In about two generations, China has transformed from a largely agrarian country to the second largest economy in the world. That means Zoomers and millennials don’t even remember the “old” China.
The speed that this transformation of the world’s most populous country happened is staggering. In the West, it has taken nearly a century to transition from an industrialized society to a post-industrialized one.
Perhaps the speed of that transition in China had to do in some part with the fact that it was able to skip over the industrialized aspect of infrastructure development other than allowing Western countries to build out its manufacturing base as the West outsourced the means of production.
But by skipping that key aspect of economic development, meant China could start with a clean slate as it reinvested its wealth into post-industrial aspirations – high speed rail, new cities, solar, electric vehicles, real estate, artificial intelligence, etc.
This is certainly an ongoing story and who “wins” isn’t the point. Here, the point is, the West doesn’t have all the answers when it comes to economic development. Technology is allowing emerging markets to create unique paths that are allowing them to grow and thrive in new and different ways.
And nowhere is this more evident than in fintech and finserv.
All the venture capital money that flowed into fintechs and challenger banks when money was cheap and easy has dried up and US banks and credit unions that have weathered the onslaught are now doing well by comparison.
There are a multitude of reasons for this that I won’t go into here. But the fact is, financial institutions have become safe, reliable harbors as digital banking services implode.
Yet, as we wade through the rubble in the US, the digital banking sector in Latin America and Africa continues to grow and expand.
And a large part of the reason is, they haven’t followed the model of the big Western nations. They’ve built digital solutions that solve their problems, the primary one being connecting unbanked and underbanked people to secure, fast, and efficient payment platforms. In the West, this issue isn’t really on VCs’ or entrepreneurs’ radar since that issue has been addressed, albeit with relatively antiquated systems.
I remember one clear example of this when I visited Quito, Ecuador before the USD became the national currency. I needed to exchange some dollars for sucres. My local friend drove me to a Citibank downtown.
But instead of going in, we went to the back parking lot that was full of guys standing in various spots, doing freelance currency exchange. My friend told me that the exchange rate was better and there were no fees with the local market makers. “Nobody who lives here actually uses the bank,” he told me. In a poor country every penny counts. And with 20-50% inflation, turning dollars to sucres was a daily errand.
The challenges in emerging markets were and are different than they are in developed economies. And that means they can’t rely on their generally ill-fitting legacy systems. They were already broken for emerging markets.
The digital revolution meant they could rebuild a new way to deliver banking and financial services to people that may not have engaged in relationships with financial institutions unless absolutely necessary.
Just remember, as you read stories of troubled US and European unicorns, what’s often left out of the discussion is how Latin American and African (as well as others) fintech and finserv markets continue to thrive.
They are embracing open banking and new ideas in payments, even digital currencies where in the West, these can be seen as disruptive and threatening to the staid status quo.
Plus, in the emerging markets the disruptors need to be focused on profits and growth, not just growth. There’s little money and patience in these volatile economies to waste time growing a business that can’t turn a profit.
And as we see by the implosions of US and European fintechs, that growth at all costs model doesn’t really work anyway.
It also means that emerging markets get a bad rap when it comes to disruption. Digital banking can be a great leveler and may well have a more consistent impact on these countries’ financial systems that were historically ill-suited to the majority of the population than in more developed nations.
The bottom line, fintech remains a dynamic, important, and vibrant sector that still remains an important factor in the development of the new digital banking model. And fintechs in developed nations may want to examine what they can learn from their neighbors’ efforts.