Between 2015 and 2023, more than US$350 billion of venture capital (VC) funding was invested in the fintech sector globally, with the US and Canada alone accounting for 39% of total fintech funding.

North America also has much higher funding per capita than other regions, highlighting the concentration of fintech funding activity.

But in recent years, fintech funding in the Middle East and North Africa (MENA) and Latin America and the Caribbean (LAC) has experienced significant growth on the back of booming fintech innovation and soaring adoption of digital financial services.

Despite this growth, there is still a mismatch between fintech funding and future growth potential in these regions, representing a significant opportunity for investors worldwide, a new paper by the World Economic Forum (WEF) says.

The whitepaper, released on September 04 and produced in collaboration with McKinsey and Company, examines global fintech funding trends and delves into where fintech funding gaps exist.

It highlights the surge in fintech funding that regions including MENA and LAC have recorded over the past few years. Between 2015 and 2023, LAC saw the highest funding compound annual growth rate (CAGR) across all major regions, reaching 37%. MENA, meanwhile, recorded the second highest CAGR with 33%, while the volume of fintech VC funding in the region more than tripled from US$600 million to US$1.9 billion between 2020 and 2023.

According to the paper, rising fintech funding activity in MENA and LAC has been driven by booming adoption of digital financial services. In LAC, there were more than 300 million users of digital payments and more than 30 million users of digital banks in 2021, mostly concentrated in Brazil and Mexico.

In MENA, this growth was driven by a series of successful fundraisings by regional fintech leaders, including the birth of three unicorns in 2023: buy now, pay later (BNPL) companies Tabby and Tamara, both from Saudi Arabia, and microfinance and payment startup MNT-Halan from Egypt.

These companies have managed to garner significant customer bases of 14 million users for Tabby, 10 million for Tamara, and seven million for MNT-Halan. The MENA region has a young, educated and growing population and some of the world’s highest mobile, internet and smartphone penetration rates, making the region for a fertile ground for financial innovation.

An untapped opportunity

When looking at fintech funding between 2020 and 2023 and comparing it to estimated future revenue by region, the WEF paper notes that fintech funding was not distributed according to future growth potential in different region.

Between 2020 and 2023, Europe and North America received more fintech funding than their projected 2028 revenue, with Europe getting 109% and North America 180% of expected future earnings. In contrast, regions like Asia-Pacific (APAC), LAC and MENA received much less, only 67%, 70%, and 63% of their anticipated future fintech revenue, respectively.

These findings suggest that global VC funding does not align with the emerging growth opportunities. This is despite forecasts that emerging regions such as APAC, LAC and MENA are projected to account for a significant share of the global fintech revenue by 2028 at 30%, 9% and 6%, respectively.

This mismatch between fintech funding and future growth potential means that regions like LAC and MENA are currently underfunded, even though they are expected to see substantial growth in the coming years. This presents a significant opportunity for for investors.

Closing the funding gaps

Finally, the WEF paper formulates a series of recommendations to close these funding gaps, outlining five pathways. The first pathway involves investing in digital public infrastructure by developing core building blocks centered on digital identity, payments, data sharing and emerging technologies.

The second pathway involves enhancing regulatory clarity and encouraging regional collaboration. This includes improving certainty and clarity in banking regulation, launching initiatives such as regulatory sandboxes, and encouraging interoperability and regulatory standardization.

The third pathway involves nurturing talent by establishing local hubs for global talent, and strengthening support networks including incubation and acceleration programs, and innovation hubs.

The fourth pathway involves developing local financing capabilities by broadening the investor base beyond traditional VC funds to include corporate venture capital (CVC), minority equity investment from incumbent banks, sovereign wealth funds with growth equity expertise, and family offices. Governments can also play an important role in fostering innovation by deploying policy instruments to boost effective investment returns and attract more capital from investors to fund various industries.

Finally, the fifth pathway involves encouraging sustainable fintech growth strategies by leveraging emerging technologies such as artificial intelligence (AI) and demonstrating a clear path to profitability.

This article first appeared on fintechnews.ae

Featured image credit: edited from freepik