We're still in the first innings for emerging markets Fintech
This week Stew Glynn dives into Coatue's latest Fintech report and what it means for emerging markets investing. Presenting his 10 favourite slides from the 50 page report, we visit all corners of the financial system on the 'Pursuit of the Prize'.
Plus, Peru's incredibly rare and linear path to economic development and the ease of starting a business across the world.
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We're still in the first innings for Fintech
Stew here. The size of the prize in financial services is bigger than most understand. Recently, cross-over VC fund, Coatue, released their ‘Fintech and the Pursuit of the Prize’ report. This is one of my favourite reads on investing in Fintech this year. I’ve summarised my favoured takes from the report in the below teardown, read on for more on global Fintech.
Let’s dive in.
We’re referencing slides from within Coatue’s recent ‘Fintech and the Pursuit of the Prize’ report, plus adding a bit of spice on top to share our take. The report is over 50 slides on the state of the public Fintech market, how Fintech is faring vs. the legacy financial institutions, the focus on efficiency, the amazing emerging market opportunity, and crypto. Yet if you want a quick take, see our 10 favourite slides below.
Still in the first innings, but becoming a real financial institution takes time to build
It may feel like neobanks, payment providers, trading apps, crypto, and names such as Shopify, Stripe, and others are often dominant across the media. And yet, when reviewing the public market cap penetration of Fintechs as a percentage of Legacy Financial Services, the outcome is a meager 2% of today’s $11.3T market (Oct’22).
This highlights just how early we are on the disruption curve and confirms our collective belief that Fintechs are in their first innings.
The chart below clearly shows that Financial Services remains the largest pool of gross profit by sector at $6.5 trillion annually. This sector is the largest dance-floor on the planet for builders to pursue.
That being said, being a financial institution comes with a requirement for user trust and honouring the arrangement between institution and customer - managing people’s money brings with it real gravitas.
This is one reason why Fintechs still take time to build to reach scale, as each needs to navigate consumer trust, regulation, balance sheet depth, whilst trying to gather traction and adoption. The average listed modern Fintech is 12 years old, vs. the legacy financial services providers’ averaging 96 years.
Emerging market Fintech opening up an unprecedented greenfield opportunity
Moving closer to our areas of focus at TEN13 is Fintech in emerging markets. We believe that technology adoption can happen quickly when there are fewer incumbents and engrained systems slowing down the ramp.
Here’s an example: Look at the pace of adoption of emerging Merchant Acquirers in LatAm, and how quickly Fintechs are sewing up market share. Over the course of 6 years, players such as PagSeguro and Stone have picked up $100bn (25%) in market share of the merchant acquirer market.
All of the concepts that we have shared on Outliers in the past, such as percentage Unbanked, or bank branches per 100k population - clearly show that countries such as Nigeria, Brazil, Mexico, are ripe for financial disruption.
Further adjusted by smartphone adoption, internet penetration, venture capital funding, and infrastructure, all being part of the recipe book for Fintech uptake and growth velocity. Our take is also that emerging markets such as LatAm will have less infrastructure and legacy competition to unseat, which then combines with a growing, young population that is tech-savvy, connected, and willing to adopt new tooling - you get a recipe for rapid uptake.
One of the bigger challenges that we’ve seen in 2022 is that venture capital has exited hard and fast out of regions like Africa & LatAm, international VCs are (generally) opting to take less market risk on the unknown which leads to lower disruption in these markets. This is a key input that allows for new market entrants to emerge.
Crypto will continue to hold a place in the stack and become interchangeable with fiat:
It’s clear we’re in the ‘Crypto Winter’ part of the cycle, we’re not going to opine on the outlook other than to say that it looks like crypto and some of its use cases are real and here to remain.
There remains demand from users for product offerings and the world’s largest platforms such as CashApp & Square, NUBank, Revolut, Chipper Cash, and others have embedded the ability to purchase and transfer crypto with rapid uptake.
Here’s an example: Look at the adoption of Cloudwalk, whose vision is to become the best payment network on the planet (but starting with Brazil). Shows the ramp of user adoption when combining disruptive technology, ways around the incumbent rails, and a user base that wants a better solution - zero to 1.7 million wallets in 6 months.
However, there are storm clouds on the horizon, and some business models are yet to prove themselves:
Not all business models and target customers are created equal, and this year has unseated some of the Fintech market darlings such as Shopify, Toast, Sofi, NUBank, and more based on this.
As can be seen below, the public markets have not been kind to Fintechs that service SMB Payments, InsurTech and Consumer Finance - these categories are deemed “Unproven Business Models” by Coatue and generally underperformed the general market (however, also grew very fast historically too).
Overall, the 50 pages of stats and graphs can be distilled into 3 main takeaways for me:
I am cheating a little here as this week’s Tweet is a link to a broader article but I had to include it. Progress is rarely linear…except in Peru, it seems. Firstly, have a look at the 38 graphs linked here composed by the Cato Institute.
Essentially every measure of development has changed rapidly for the better in Peru. GDP per capita for instance has rocketed up ~350% to $6,600 over the last 20 years. Other measures from internet connectivity to sewage connections in homes have also improved. While Peru still has its flaws, the country has seemed to make the most of their commodities booms over the decades.
Peru’s startup ecosystem is still extremely early, it has had some success. Crehana is the country’s biggest startup; an Edtech specialising in corporate re-skilling. So far Crehana has raised US$95m up until its Series B in 2021.
Again, full article here.
The World Bank compiles data on essentially any macro-factor for any country in the world; you can play around for yourself here. I did some digging and put together the table above which looks at the number of days needed to start a business in each country, and how that has changed recently. There are no surprises at the top of the list; Singapore, NZ and Australia are regularly lauded for their ease of doing business.
On the flip side, I highlighted a few countries that made incredible gains from 2014 to 2019. What was a month-plus-long process in Nigeria, Indonesia and Brazil is now 75+% quicker in each country. Further research out of the University of Ottawa using similar data found every 1% increase in the ease of starting a business leads to a 0.04% boost in GDP which can add up significantly over time.
Your authors this week
Alex Barrat - New to the VC world, joining the TEN13 deal team, Alex spent his early career at VC-funded scale up Stake. Fascinated by development economics. All pitches welcome. Submit your deck here.