FinTech startups around the world interact with their customers virtually, but this doesn’t always work in developing markets, particularly when targeting poor customers who often trust face-to-face interactions more than virtual ones. Recognizing this, many FinTech startups in Africa are using a "high-touch," in-person approach to customer relations with their low-income customers. But doesn’t this increase operational costs and hinder the scalability of these FinTech startups? Are they more likely to fail than counterparts in other markets? Last year, CGAP began working with several FinTechs to pilot and scale digital finance innovations for low-income customers in Africa. Through that work, we are seeing FinTechs find ways around their customer relations challenges by teaming up with a variety of organizations, from farmers’ associations to savings groups.
Our initial findings show how some startups are leveraging partnerships to reach customers as diverse as women’s savings groups, dairy cooperatives and smallholder farmers. These partnerships are not just supplier relationships, where ancillary activities like real estate maintenance are outsourced. They are relationships in which companies delegate key aspects of their business models. And they are accelerated by digital technologies that link customer data across firms or enable transfers from one company’s platforms to another’s. Both sides engage for mutual benefit and offer unique financial services they hope will give them a competitive advantage. The following are a few areas where we are seeing these types of partnerships emerge.
Partnering to reach customers
FinTechs in Africa struggle to acquire customers in difficult-to-access regions or among segments that have low access to technology. Many rely on farmers’ associations, savings groups and other social organizations to sign up and manage relations with large groups of new customers. These partners help explain new financial services to large numbers of new customers at one time, bringing down the FinTech’s staff costs for such physical interactions. Working through these associations also creates trust in the financial service among association members. For example, Patasente, an online supply chain financing platform for small businesses, is working with a dairy cooperative in Uganda. George Bakka, founder and CEO of Patasente, says, “The cooperative helps us gather farmers for our registration sessions, and then bulk procurers pay them using the platform. Their payment transactions allow us capture real-time data on daily milk supplies for each farmer, which in turn helps us to assess farmers’ creditworthiness. This increases the chance of farmers receiving a loan. The farmers see that this cooperative is giving them something more than a normal cooperative would. Everyone wins.”
Partnering to overcome licensing challenges
Regulatory constraints are another driver to develop partnerships. Often FinTech companies, particularly those that specialize in digital platforms, may not have the necessary licenses to offer financial services directly. Other FinTechs may be too early in their development to request a license. In both cases, they partner with microfinance institutions, banks or others to provide these services.
Partnering for new value propositions
FinTechs may have an innovative idea around creating a “one-stop-shop” for a variety of financial services but lack the technology, scale or capabilities required to develop each part of the solution. In such a scenario, partnerships are key to the value proposition offered to customers.
Some FinTech companies simply create a compelling platform or marketplace for financial services and then seek partnerships with a range of established financial services providers (FSPs), including banks and microfinance institutions, to bundle services such as credit, insurance and savings. Sometimes regular use of one part of the marketplace (savings, for example) may lead customers to become eligible to use another part (credit or insurance).
For example, Tulaa, a mobile wallet for smallholder farmers in Kenya, built a platform that enables its customers to save and borrow to purchase inputs and market their crops at harvest time. The company has partnered with a microfinance institution to make credit decisions and offer loans, and teamed up with mobile payments aggregators for all payments into the platform — both key aspects of its value proposition. MaTontine, an online savings group platform in Senegal partners with credit and insurance companies who offer credit to savings group members based on the regularity of their digital payments to their groups. In Ghana, People’s Pension Trust signed an agreement with Vodafone Ghana to offer a mobile-based pension plan to the more than 8 million Vodafone customers.
Bundling services together on one platform may have other advantages for the customer, such as reduced costs to access and greater customization of services to their needs. For FSP partners, FinTechs with compelling platforms may offer greater access to customers than what the FSPs can offer individually.
The cost of partnerships
Partnerships can bring many advantages to a FinTech startup, its customers and its shareholders. But they also bring costs, operational complexity and potential disadvantages, especially for smaller startups with unproven value propositions and little bargaining power.
Sharing your customer experience with partners means spending time and resources to build consensus to solve issues. It also carries the risk that these issues may not be totally solved due to different priorities. Small startups are often unable to negotiate equitable relationships with large FSPs. They may need to adapt product features so that they fit the demands of the partner FSP organization. If these demands affect pricing, or customer-eligibility for a loan, the startup may even run the risk of eroding its innovation’s value proposition.
Partnerships with large, incumbent players like telecommunication companies may be challenging if they are unwilling to dedicate the time and resources to establish customized menus or screens when the revenue stream is small. This is why relationships via open APIs can be so powerful. With open APIs, FinTech startups can leverage various capabilities and assets of more established digital payment providers. By integrating with their systems, information can flow seamlessly between platforms, so that customers can take advantage of both services. The only catch is, we need to ensure that costs for APIs are accessible to startups.
Many startups believe they cannot afford to think about the downsides of partnerships, when the potential benefits are so close. For many FinTechs launching new products, partnerships may be the only cost-effective way to get their product to market. But partnerships soon become an important part of their business models. When this happens, the partnerships’ success becomes critical to the success of the companies themselves. As a previous CGAP blog post put it: “For a partnership to be successful, each partner needs to enter with a clear understanding of its motivation, role and expectations, particularly regarding the composition and timing of benefits likely to flow to it. A long-term view is … required, as is some degree of flexibility in managing relationships.”
FinTech startups need to take time to manage their partnerships. They should understand their partnerships’ strengths and weaknesses, as well as the opportunities and limits that these partnership may put on their scalability. When your partner is not willing to put in the same effort as you are, consider other partnership options or hope that your success can slowly change those dynamics.