, two firms that are likely to rise to Alibaba or Amazon stature in the coming years. Singapore-based Sea has three business segments: Garena, gaming and entertainment; Shopee, an e-commerce platform; and SeaMoney, a fintech provider. These two last segments have grown dramatically over the past three years, as low e-commerce penetration, take-rate expansion, and a large unbanked population in Southeast Asia offer big potential for digital financial services.    

Sea Ltd. has had some financial hiccups recently, but long term, Southeast Asia is a very promising market. It is home to 666 million people, 24% of which is Gen Z. Harvard’s Atlas of Economic Complexity has many ASEAN countries rising sharply in its service sector job mix by 2030. And according to a recent McKinsey report, between 2022 and 2026, the Southeast Asian e-commerce market is projected to triple. Indonesia is already the ninth largest e-commerce sector in the world.  

FMQQ’s second largest holding is Mercado Libre (MELI), the so-called Amazon of Latin America. Last quarter, the company posted stellar double beats, with revenues up 35.1% year over year and earnings up 205.3%. Its fintech business nearly doubled its total payment volume, with e-commerce up 43% in total volume.  

The profound opportunity for digital payment and e-commerce platforms in the emerging world is that they are likely to become the de facto financial institutions for most of the world’s population by 2035.  

Whereas it took decades for fintech to approach its market position in the highly regulated, bank-saturated West, it is rolling up vast tracts of young Gen Z consumers in the emerging economies with relative ease.  

The mobile centricity that recircuited work and consumption patterns from Beijing to Boston is still on the move. This time, however, the vector of change travels from Bali to Burkina Faso.