Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Emerging Markets Are Building Domestic Payment Systems
Transcript
- Lucas: So this week, the iShares MSCI Emerging Markets ETF, ticker e e m, dipped about one point nine percent over five days. But if you zoom in on individual countries, the picture is way more interesting. Luna: Yeah, I saw that. China ETFs like FXI and MCHI were actually up, while Taiwan's EWT dropped four and a half percent. What's driving that split? Lucas: Part of it is sector composition — Taiwan is heavy on semiconductors, and we've seen some rotation out of tech this week. But I think the bigger story is something we don't talk about enough: the infrastructure underneath these economies. Luna: You mean payment systems? Lucas: Exactly. Over the past five years, a handful of emerging markets have built their own domestic payment rails — systems that process transactions entirely within their borders, bypassing the global card networks. India's UPI, Brazil's Pix, China's digital yuan, even Nigeria's eNaira. And the numbers are staggering. Luna: I read that UPI processed something like 13 billion transactions in June alone. That's... almost half the world's population in transactions, in one month. Lucas: Thirteen billion is right. And Pix in Brazil handled about eight billion in the same period. To put that in perspective, Visa globally processes around 20 billion transactions per quarter. So two emerging market systems, in one month, are already at a significant fraction of Visa's worldwide volume. Luna: Wow. So what's the economic argument for a country building its own system instead of just using the existing ones? Lucas: Three big reasons. First, cost — domestic systems are typically much cheaper for merchants and consumers. UPI transactions cost near zero, while card networks charge one to three percent. Second, data sovereignty — when you use a foreign network, transaction data flows outside your borders. Governments want that data to stay home for both economic and security reasons. Luna: And third? Lucas: Financial inclusion. These systems are designed to work on basic smartphones, even feature phones in some cases. India added over 300 million new digital payment users through UPI, many of whom never had a credit card. Brazil's Pix brought in 150 million users in its first two years. Luna: That's huge for GDP growth too — when more people participate in the formal economy, tax collection improves, credit scores become possible, and small businesses can access financing. Lucas: Precisely. And it's not just India and Brazil. China's digital yuan is still in pilot, but it's already the most advanced central bank digital currency in the world. Alibaba, which trades as b a b a, was up two point three percent this week, partly on news that its Ant Group is integrating deeper with the digital yuan infrastructure. Luna: So for investors, how do you play this trend? I mean, these systems aren't publicly traded — UPI is a protocol, not a company. Lucas: Right, you can't buy stock in UPI. But you can look at the companies that benefit from increased digital payment volume. In India, that's firms like Infosys and Tata Consultancy Services, which build the banking software. In Brazil, it's the large retail banks that have integrated Pix — Itaú, Bradesco. And then there's the broader consumption story: when more people have digital payments, consumer spending tends to rise. Luna: So you're saying the ETF approach might work — like INDA for India or EWZ for Brazil — because these payment systems lift the whole economy? Lucas: That's one way. But there's a nuance. Domestic payment systems also reduce the moat of global payment processors like Visa and Mastercard in these markets. If Brazil's Pix continues to grow, Visa's Brazilian revenue could take a hit. So an investor overweight Visa might want to think about that exposure. Luna: Interesting. So it's not just an emerging market story — it's a competitive threat to incumbents. And the geopolitical angle is big too. These systems give countries more economic independence. Lucas: Exactly. And that's why we're seeing more countries explore their own systems. Nigeria's eNaira hasn't taken off yet — only about one percent of transactions use it — but the central bank is pushing harder. Thailand and Cambodia have cross-border QR code linkages. The ASEAN region is trying to build a unified payment zone. Luna: You know, speaking of economic independence — it's funny, this show is also independent in a way. We don't have a big network backing us, and listener support is what keeps us ad-free. Lucas: Yeah, absolutely. If walking through the economy with us has made something click, there's a simple way to help: you can find us at buy me a coffee dot com slash fexingo. No pressure ever, just a way for folks who find value here to chip in. Luna: And every bit helps us keep digging into stories like this one. So thank you to anyone who's already contributed. Lucas: Alright, back to payments. One development I'm watching closely is the potential for these systems to start interoperating. India and Singapore already have a upi paynow link. If India and the UAE finalize theirs, that could create a corridor of over a billion people using seamless cross-border payments. Luna: That would be a game-changer for remittances too. India receives over 100 billion dollars a year in remittances, and a lot of that still goes through traditional wire transfers with high fees. Lucas: Exactly. upi based remittances could cut costs from six or seven percent to near zero. That's real money staying in the pockets of families who need it. Luna: So what's the biggest risk to this trend? Governments could use these systems for surveillance, or to shut down dissent — look at what happened with internet blackouts in some countries. Lucas: That's the dark side. When all transactions are on a government-controlled ledger, the state has unprecedented visibility into citizens' lives. In China, the digital yuan is designed to allow the central bank to track every transaction. That raises serious privacy concerns. Luna: And in India, there have been debates about data localization laws and whether the government could access UPI data for law enforcement. Lucas: Right. So the trade-off is clear: lower costs and greater inclusion versus potential loss of privacy. It's not a simple good-or-bad story. But for investors and economists, the rise of these systems is one of the most important structural shifts in emerging markets right now. Luna: And it's happening fast. In 2016, UPI didn't exist. Now it's processing more transactions than most countries' entire GDP in a month. Lucas: That's the kind of speed that makes emerging markets so fascinating. We'll keep tracking it. Luna: Sounds good. Until next time.