As far as Western consumers are concerned, digital banking is – at this stage – fairly ubiquitous.
Richard Shearer, CEO of Tintra, discusses digital banking’s increased prevalence in the emerging world.
In the West, Digital banking is now entirely uncontroversial to make payments, transfer money, and communicate with banks entirely through mobile apps and websites. The rise of online-only challenger banks is a testament to the staying power of this trend, as newcomers to the banking scene recognise that physical branches are becoming increasingly unnecessary – an eccentric reminder of an analogue world. And, of course, it goes without saying that the conveniences of digital banking have been thrown into an ever-more flattering light during the course of a pandemic which has demanded a minimum of physical interaction in settings like banks, alongside a reluctance to handle cash.
Though these developments in Western countries are, as I have mentioned, well-established, it may be surprising to learn that emerging economies have also witnessed an enthusiastic embrace of digital banking. This is a broad statement, of course, and one that does need qualifying. Pre-pandemic research from McKinsey suggested that for some emerging Asian countries, digital banking penetration had grown by 300 per cent, but the median was a far more modest 52 per cent.
Even with such caveats in mind, there are clearly developing countries whose digital banking adoption has caught up with that of developed markets – in fact, a 2021 survey from McKinsey found that emerging Asia-Pacific markets saw fintech app and e-wallet penetration reach 54 per cent in 2021, whereas developed Asia-Pacific regions only saw penetration of 43 per cent.
Statistics aside, this relationship between emerging markets and digital banking may – at first glance – appear counter-intuitive. After all, the public imagination tends not to associate such locations with technological advances – and this is reflected in one United Nations report, which notes that tech advances and their associated benefits “remain geographically concentrated, primarily in developed countries.”
On closer inspection, however, there are some clear reasons for digital banking’s increased prevalence in the emerging world.
Modern practices for young populations
On a practical level, emerging markets simply contain young populations. In fact, according to PwC, almost 90 per cent of people under 30 reside in emerging markets. This means, in PwC’s words, that “population trends favour the growth of online transactions.”
Clearly, then, the demographic dominance of digital natives has a part to play in the adoption of digital banking across emerging markets – but this is only one in a string of motivating factors. After all, it’s worth noting that a large proportion of emerging markets are getting wealthier: we’re seeing the emergence of a far bigger middle class in places like India, for example. In fact, according to 2019 estimates from World Data Lab, around 600 million Indians were on the cusp of joining the middle classes at that time.
Similar projections have been made by McKinsey in the context of China, with the firm noting that the Chinese middle class will soon reach something in the region of 550 million. All of this additional wealth comes hand-in-hand with greater demand for convenient banking services, whether that be in the form of savings accounts or the desire to link mobile apps to bank accounts – thus setting the stage for digital banking.
However, these are not the only factors that encourage a shift towards digital banking in emerging economies. It would be facile to suggest that this movement is entirely natural or inevitable when, in fact, many emerging market governments actively encourage any moves which boost financial inclusion – ensuring that individuals and businesses can access financial products and services like bank accounts.
As PwC have recently noted, in fact, “governments’ desire to boost financial inclusion and reduce the use of cash is fuelling rapid growth in electronic payment” – meaning that newer technologies and innovations “make it more economically viable for banks to reach the ‘unbanked’ or ‘underbanked’ populations.”
This discussion of the active pursuit of financial inclusion brings us on to another set of reasons for the rise of digital banking: its many economic benefits. It is, perhaps, unsurprising to learn that various emerging market governments have a strong economic motive to encourage financial inclusion through digital banking.
Turning briefly to a final set of statistics, it is worth noting that, according to research from HSBC, digital finance is capable of increasing the GDP of all emerging economies by 6 per cent by 2025. In practical terms, this kind of growth could take the form of 95 million new jobs, while markets could see a flow of as much as $2 trillion in new credit. No wonder, then, that digital banking is so highly prized by emerging economies. But, again, there is more to this phenomenon than the slightly dry terrain of GDP growth.
Digital banking doesn’t just create new credit: it spurs on new levels of innovation.
As emerging markets feel the effects of financial inclusion, we’re seeing what some have described as a ‘leapfrog’ process. Some consumers rocket from no bank account whatsoever to the cutting edge of banking services – and, perhaps crucially, this forward momentum has led to further innovations in online banking and similar payments processes.
PwC’s recent report on payments transformations points, for example, to payments made through social media, advances in NFC technology, use of blockchain, and mobile money. As such, emerging markets’ embrace of digital banking isn’t just a fast track towards parity with the banking systems of the developed world – it can be a catalyst for the adoption of revolutionary banking and payments technology.
Rethinking our terminology
Reflecting on developments like this is a great way to remind ourselves that, in fact, the term ‘emerging’ isn’t necessarily the most applicable or appropriate way of describing these markets. After all, these new waves of financial inclusion and technological advance clearly show that many of the countries branded as ‘emerging’ have, in fact, emerged, and now find themselves in a position to capitalise on – and potentially pioneer – the future of digital banking services.