What Is the Role of Start-Ups in Financial Inclusion?

A couple of weeks ago we were at Finovate in New York City (NYC), an extraordinary event that has become an important pit stop for innovators in the finance and technology industries in the United States. At Finovate, 64 start-ups and other innovators have seven minutes each to pitch their ideas to investors, established companies looking for acquisitions, fellow entrepreneurs and industry-watchers. It’s a rapid-fire, fast-moving and a highly entertaining event. Finovate has grown over time from its NYC flagship event to include events in San Francisco, London and Singapore.

We have attended Finovate’s flagship event two years in a row in part to see what kinds of innovations are taking place and in part to see what are the problems at the intersection of technology and finance that start-ups and innovators are looking to solve.

Fiji G2P payments

The environment at Finovate is also a reminder to those of us working in financial inclusion, from Mexico to Pakistan, of the importance of start-ups and individual innovators. In fact, the interests of innovators and those of us interested in inclusion often intersect: we both want to solve the same problems and resolve what we see as a market failure, i.e., millions without formal financial access.

Undoubtedly, there is some ambivalence towards the role of start-ups and individual innovators when it comes to financial inclusion. Oddly enough, this ambivalence stems from the view that start-ups cannot scale, and inclusion is ultimately about reaching the millions outside the realm of formal financial services. There is also a view that when it comes to the specialized and highly regulated nature of finance, the established banks, larger organizations and other players are better placed to lead the way. For example, you might be able to bootstrap a credit operation up to a point, but not insurance or large scale payment operations. Most of the few start-ups that do get funded in emerging markets trying to reach the unbanked or underbanked fail completely or under-deliver on their promise, which adds to the ambivalence towards start-ups more generally.

The truth is that whether it is in finance or other industries, many start-ups do fail or get acquired, or the problem they were trying to solve goes away as industry structures shift. A recent report by Harvard’s Shikhar Ghosh looking at 2000 U.S. companies over a six year period, shows that 3 out of 4 venture-backed firms failed. In fact, if we define failure as the inability to meet projected return on investment, then 95 percent of firms failed.

But don’t start-ups teach us even when they do fail? Their failure may show us how not to do it or what not to do. The question we need to ask is whether it is sufficient that the ultimate benefit of start-ups may lie in spurring the rest of us along?

In fact, we propose that start-ups play an important role in the ecosystem of providers of financial services for the poor. First, they point out where innovation is needed. At last year's closed-door partner event, participating MNOs and banks were asked which organizations were more likely to innovate: 37% of the participants said start-ups.

Innovation can be incremental. At Finovate this year, a number of companies such as Dashlane were trying to find ways for people to rapidly fill in forms. On the other end of the innovation spectrum Locaid showcased never-before-seen ways of using location tools in finance, and the company C.K. Mack suggested that rental income from properties could be securitized.

Second, start-ups identify or spotlight a new consumer need. Arguably that need is greater if more of them are falling over each other to meet it. Start-ups like Bolstr, Shopkeep and a number of others at Finovate spotlight the needs of the smallest mom-and-pop stores, a segment that perhaps the entire financial industry in the U.S. needs to pay closer attention to. Solutions for recent graduates to navigate and manage school loans were another area of consumer need highlighted by companies like

And, lastly, start-ups identify new business opportunities. In other words, start-ups give definition to a “white space” and illustrate what solutions might look like and how money might be made. If we look closer at the world of branchless banking, we have already seen a handful of start-ups that identified gaps in the market, developed innovative solutions and went on to successfully raise funding and even acquire other firms. For example, Mumbai-based FINO received backing from HSBC, Intel Capital and the IFC to expand its branchless banking business and even recently acquired the now-defunct Nokia Money.

The risk attached to expecting start-ups to identify innovation, consumer needs, and new business opportunities is that they display a herd mentality. One start-up’s success in securing funding and “making it big” pulls others into the same space even when they propose nothing new. For example, a lot of companies seem to be throwing up different solutions and dashboards for Americans in the area of personal financial management. These dashboards increasingly look the same with colourful nifty wheel graphs and so on. We saw some of that again at Finovate this year.

Over the next couple of months, we will be looking more closely at the role of start-ups in financial inclusion. In particular, we will explore the challenge we face in building provider ecosystems in developing countries that foster more start-up led innovation in financial inclusion. We want more start-ups doing what they do best. An ecosystem like this is sprouting up in Nairobi, a place The Economist recently dubbed the “Silicon Savanah”. The question is where else and how?


27 September 2012 Submitted by Michael Joyce (not verified)

An interesting article.
On one hand, startups have already done great things for financial inclusion - microfinance can trace its roots to startups and entrepreneurship. On the other hand, what makes the start-up culture of technology so exciting in the developed world is that start-ups often have the "rails", the infrastructure of communications links, scalable cloud-based servers and interlinking payment systems in place so they can use these to innovate new services on top of these platforms.
Financial inclusion in the developing world usually lacks these rails- telcos are present, but banks are closed systems, there is little interconnectivity between payment switches and physical infrastructure is severely lacking.
Kenya is starting to see some organisations using M-Pesa as the "rails" for innovative services, but Safaricom has been very slow to open up these opportunities. There's a bit of a chicken-and-egg scenario, but the long and the short of it is that someone must make that investment, and unfortunately there's not enough people willing to do that at the moment.

27 September 2012 Submitted by Kabir (not verified)

Thanks for your thoughtful comment, Michael. Microfinance's roots are indeed in entrepreneurship yet there is some ambivalence and lack of clarity on what a start-up or individual innovator actually accomplishes for financial inclusion.

As you mentioned, some of us do see the power of a widespread low-cost payment infrastructure as essential to unleashing start-up energy in financial services and a whole range of other services for the BOP. In this way, interconnection in payment systems and innovation in financial services are linked.

27 September 2012 Submitted by ctellez (not verified)


I completely agree with you regarding the slow response MNOs have had to open up. In fact, that is the topic of an upcoming post.

27 September 2012 Submitted by Oltac Unsal (not verified)

In fact, what you write can be generalized to the entire innovative startup space and point to the how current narrow definitions of "failure" is harmful especially from policy/intervention perspective. 95% of startups fail to return on the investment and you clearly make the point that we care about other things so the investment is simply cost of doing business. If this cost is not borne first by the public, then by the private sector, the 5% never materializes for those catalytic / gravity defying jumps. Failing means risk has been taken, and without risks we simply don't advance enough. I recommend Paul Graham's article "Black Swan Farming" to fully understand this point from a practicioner's perspective.

Another reason why the definition is too narrow, and thereby misleading is that a startup may fail but the learnings of the entrepeneur would more likely to enable her to succeed at her job or another startup sooner or later. Until/unless we can defnitively point to a time series that says otherwise failure of a snapshot in time paints an unnecessarily pessimistic picture. Even within a single startup's lifespan, a "pivot" should be counted as a failure if we take the current definition too seriously. Anecdotally, the entrepeneurial ecosystem is full of "failed" entrepreneurs who go on to do be in the 5%. Again, the cost of doing business, or perhaps the investment in the failed enterprise can be reclassified as a charitable contribution to education.

Unless we start "celebrating smart failure" from a public policy / intervention perspective and develop systems to deal with it effectively, we will be doing more harm than good. Tell me, how does CGAP promote controlled risk taking? Do you have sandboxed projects that push the limits so hard that the project is guaranteed to "fail" but learnings more than make up for such "failure?"

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