Old Lenders, New Models

Emerging market financials face crosscurrents head-on.

Franklin Templeton Emerging Markets Equity

Lending in Transformative Times

Opportunity and competitive pressure mark the emerging market (EM) financial landscape today. Optimists point to strong economies and growing consumption as reliable drivers for loans and other financial services. But skeptics warn of disruption, and traditional lenders losing ground to virtual banks and other digital upstarts.

We assess the complex story of the EM financial industry in this report and look at the consumption and technology crosscurrents facing traditional lenders.

Each incumbent faces different opportunities and challenges, and may respond differently to market changes, regulators and other factors. We are positive on proactive lenders that are building solid franchises upon EMs’ consumption power and remaking themselves for a digital future.

Key Takeaways

  • The EM financial industry inspires opportunity. Healthy lenders, a growing middle class, and scores of underserved consumers bode well for its longer-term growth.
  • But ambitious digital challengers are vying for market share. Some have leapfrogged old business models. For now, the full scale of competition remains to be seen.
  • We believe many traditional lenders still have influence, but how long can it be sustained? Some incumbents are fighting disruption fears by reinventing themselves and embracing technology to fend off attackers and blaze new growth.
  • Investing in EM financial firms requires careful stock selection and valuation. We seek companies that demonstrate sustainable earnings power and trade at a discount relative to our perception of their intrinsic worth.

Growing Consumption Fueling Demand

Emerging markets are a bright spot for financial companies, especially post the global financial crisis. These economies are growing faster than developed markets (DMs), and an aspirational middle class is driving demand for a host of goods and services. Meanwhile, consumer access to credit remains nascent in many markets.

The EM financial industry still has much room for growth. Vast populations in the emerging world continue to have little or no access to financial services. Across high-income economies, 94% of adults have an account with a financial institution.1 However, in EMs, the overall picture is erratic: 35% of adults in Mexico have an account, compared with 95% in South Korea. Poverty, poor infrastructure and other factors have kept many EMs behind high-income economies. Exhibit 1 shows the global dispersion.

Non-financial Account Holders Offer Great OpportunityExhibit 1: Adults with a financial institution account

Sources: Demirgüç-Kunt, Asli, Leora Klapper, Dorothe Singer, Saniya Ansar, and Jake Hess. 2018. The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution. Washington, DC: World Bank. doi:10.1596/978-1-4648-1259-0. License: Creative Commons Attribution CC BY 3.0 IGO; World Bank. The Little Data Book on Financial Inclusion 2018. High-income economies are those with a gross national income per capita of US$12,236 or more.

In our view, EM financial firms have great potential. Many delivered returns on equity (ROEs) above their DM peers. The ROE for Brazilian commercial banks was 17% as per the World Bank’s 2017 data.2 By contrast, ROEs in the United States and the United Kingdom were 9% and 6% respectively.

Assessing the Fintech Challenge

From the look of things, EM financial firms should be coasting. But disruption concerns are rippling throughout the industry. The flip side of a massive growth runway is the attention it lures from eager digital upstarts. Armed with the latest financial technology (fintech), these firms herald innovation in the financial space, banking for the masses and potential rivalry for incumbents.

Several challengers have leapfrogged old business models to entice underserved consumers. In China, “super apps” from internet giants Tencent and Alibaba Group create an ecosystem of services, ranging from e-commerce to mobile payment, and with easy ways for users to also invest. Within Tencent’s WeChat app is LiCaiTong, a wealth management platform that amassed over 800 billion yuan (US$114 billion) in assets in 2019.5 Exhibit 2 captures a snapshot of Tencent’s multifunction WeChat app.

Super Apps Create an Ecosystem of Services Including Ways to Invest Exhibit 2: Tencent’s WeChat app

Source: Franklin Templeton. Logos are trademarks of their owners and are used for illustrative purposes. They should not be construed as an endorsement or sponsorship by Franklin Templeton.

For now, a wave of financing is freeing fintech firms to capture market share without prioritizing profits. Global funding for venture capital-backed fintech companies was US$34.5 billion in 2019, according to market intelligence firm CB Insights.6 Improving internet coverage and growing consumer demand for convenience and customization also lead fintech’s EM march.

Crucially, regulators are welcoming new players to raise financial inclusion, innovation, and competition in some markets. For example, Brazil kickstarted efforts to introduce open banking in 2019. This would require financial institutions to share data, products and services with other entities.

For all the hype around digital contenders, how much they can gain on established lenders’ space is still uncertain. Much will depend on rapidly evolving dynamics in each market. We have seen most entrants challenge positions in non-core banking areas, such as money transfers, where barriers to entry are lower than those around lending and deposit-taking activities. This means the pressure, so far, has largely been on established lenders’ fee revenue. Thailand’s major banks, for example, scrapped digital transaction

Staying Competitive

We believe some traditional EM financial firms still have compelling return opportunities. First, digital competition in core lending and deposit businesses has been mostly limited. These areas remain highly regulated and capital-intensive, which defies the asset-light nature of most fintech companies. For fintech firms that value their agility, collaboration would be the natural mode of co-existence.

Second is reputation. Established lenders often count longstanding brands and customer relationships as some of their defining strengths. Reflecting the deep consumer confidence many institutions still command, deposits have continued to grow, and we view that as a tailwind.

Compounding incumbents’ influence are profits. Lucrative years have enabled many to invest intently in technology without sacrificing sustainable growth. They appear better prepared for any digital revolution, compared with Western banks that remain strained since the global financial crisis. Extending this edge, the costs of building and maintaining technology software tend to be lower in EMs than DMs. Many EM lenders have also constructed nimble digital platforms from the ground up, while their DM peers struggle with migrating from legacy systems. Local access to strong expertise in artificial intelligence has helped lenders develop their own capabilities in digitally booming countries such as China.

The vital question is how long these historic advantages can last in an era of change. In our view, some of the most forward-thinking lenders have started to prepare for disruption by reinventing themselves first. Their specific responses differ with considerations ranging from how dominant they are to how experimental their regulators could be. The moves we have seen typically fall into one or a few of these categories: digitalize processes, partner with fintech firms, spin off a virtual unit, or build an ecosystem similar to “super apps.”

Careful Stock Selection

We are optimistic about many traditional lenders that are building solid franchises upon EMs’ consumption power, even as they boldly remake themselves for a digital future. Some of the most astute companies have embraced technology not just to fend off possible disruptors, but also to capture efficiencies, entrench customer loyalty, and gain more business. Many lenders possess troves of customer data and are tapping analytics to turn them into a valuable competitive advantage.

Such efforts have delivered measurable results. In some markets, we witnessed a new generation of technology-savvy and proinnovation lenders outshine an older generation of banks (often with state-owned roots). To us, this further highlights the importance of transformation.

Investing in the EM financial industry calls for an unbiased evaluation of companies’ long-term strategies and potential downsides, valuing their prospects amid radical technology shifts. This work requires critical on-the-ground research, with company relationship-driven engagements. Global industry perspectives enrich local findings further. Broadly speaking, we favor companies that demonstrate sustainable earnings power and trade at a discount relative to our perception of their intrinsic worth.


  1. Sources: Demirgüç-Kunt, Asli, Leora Klapper, Dorothe Singer, Saniya Ansar and Jake Hess. 2018. The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution. Washington, DC: World Bank. doi:10.1596/978-1-4648-1259-0. License: Creative Commons Attribution CC BY 3.0 IGO; World Bank. The Little Data Book on Financial Inclusion 2018. High-income economies are those with a gross national income per capita of US$12,236 or more.

  2. Source: Global Financial Development Database (GFDD), the World Bank. Raw data are from Bankscope. Latest version of the dataset is as of October 2019, updated with data through 2017. Bank ROE is based on commercial banks’ after-tax net income to yearly averaged equity.

  3. Source: Unique Identification Authority of India, Government of India. As of December 31, 2019.

  4. Source: Department of Financial Services, Ministry of Finance, Government of India. As of February 5, 2020. The Guinness World Record was for the most bank accounts opened in a week as part of a financial inclusion campaign.

  5. Source: Tencent 2019 Interim Report. As of June 30, 2019.

  6. Source: CB Insights, The State Of Fintech: Investment & Sector Trends To Watch, Q4 2019. The report focuses on equity financing to venture capital-backed fintech companies.

  7. Source: Setboonsarng, C., “Thailand's top banks to waive off digital transaction fees,” Reuters, March 29, 2018.

Franklin Templeton Emerging Markets Equity

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Chetan Sehgal, CFA Director of Portfolio Management,
Franklin Templeton Emerging Markets Equity

Sukumar Rajah Director of Portfolio Management,
Franklin Templeton Emerging Markets Equity


All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.