Emerging Markets 101: Risks and Rewards

Investing in emerging markets can be both exciting and rewarding, but it also comes with its own set of risks and challenges. This blog is a beginner's guide to understanding the potential in emerging markets, covering the definition of emerging markets and their characteristics, risks involved and long-term prospects.

Let’s look at how an emerging market economy is defined. There are many characteristics to consider, but the main point is that an emerging market is one that is transitioning from a low-income, low-investment economy to a modern growing economy, with increasing high per capital income, and a regulatory system that is getting stronger. 

As an emerging market becomes more engaged with global markets, it will benefit from increased direct and indirect investment, more trade flows and will see the entrance of foreign players, including banks, fintechs, and other payment service providers. 

Successful emerging markets include Brazil, Argentina, India, Thailand, Indonesia and Egypt, all of which now have more mature banking and payment infrastructures in place. 

The rewards on offer in emerging markets 

These successful economies also affirm the maxim that favours the brave. Emerging markets can offer many tantalising rewards to early movers willing to take the risk and stake a claim ahead of their competitors. Whereas more mature markets come with steady growth in GDP, personal income levels and revenues, the rates of growth are slower and more likely to be in the single-digit ranges. Emerging markets can offer much faster double-digit and sometimes exponential returns on the back of their rapid ascent.

Furthermore, with the proliferation of smartphones leapfrogging many of the physical banking infrastructure gaps, banks and payment players can depend on these consumers being tech-savvy enough to use their services. Many emerging markets are benefiting from fast-growing middle-class demographics with much greater spending power than before.

The other major advantage, especially for multi-national players, is a diversification of their revenue streams. When one market suffers an economic downturn, it can be offset by rapid growth in another. 

Risks are amplified and need careful consideration

However, with higher returns comes greater risk, and emerging markets also come with inherent risks not encountered in developed markets. These risks can include political instability, a lack of stable technical infrastructure like broadband or power supplies, and currency volatility. Emerging markets generally do not have as highly developed market and regulatory institutions as those found in developed nations. For banks and payment companies, specific risks can include unclear regulatory frameworks, foreign exchange price uncertainty, and market-specific payment preferences and fraud trends that require highly localised and nuanced countermeasures.

Many foreign payments businesses are keen to enter emerging markets and work with local merchants – but lack the local market knowledge to do so successfully. Although there may be demand for their services, there is so much red tape to cut through first. The logistics of establishing local subsidiaries, understanding local laws and business taxes, and ensuring payment and delivery for goods and services can be overwhelming without the right expertise to guide them.

So why take the risk? Undoubtedly, one of the biggest advantages is that of tapping into an as-yet underbanked customer base that can run into the millions. Success in emerging markets comes down to understanding what the payment problems are in each market, and having the right solutions for merchants. That includes the ability to accept a wide number of payment methods, access to local payment solutions, and a firm understanding of all regulatory and compliance obligations. 

Successful emerging market partnerships in action

That’s why PayFuture is the go-to partner for connecting merchants in developed markets to emerging ones. Our unique selling point is our ability to act as a bridge between territories, so that merchants in mature markets can gain access to new growth hotspots worldwide.

We’ve already helped merchants to work in markets including Pakistan, Bangladesh, Argentina, Nigeria, Brazil, Peru and Egypt as well as many other fast-growing economies. Our gateway offers the ability to connect to multiple local payment technology providers across multiple emerging market regions, all via one simple-to-integrate API for both payin and payouts. 

As well as ensuring fast, scalable and most importantly in emerging markets, reliable payment flows, PayFuture also helps businesses to set up in emerging markets for the first time, speeding their passage through layers of bureaucracy and ensuring full compliance with all relevant regulatory obligations.

We’re incredibly excited about the prospects for payments in emerging markets over the next few years. There may be some short-term bumps in the road and economic turbulence to contend with, but the potential payoffs of keeping a long-term perspective are clear to see. The dynamic nature of emerging markets, and the chance to give consumers and online businesses the future-proof solutions they deserve, will continue to create an irresistible pull for those payment players willing to be bold enough to make the move. 

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