Tech Start-ups and Financial Inclusion: Trends To Watch In 2013
In my last post, we talked about the potential for start-ups to shake things up in the financial inclusion space. But where’s the real opportunity today? At Venture Lab, we’ve got our eye on a number of trends for 2013.
First, mobile. There’s no denying the increasing ubiquity of mobile phones – over 4 billion in the developing world and counting – and we’re excited to explore the ways that mobile phones provide a channel to reach people with financial services. Our financial inclusion community has long focused on the growth of Kenya’s M-PESA, and no doubt, with over 16 million customers and 80 percent of the nation’s population having used it last year, it’s an iconic story in a sector thirsty for scaled success stories. Hopefully, markets like Pakistan, Tanzania and Mexico won’t be far behind.
But there are other ways mobile can enable more widespread access to financial services. Take Coda Payments, for example, one of our first investments working in Southeast Asia. Coda operates a payments processing platform that connects with mobile network operators’ (MNO) billing systems and enables customers to purchase digital goods with a straightforward deduction against prepaid airtime. Think apps, e-content, information services, insurance premiums, and more.
Because Coda doesn’t require a new account, there’s no need for account-opening bureaucracy (such as “know-your-customer” procedures or documentation) or extensive customer marketing. And because the value is simply stored airtime credit sold through existing distributors and retailers, there’s no need to appoint and manage a new agent network. For merchants of digital goods, it provides a straightforward way to access the bottom 90 percent of the market that may not have a credit or debit card, , but likely does have a cell phone.
Point-of-sale innovations like U.S.-based Square also leverage widespread mobile access to expand card acceptance among merchants and help customers become part of the digital or “cash-lite” world. Companies such as Square offer a minimalist card reader that plug into smartphones, turning smartphones into full- service point-of-sale devices. This technology in combination with sophisticated risk management tools enable them to support merchants who may traditionally have been ignored by mainstream banks and merchant acquirers.
Square now processes over $8 billion in payments on an annualized basis and was recently valued at over $3 billion. Its success has inspired a new breed of payments start-ups adapting this successful model in less developed markets, such as BlitzPay in Mexico (one of our investments) and Ezetap in India.
Frankly, the m-payments platforms themselves are only part of the fun. Perhaps more exciting will be the ways these platforms (such as M-PESA and Coda) can be used as the “rails” on which innovative financial services can be offered – say, enabling people to pay for micro-insurance with micro-premiums, enabling “pay-as-you-go” energy or clean water access, or even enabling a new kind of microlending altogether.
Innovations like these unlock the potential of digital transactions for the base of the pyramid, and over time may stimulate additional offerings targeting a now-empowered mass market, such as training or education, health or agricultural information, job listings, and even new forms of insurance or credit.
The second area of potential has been enabled by increasing internet access (especially through data-enabled smart-phones), and promises an even richer and deeper way of delivering financial services to the BOP.
Companies like Lenddo and Wonga are pioneering a new way to find customers, build relationships, and deliver sophisticated financial services at a scale and cost well below brick-and-mortar alternatives. Further, crowd-funding platforms, which can provide more direct and efficient ways of accessing funding by using web platforms to cut out the middleman, are on the rise.
Some of these ideas may seem futuristic given the limited access to the internet that poorer customers must contend with, but access at all income levels is expanding quickly, suggesting that even if these ideas won’t reach the poorest today, that day may come sooner than we think.
The third promising area for start-ups in financial inclusion comes courtesy of the explosion of data and analytical tools. This has largely been driven by increasing internet access and the expansion of “digital footprints”, and enables innovations in credit underwriting and new ways for assessing the creditworthiness of poorer individuals and those enterprises currently without access to finance.
Exciting work is being done in the realm of “big data” analytics, analysis of alternative data sets like cell phone histories, and even psychometric testing. One of our investees, DemystData, has built a technology platform that aggregates and analyzes online and social media customer data from hundreds of sources, helping leading banks and lenders responsibly lend to “thin-file” underbanked customers and serve them more efficiently with a range of other financial services.
The evolving technology landscape provides fertile ground for financial- inclusion innovations. Of course, deep challenges remain for would-be entrepreneurs to take these concepts to scale on their own (as has been discussed in the past on this blog, here and here). It may be that ideas from pioneering start-ups grow through partnerships, or by bigger players, such as banks or mobile operators, through strategic acquisitions.
If nothing else, these innovations show the way for others, both to learn from and to build upon.
--- Paul Breloff is the Managing Director of the Accion Venture Lab, which provides seed capital and support to innovative financial inclusion startups around the world. For more information, please see www.accion.org/venturelab.