Bank to the Future

March 17, 2022

Close up of a male's hand paying bill with credit card contactless payment on smartphone in a cafe, scanning on a card machine.

When you think about banking in emerging markets, it may conjure images of long lines outside banks under the tropical sun. Surprisingly, it has been a rather short road from the long lines of yesterday to the super apps of today. For example, it’s not uncommon now to see street side hawkers in China and India accepting payments via apps as deftly as they handle their cast iron woks. Unburdened by the shackles of high cost legacy financial infrastructure, emerging markets have been faster, leaner, and more efficient in building the new age pipes that move money from point A to B.

There are three key reasons for this lightning pace of technology adoption.

  • Firstly, in the absence of a traditional brick and mortar banking network, the pace of adoption has been exponential. EM consumers have leapfrogged credit cards and traditional bank-to-bank payments to mobile-based transactions.
  • Secondly, emerging markets themselves have been open to collaborating with each other when it comes to sharing infrastructure and regulatory best practices via fintech bridges that connect fintech hubs like Dubai, Nairobi, and Singapore.
  • Finally, emerging markets offer the size and scale of the population required to encourage fintech startups to innovate and roll out new products.

The result of this fintech innovation and rapid penetration of mobile internet has been the rise of digital payment platforms, such as Paytm in India, GoPay in Indonesia, and M-Pesa in Kenya. Similarly, we have seen the rise of digital banks, like WeBank in China, Next Bank in Taiwan, and Kakao Bank in South Korea. Another differentiating factor in emerging markets has been the proactive intervention of governments in building the infrastructure that makes payments low cost and frictionless. In Brazil for example, there is PIX, an instant payment and open banking infrastructure. In India, we have the Unified Payments Interface (UPI), which is a real time, identity-based payment infrastructure.

A great result of this blistering adoption of fintech is the tradition of gifting red packets or envelopes called “Hongbaos” during the Chinese New Year as a blessing of good luck.According to WeChat, in 2019, a staggering 820 million digital Hongbaos were exchanged during the New Year. At Global Alpha, we are both excited by and aware of the disruption that is being caused by fintech to traditional financial incumbents in banking, payment processing, insurance, and investments.

In identifying investment opportunities, it is particularly relevant for us to understand how traditional banking incumbents are adapting to competition in digital banking.3 Let us take emerging markets in the Asia Pacific as an example where the share of consumers using digital banking has risen from 54% in 2017 to 88% in 2021 according to a McKinsey report. That’s a growth of 1.4x over 5 years.

Similarly, while over 70% of consumers in these countries are interested in using digital channels to access banking services, only 20-30% of them have actually made a purchase via these channels. This is a huge untapped opportunity for traditional banks to reach consumers in the comfort of their homes while offering them their full suite of products and services.

In this rapidly shifting landscape, we evaluate how traditional banks are shifting to an omnichannel approach by leveraging digital channels for everything from transactions, customer acquisition and retention, and cross-selling to improve the productivity of existing branch infrastructure. On the other end of the spectrum, we also look at new digital-only banks and how they are leveraging technology to offer a different value proposition to consumers.

We ask the following questions while evaluating opportunities in this space:

  • Do they have a unique proposition to make banking services more accessible and affordable? It’s not just about a sleeker interface and new branding. The rubber meets the road in seamless onboarding, friction-free purchasing experiences and high-quality customer service.
  • Do they offer the full suite of products and services that traditional banks offer?
  • Are they catering to underserved segments ignored by big banks? These segments offer the critical mass necessary for quick scalability.
  • Do they have experienced leadership with a plan towards a clear path to profitability? An experienced team knows how to leverage data for accurate targeting and product pricing while still deploying a robust risk management framework.

Banco Regional (RA MM)

One of our holdings that is looking to leverage opportunities in this space is Banco Regional in Mexico. Banco Regional focuses on banking for the small and medium enterprises (SME) segment. Banco Regional made a successful foray into the consumer segment by targeting the high net worth segment and more recently, it has decided to target the mid/low-end consumer with a fully digital offering called Hey Bank. With over 500 programmers on their payroll, Hey Bank has built an offering that is easy to use and full of convenient functionalities. Their mobile app allows customers to open an account in just five minutes. We like the fact that Hey Bank pursues profitable clients and is expected to break even by 2022. At Global Alpha, we continue to look for opportunities at the intersection of finance and technology that tap into the growing financialization of emerging economies.

Global Alpha Capital Management Ltd.
March 17th, 2022