Driving Financial Inclusion Innovation: Why Startups and Why Now?
Launching a financial services startup is not for the faint of heart. As CGAP recently discussed, would-be entrepreneurs in financial services have historically faced a number of unique challenges: heavy regulation and correspondingly expensive compliance; the need for big money to fund portfolio growth, underwriting pools, and marketing; established distribution channels and partnerships; and often the ability to compete head-on with bank and mobile operator incumbents who have focused on building vertically integrated financial service empires and have resisted opening up their platforms to the offerings of smaller players who can plug into their existing distribution platforms (although this may be changing).
Compare this experience with that of your average internet startup that can launch from a garage with a couple programmers and an internet connection. And the degree of difficulty rating only gets higher when one chooses to focus on marginalized or lower-income customers in emerging markets, where one must confront a morass of other challenges like poor physical and telecommunications infrastructure, relatively lower levels of available human capital and talent, and often a more fluid political economy. Who’s ready to tackle all of that?
Despite these challenges, certain characteristics of early-stage companies put them in a great position from which to experiment and develop innovative products, technology, and delivery models. Small, standalone companies are often more nimble and less saddled by complex hierarchy and bureaucracy (policies, decision-making, red tape), and often have more lean cost structures. These features enable startups to better course-correct and adapt based on customer or market realities, as well as pursue niche markets, products, or strategies which would not satisfy the investment criteria of bigger players – and these niche strategies may eventually mature into “disruptive” innovations that can steal market share from established players, or show the way for the incumbents to take the idea to scale.
These advantages make startups worth the risk and investment, and we are bullish about the potential for new entrants to shake up the financial inclusion landscape and re-invent the ways in which we reach the global poor and underserved with financial services. The socioeconomic base of the pyramid (BOP) need a full range of financial tools to improve their lives, from credit to insurance to savings, transfers, and more, and traditional status quo models and institutions will likely not be sufficient.
So what are we doing about it? To complement the exciting work of Accion’s Frontier Investments Group, we recently established the Accion Venture Lab to play a more active role identifying and accelerating the next generation of innovative financial inclusion enterprises. The Venture Lab is a seed-stage impact investment initiative that provides small amounts of capital (usually under $300,000) and management support to jumpstart game-changing startups, promoting business models that deliver more products and opportunities to more people at the base of the pyramid.
Even as the practice of impact investing expands, still relatively few investors have the risk appetite and fund economics to invest small amounts of money and spend time working with companies that have yet to prove a new concept or generate significant revenue. As consultancy Monitor reports, promising social enterprises often run into a “pioneer gap” after initial savings and family money runs out but before the model has been sufficiently proven to attract money from institutional investors. We hope to provide the kind of patient, risk tolerant capital and management support that gives enterprises the greatest chance for success.
Ultimately our ambition is not only to support and grow individual firms (though we certainly aim to do that!), but to accelerate the development of the financial inclusion sector more broadly by investing in high risk, high return technologies and business models and sharing the learnings across the industry. As Omidyar Network thoughtfully articulated recently, we can perhaps have bigger impact as investors if we think about building sectors rather than individual firms, and supporting market innovators who pioneer new approaches and pave the way for others to have massive impact. Hopefully, we’ll have some exciting success stories to point to, but even when ideas don’t work out (a common fate for startups, even in developed markets), we hope lessons from our experiences can help catalyze more successful innovations and ventures elsewhere.