Where Does Fintech Have Tailwinds?

While looking through my stock screeners, about a year ago I started noticing some high-growth, but reasonably priced companies start to pop up. Maybe they were there the whole time, but for whatever reason I started getting interested in them. These companies are all in what is generally called the fintech (Financial Technology) space.

At the time, I was oblivious to this theme. Studying one company eventually led to another and so on and so forth. And many of these companies have very similar characteristics. As time has marched on and I’ve gained more and more superficial knowledge of these companies, I’ve started to ask “What is going on here? Why are there so many companies growing so quickly in this space?”

My guess as to why this is happening starts with the name Financial Technology. It’s been staring me in the face. To me, financial technology companies are about the move from physical to digital. From cash and brick and mortar to tap to pay and online banking. While you’ll find different definitions out there, I’m keeping this broad, because that’s how I think about it.

Armed with this definition, I now think of Amazon as a fintech. Amazon is riding the wave of physical shopping to digital shopping. Now, few people might agree with me, but that’s ok, as my goal here is to understand and also predict future growth. So what are some other areas of physical moving to digital? How about cross border money transfers? When I worked at Kmart, people would come in and give us a check and we’d send money via Western Union. That’s a physical process and Western Union had a huge share of it. Now, that’s obviously something that can be done from a smartphone. How about tap to pay? While still a physical act, you are moving from paying with physical cash to digital. From paying with a physical credit card to paying with a digital credit card.

If you have this mental model of the disruption happening, then where would you expect to see the most growth in fintech companies? That’s right, the places in the world using the most cash with the lowest smartphone adoption rates. While the tailwinds exist around the world, as more of our lives move digital all the time, places with higher cash use have more potential for fintech growth.

All of this supports what I am seeing. Emerging markets have some amazing companies growing at astonishing rates. That’s where strong tailwinds appear to be. Of course, I might have just constructed this narrative because humans don’t like to believe in randomness, that’s totally possible. But per usual, I quite like my narrative here.

Let’s dive into some statistics, rounded up by Perplexity, so don’t treat these as accurate. They are just an interesting place to start, and you can confirm them if anything piques your interest.

Let’s start with smartphone adoption per country. I imagine this is useful for figuring out where easy growth is going to come from. If you don’t have a cell phone, you probably aren’t an Amazon, Meli or Alibaba customer, you aren’t a customer of a digital bank.

I will note that there appear to be some headwinds in this area at the moment due to the AI memory shortage. However, I wouldn’t count on it too much, surely we can build memory for lower end phones with older DUV equipment?

E-commerce penetration rate should do a decent job of telling us how far along a society is in adopting financial technology. At least in the US, e-commerce emerged long before digital banks, tap-to-pay, and restaurant specific POS devices.

This final table is composed of estimates made from estimates. Lots to go wrong here, but hopefully the model is useful. The market readiness score is made up of 50% GDP, 30% smartphone adoption and 20% GDP per capita. The opportunity index is 55% cash usage and 45% e-commerce. The final score is the average of readiness and opportunity.

What do I hope to have achieved with all this data organizing? I hope to have a list of interesting countries with fintech growth opportunities. In Peter Lynch parlance, I hope to have found great places to turn over rocks.

It’s actually surprising to me that the United States is so far up on this list, with 93% using smartphones already. When your GDP is that large, the opportunity is still large. As e-commerce penetration rises from 17%, the opportunity score will shrink further. Also, this model is simplistic, ignoring that fintech as I’ve defined it is more than just e-commerce. The US has golden opportunities in moving the physical online in ways we haven’t even thought of yet, but those opportunities are probably not as easy to exploit as…. Germany?

How did Germany earn the top spot to look for fintech expansion? High cash usage and high GDP. Stripe confirms that this 51% cash usage number is correct. It’s hard for me to understand why cash usage would stay high. I’m annoyed when I have to take my wallet anywhere and prefer tap to pay.

Japan is also an interesting one that I didn’t see coming. I tend to think of Japan as an early adopter society, but again, a high GDP country with high cash usage. I wonder if the population age is a factor here?

Lots of interesting choices on the list, and the final scores are close together at the top. In a method as crude as this, a 55 and 43 might as well be the same number. Yet, I was interested to see what would jump out here. I expected to see more emerging markets, like Mexico, but there appears to be a lot of opportunity left in developed countries like Germany, Japan and Italy, which makes them good markets to study.