The Digital Intelligence Index (DII) put together by specialist Emerging and Frontier market investment fund Sturgeon Capital provides insights into the potential for fintech investments in emerging and developing markets.

The fund’s latest DII scorecard highlights the prospects for countries such as Bangladesh, Kazakhstan and Georgia, which are categorised as "break out" countries due to their high pace of digitalisation and rapid digital growth, the fund said in its latest report.

Although these economies currently rank 83rd, 55th and 47th out of 90 respectively, they display positive attitudes towards digitalisation among their populations and have achieved innovation-led growth. However, they still face challenges in terms of infrastructure and institutional mechanisms required for a complete digital transformation, the fund said in a note.

In contrast, Pakistan and Egypt, with a combined population of 329mn, are classified as "watch out" countries with lower levels of digitalisation and momentum. These countries rank 80th and 78th respectively out of 90, indicating their current state of digitalisation. They encounter obstacles related to infrastructure, institutions, consumer demand and scepticism towards digital solutions. Additionally, lower digital literacy and limited access to digital products further hinder their progress.

While Uzbekistan and Kyrgyzstan were not specifically ranked in the DII research, they have demonstrated significant strides in digitalisation over the past decade.

Uzbekistan, with a population of over 34mn, has implemented a "Digital Uzbekistan – 2030 Strategy" aimed at enhancing internet access across the country. The government has committed to investing in 260 projects to develop e-government infrastructure and the banking sector. As a result, internet penetration in Uzbekistan reached 70% in 2022, compared with 51% in 2017. The country has also witnessed remarkable improvements in mobile internet connection speeds and significant investments in fibre optic communication lines. The Digital Strategy 2030 aims to expand internet coverage, increase affordability, provide online government services, implement digital passports and mobile IDs, and bridge the urban-rural digital divide.

Similarly Kyrgyzstan has seen an increase in internet penetration from 34% in 2017 to 51% in 2022. The government has recently launched an "E-commerce Development Programme" to improve the legal framework for online businesses and promote sectorial growth as part of its Vision 2040 development strategy. With a high adult literacy rate of 99% in both countries, there is a solid foundation to build upon as digital solutions become more accessible and affordable.

Rapid growth of mobile phone and fintech services penetration

The latest Findex data highlights the significant increase in financial inclusion among emerging market (EM) and frontier market (FM) economies. In 2021, a staggering 865mn people in these economies opened their first financial institution (FI) account, primarily to receive government payments. This surge in account ownership demonstrates the growing recognition of the importance of financial services in these regions. Additionally, a notable proportion of adults, one-third to be precise, have been utilising their accounts to pay utility bills since the onset of the pandemic.

Global account ownership has experienced a remarkable 50% growth since 2011. However, the progress varies between high-income countries and low- to middle-income countries. In EM and FM countries specifically, 74% of men and 68% of women had an account in 2021, showcasing the strides made in financial inclusion across these regions.

The Findex data also sheds light on the mobile phone and internet penetration rates within the sample countries. Kyrgyzstan, Kazakhstan and Georgia have emerged as leaders in this regard, with penetration rates ranging from 80% to 90%. These findings align with the favourable scores these countries receive in the Digital Intelligence Index (DII) supply conditions category. Furthermore, Kazakhstan and Georgia stand out for their mobile phone affordability and availability. On the other hand, Pakistan scores the lowest in mobile phone availability at 63%.

Widespread mobile phone penetration is twinned with deep penetration of financial institutions and mobile money accounts. “Kazakhstan and Georgia score the highest in financial institutions or mobile money account ownership, at 81% and 70% penetration levels respectively. Georgia also has the highest proportion of inactive accounts in the sample at 4%,” Sturgeon said. “The high account ownership in these countries tracks the high internet and mobile phone penetration of 80% and 91%.” Kazakhstan and Georgia boast advanced banking ecosystems, supported by multiple players offering digital financial services. Notably, Kazakhstan's Kaspi stands out as a prominent example. Originally established as a traditional bank in 1991, Kaspi has evolved into the region's most renowned fintech company. In October 2020 it made a significant mark by conducting its initial public offering (IPO) on the London Stock Exchange (LSE). This IPO resulted in a valuation of $6bn, making it the largest international tech IPO in London for that year.

Similarly, TBC Bank, the largest bank in Georgia, made strides in digital banking by launching its digital neobank called Space in 2020. This strategic move aimed to expand the bank's digital banking services and facilitate cross-border banking activities. Space has already made progress by expanding its operations to Uzbekistan under the name TBC UZ. It obtained a banking licence and commenced operations in October 2020. The neobank has garnered significant attention, with its payment app recording over 2.4mn downloads by July 2022.

When it comes to the usage of credit and debit cards, Georgia and Kazakhstan continue to lead the way. In Kazakhstan, the penetration rate for credit cards stands at 21%, while it reaches 60% for debit cards. Similarly, Georgia demonstrates significant adoption, with a credit card penetration rate of 13% and a debit card penetration rate of 42%. According to the National Bank of Kazakhstan's latest update in December 2022, the country has a total of 64.4mn payment cards in circulation, with 79% being debit cards and 18% credit cards, provided by 18 banks and KazPost.

Georgia has shown positive growth in credit card usage, increasing from 9% in 2011 to 13% in 2021, although there was a decline from 18% in 2014. On the other hand, debit card penetration in Georgia had risen to 42% in 2021. The country has received recognition for its advancements in contactless payments, with Visa reporting a penetration rate of over 95% in 2020, establishing Georgia as a global leader in this area.

On the other end of the spectrum, Bangladesh has the lowest penetration rates for credit and debit cards, standing at 1% and 5% respectively. Meanwhile, Pakistan has yet to make significant strides in credit card usage, with a penetration rate of 0%, while debit card penetration has reached 8%.

The coronavirus pandemic also had a significant impact as governments across the EM space used online payments solutions to distribute money.

“In 2021, 51% of respondents in Kazakhstan and 36% in Georgia reported opening their first financial account to receive a payment from the government or a wage from a private employer,” Sturgeon Capital said. “On the flip side, only 7% of respondents in Uzbekistan and 5% in Pakistan reported opening an account to receive private wages or government payments.” In terms of digital payments adoption, Kazakhstan and Georgia demonstrate impressive penetration rates. In Kazakhstan, 78% of individuals reported using a mobile money account, debit or credit card, or their phone to make payments from an account or engage in online and in-store transactions. Similarly, Georgia showcases a significant uptake, with 62% of the population embracing digital payment methods.

“Similarly Egypt, at 20% of digital payments penetration in 2021, has issues relating to a lack of trust and low digital literacy, with 72% of account holders paying their utility bills in cash. Digitalising wages in Egypt could reduce its unbanked population by 20%, but doing so would also require educational campaigns and support, as 65% of the unbanked in the country would need help to understand how online banking works,” says Sturgeon Capital.

 

Country drilldowns  

The DII analysis drilled down into the digital landscapes of Egypt, Georgia and Kazakhstan. While there has been progress, there is still lots of room for improvement.

Egypt, with its high consumer spending, demonstrates strong demand on the DII. However, there exists a significant digital divide between different socioeconomic classes, particularly regarding account ownership, digital payments and internet usage. While access to financial institutions performs relatively well, the country's communications infrastructure lags behind. Internet usage has rapidly expanded in recent years, with 72% of the Egyptian population using the internet in 2020. However, Egypt scores poorly on the institutional side, with limited transparency and freedom of expression online. The legal environment for business requires reform to enable unrestricted data exchange. Additionally, while start-up capacity shows positive advancement, Egypt's business practices indicate low technology penetration and internet usage among private enterprises.

Georgia demonstrates the gender digital divide parity in internet usage, but a significant rural-urban digital divide persists. Urban households enjoy access to fixed broadband services at a rate of 83%, against only 5% in rural areas. Mobile access availability performs well, with 99% 3G coverage and a mobile connection penetration of 155%. However, inefficiencies in fulfilment infrastructure, such as lower quality roads and transport links, present challenges. Georgia excels in its institutional ability to tackle bureaucracy and corruption. Nevertheless, the government's facilitation of ICT scores poorly, indicating restrictions on digital trade data and inadequate adaptation of the legal framework to digital business models. On a positive note, Georgia ranks first in start-up capacity, indicating a favourable environment for establishing and registering businesses. However, lower internet penetration among small and medium-sized enterprises (SMEs) suggests room for improvement in business practices.

Kazakhstan addresses the gender digital divide effectively, but consumer spending experienced negative growth (-3.79%) in 2020. The affordability of mobile access ranks high, with competitive handset prices and mobile tariffs, 70% subscriber penetration and 73% smartphone adoption. However, access to financial institutions presents gaps in credit data depth and meeting business needs. Kazakhstan excels in administering tax codes and reducing bureaucratic red tape. However, its ICT regulatory environment scores poorly, indicating ineffective regulatory frameworks that fail to foster market competitiveness, especially in sectors like electricity and telecommunications dominated by oligopolies. In terms of start-up capacity, Kazakhstan ranks second after Georgia, highlighting an environment that encourages innovation through an easy and low-cost business setup process. However, offline operations remain prevalent among businesses, as reflected in lower scores for business practices.