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.
With regard to your comment on the ubiquity of mobile phones how do you interpret the GSMA (Oct 2012) research that indicates 2.2 sim cards per head in Sub Saharan Africa?
In reality the spread could be substantially below the impression you create in terms of penetration. My own experience is that there is a bias towards the urban population and that I often meet African Business people with 3, 4 and 5 phones. If you also make an allowance for the itinerant business or development executives (I have active sim cards for Rwanda, Uganda, Kenya and Nigeria) you have another cut that questions of how far Mobiles really penetrate.
I have not seen the detail of the GSMA research, but I did see the text of the Nigerian Minister of Agriculture's recent speech in which he quoted that 70% of Nigerian Farmers do not have mobile phones... that was based on a sample of 400,000.
That said, there is no doubt in some markets the penetration and potential really is there for people to add value through services such as those you describe.
I would welcome your views, on or offline.
Mobile banking has allowed greater financial inclusion as it does not rely on high-cost infrastructure like traditional banking does. In order to help increase access in Sub-Saharan Africa, The Overseas Private Investment Corporation (OPIC) provided finance and political risk insurance for investments made by the Access Africa Fund. The Access Africa Fund made an equity investment in Musoni Kenya, the first MFI in Africa to go 100 percent mobile by making all loan repayments and loan disbursements using Mobile Money Transfers (MMT).
I think Paul's point and figures are not to be seen in their absolute. What I understand from his post is the spirit of growth and obviously, the trend is on the upward. I doubt that the itinerant business executives and multiple sim holders are in their millions. So, if in their thousands, then you realize even researches have their margins of error. Materiality principle comes to play and we would hesitate to discount an important growth trend by being bogged down by deviations in numbers. In Kenya, when we read in the Safaricom's records that they have 16 mobile connections, we realize that thousand of them may by that time be inactive. But that doesn't make us discount the accuracy of the good rate of subscription. As a matter of fact, due to the trickle down effect, it is the number of transactions and outreach from a connection that matters. One phone connection can do more than 10 connections that are idle, since it is the business that passes through the rail that counts, by the end of the day.
We would challenge the innovators driving the mobile microfinance agenda to keep coming back to the question: how can mobile money help us realize the vision of microfinance as a social enterprise? Beyond the need for financial sustainability, microfinance aims to deliver broader social value to its clients — value that relates to bringing clients out of poverty, and addressing their multiple and related needs (e.g., health, education, energy, etc.).
The business case for mobile money is clear: Efficiency. Scale. Flexibility. However, to the degree that financial services are simply a means to an end (the social side of social enterprise), it’s important to understand the potential effects of mobile money on the quality and substance of the client-provider relationship. A number of challenging questions present themselves:
• How can mobile technology help providers to understand the unique needs of their clients?
• Through what new means can technology help providers to leverage this understanding to meet those needs?
• How can smart data analysis help us prevent client over-indebtedness?
• Where are the opportunities for mobile money to help providers organize and connect clients together in new ways to create mutually-supporting relationships and networks?
Finally, and perhaps most importantly, we must understand the possible limitations of mobile money within the microfinance sphere. That is to say: in terms of outreach, where does the lower threshold lie, below which the individual support facilitated by the client-provider relationship simply cannot be replaced by an automated process?
Over the coming year, the Social Performance Task Force will be examining good practices and innovative solutions around the newly-launched Universal Standards for Social Performance Management (see www.sptf.info for details). As part of this, we’ll be gathering experiences about how providers manage the trade-offs between their social and financial performance. There’s an important role for mobile money innovators in this dialogue, and we look forward to their participation.
Paul, first off thank you for the good blogpost--it's very clear that mobile will continue to be the logical channel to financially include the BoP. To David's post, I think you're spot on to point out the mutli-SIM reality in many emerging markets. One of the challenges given this reality for mobile payment technology companies like ours is to find SIM-agnostic communication channels so that everyone (especially the BoP on simple low-end phones with no mobile internet connectivity) can be financially included. We at Mistral Mobile are happy to report that we have indeed solved this technical hurdle to contribute to financial inclusion.
Paul, thanks for sharing your thoughts. We are engaged in a number of a activities in Africa that could be enhanced by some of the services you have implemented. Would very much like to discuss at your convenience. You can reach me on LinkedIn by sending a contact request.