Free Newsletter
Get the hottest Swiss Fintech news in your inbox once a month
Between 2015 and 2023, over $350 billion in venture capital (VC) funding will be invested in the fintech sector worldwide, with the United States and Canada alone accounting for 39% of all fintech funding.
Funding per capita is also much higher in North America than in other regions, highlighting the concentration of fintech fundraising activity.
However, in recent years, fintech funding has increased significantly in the Middle East and North Africa (MENA) and Latin America and the Caribbean (LAC) regions due to the rapid growth of fintech innovation and the surge in adoption of digital financial services.
Despite this growth, there remains a mismatch between fintech funding and future growth potential in these regions, presenting a huge opportunity for investors around the world, according to a new report from the World Economic Forum (WEF).
The whitepaper, published on September 4th and produced in collaboration with McKinsey & Company, explores global fintech funding trends and takes a closer look at where fintech funding gaps exist.
This highlights the surge in fintech funding recorded over the past few years in regions including MENA and LAC. Between 2015 and 2023, LAC recorded the highest compound annual growth rate (CAGR) of funding among all major regions, reaching 37%, while MENA recorded the second-highest CAGR at 33%, with fintech VC funding in the region more than tripling from $600 million to $1.9 billion between 2020 and 2023.
Fintech VC funding and funding-to-GDP ratio by region, 2015-2023, Source: Driving Innovation: Closing the Fintech Funding Gap, World Economic Forum, September 2024
According to the paper, the increase in fintech fundraising activity in MENA and LAC is driven by a surge in the adoption of digital financial services: LAC surpassed 300 million digital payment users and over 30 million digital banking users in 2021, most of which were concentrated in Brazil and Mexico.
In MENA, this growth has been driven by a series of successful fundraising rounds by regional fintech leaders, with 2023 seeing the birth of three unicorns: Saudi Arabian BNPL (buy now, pay later) companies Tabby and Tamara, and Egyptian microfinance and payments startup MNT-Halan.
These companies have successfully attracted large customer bases: 14 million for Tabby, 10 million for Tamara, and 7 million for MNT-Halan. The MENA region is fertile ground for financial innovation with a young, educated and growing population, as well as some of the highest mobile, internet and smartphone penetration in the world.
Untapped Opportunity
Comparing fintech funding from 2020 to 2023 with projections of future revenues by region, the WEF paper noted that fintech funding was not allocated according to the future growth potential of each region.
Between 2020 and 2023, Europe and North America received more fintech funding than they expected for 2028, with Europe receiving 109% of expected future revenues and North America receiving 180%. In contrast, regions such as Asia Pacific (APAC), LAC, and MENA received much less funding at 67%, 70%, and 63% of expected future fintech revenues, respectively.
These findings suggest that global venture capital funding is not matching new growth opportunities, even as emerging regions such as Asia Pacific, Latin America and the Caribbean, and the Middle East and North Africa are predicted to account for a large share of global fintech revenues by 2028, at 30%, 9%, and 6%, respectively.
Fintech funding vs. future revenues (global indexed at 100), Source: Driving Innovation: Closing the Fintech Funding Gap, World Economic Forum, September 2024
The mismatch between fintech funding and future growth potential means that regions such as LAC and MENA are currently underfunded, despite being expected to grow significantly over the next few years. This presents a huge opportunity for investors.
Filling the funding gap
Finally, the WEF paper sets out a set of recommendations to close these financing gaps, outlining five pathways: The first pathway is to invest in digital public infrastructure by developing core building blocks around digital identity, payments, data sharing and emerging technologies.
The second path is to enhance regulatory clarity and promote regional cooperation. This includes increasing certainty and clarity in banking regulations, launching initiatives such as regulatory sandboxes, and promoting interoperability and regulatory standardization.
The third path is to nurture talent by establishing local hubs for global talent and strengthening support networks such as incubation and acceleration programs and innovation hubs.
The fourth path is to develop local fundraising capabilities by broadening the investor base from traditional venture capital funds to include corporate venture capital (CVC), minority investment from incumbent banks, sovereign wealth funds with growth equity expertise, and family offices.Governments can also play a key role in stimulating innovation by deploying policy measures to increase effective returns on investment and attract more capital from investors to fund different industries.
Finally, the fifth path is to foster sustainable fintech growth strategies by leveraging emerging technologies such as artificial intelligence (AI) to provide a clear path to profitability.
This article first appeared on fintechnews.ae
Featured image credit: edited from freepik
