By Hamlin Lovell, NordicInvestor

Financial Inclusion is one of the United Nations Sustainable Development Goals (SDGs), for the obvious reason that many people in developing, emerging and frontier economies, do not have a bank account – and account ownership for women is 9% below that for men in developing economies, according to the World Bank.

Access to bank accounts varies widely between countries: in China, Thailand and UAE, more than 80% of the population have one; whereas in Pakistan, Myanmar, Vietnam and Egypt, only 20-30% of the population may have a bank account. In all cases however, some of the accounts may offer limited functionality, and are sometimes inactive for extended periods.

Two billion individuals and 200 million small businesses in emerging economies today lack access to formal savings and credit”, according to McKinsey’s March 2018 report, “Mobile Money in Emerging Markets: The Business Case for Financial Inclusion”. McKinsey forecasts that digital finance providers could find as many as 1.6 billion new retail customers, and expand their balance sheets by as much as $4.2 trillion.

Mobile money

The good news is that just as certain countries have bypassed the need for fixed line telephones and moved straight to mobile networks, so, too, some them may be able to leapfrog over traditional bank accounts – and proceed straight to mobile payments via their phones. Nearly 20 years ago in 2000, the first mobile cash payments were done in the Philippines. Emerging markets are becoming leaders in digital payments, (which are also relevant to the Swedish aspiration for a cashless society).

Mobile money is one facilitator of financial inclusion. China is thought to have 500 million users, India 100 million and Kenya 30 million. There is plenty of room for increased penetration in countries such as Bangladesh, Pakistan, Tanzania, Ghana, Uganda, the Philippines and Indonesia.

Nordic Investor’s frontier market focus articles on specific countries, such as Bangladesh and Pakistan, have sometimes touched on mobile money providers, and now we are highlighting a wider spread of them.

Digital finance business models do not (yet) completely do away with banks; they nearly always involved a bank of some kind to hold deposits. The other functions – issuing E-money, providing payment services, managing a network of agents, and providing channels – can be carried out by banks as well, but could also be done by third parties, mobile network operators (MNOs), or internet players, depending on the business model. MNOs appear to be the most widespread business model, but French bank Societe Generale is taking a different approach, in a note called “Emerging Markets: Mobile Money and Financial Inclusion”, it says: “our goal is not to repeat the MNO model, but to provide easy access to financial services through a distribution network based on a variety of partners, or agents, including petrol stations, food retailers and convenience stores”.

There can also be partnerships between banks and MNOs. For instance, it was Kenya’s Safaricom that launched m-Pesa, and more Kenyan adults now have access to it than have bank accounts. The same hold true in several other countries in sub-Saharan Africa.

Examples of stocks

Coronation Asset Managers, headquartered in South Africa, participated in the listing of Safaricom back in 2008. Since then, the stock has roughly quadrupled in value, and paid regular dividends, as shown below:

Jupiter’s emerging market strategy, managed by Ross Teverson and Charles Sunnucks, has produced an October 2018 insight called “Financial Inclusion in Emerging Markets”. It identifies Kenya Commercial Bank as leveraging the m-Pesa platform to offer loans and savings accounts, and also believe it is attractively valued.

The RWC Partners emerging and frontier strategy, co-managed by John Malloy and James Johnstone, identified six investment ideas in their 3Q 2018 report, including Sberbank of Russia, which has a Sberbank Online (SBOL) division that has over 33 million users; OTP of Hungary, which is also active in other Eastern European markets such as Bulgaria, Romania and Serbia; Ping An Insurance of China, which is growing its fintech offering; Brac Bank of Bangladesh, which has a stake in the country’s mobile money leader, bKash, which has 70% market share.

In a 2016 paper ‘The love of mobile money in frontier markets’, Alliance Bernstein also mentions Senegal-based Sonatel, and Zimbabwe-based Econet Wireless, and reckons that the success stories have mainly had first mover advantages.

Of course, we always read about the successes but Alliance Bernstein also warns that, “most mobile money initiatives have been failures…due to local social, regulatory and cultural conditions”.

Private equity

Plenty of firms active in mobile money are privately owned. The largest mobile money firm is probably ANT Financial, which owns Alibaba’s Alipay, and recently raised capital at a valuation of USD 150 billion in June 2018.

For those investors with an appetite for taking a gamble on a new venture, one example of a private investment in mobile money is Omidyar Network’s investment, together with Accion Venture Lab and Planet N, in Pakistan’s first digital-only, mobile-first neobank, Tez. This is very early stage as Tez needs to obtain a license to operate as a Non-Bank Microfinance Company (NBMFC) in Pakistan, roll out its mobile platform, and start lending.

XSML Capital’s African Rivers Fund has invested in Uganda’s Telcare, which operates mobile money kiosks in Ugranda, providing mobile money transfer services on two mobile platforms: MTN Uganda, and Airtel. The fund in Uganda, Democratic Republic of Congo, Republic of Congo, and expects to be active in Burundi too.

Developed market plays

Of course, mobile payments are also a big trend in developed markets. with Apple Pay and Google Pay particularly active in the US, while Alipay and Samsung Pay are more active in developed Asian countries. Mastercard and Visa also have mobile payment solutions. These firms do offer some exposure to emerging and frontier markets but are not “pure plays” like other firms mentioned.

The next frontier of mobile-money

There are hopes that blockchain and cryptocurrencies could be used more widely for payments. Currently two obstacles include the extreme volatility of bitcoin, and the network’s limited bandwidth capacity for processing transactions, but it is possible that new technologies could make it more scalable.

Separately, firms such as Ping An Insurance are looking at facial and voice recognition technologies.

For now, MNO-based mobile money seems to be the dominant business model, which has disrupted banks in some countries, but in future MNOs themselves might be disrupted by other technologies.