3 major trends for developing market startups from China’s fintech revolution
Imagine the ideal backdrop for a fintech revolution. What are the perfect conditions? Here’s a list many of us would come up with:
In 2017, the streets of Shanghai, not Palo Alto, are at the center of fintech. China isn’t experiencing a fintech revolution, it’s living in a post-fintech society.
Among digitally active users, fintech adoption is more than twice as high in China compared to the U.S.
In term of growth, mobile payments over China’s leading service providers WeChat and Alipay reached USD $2.9 trillion (RMB 20 trillion), a 20 fold increase in four years.
Meanwhile the U.S., a country that arguably ticks off 3/4 of the above conditions, is seeing mobile payments struggle to gain traction, especially at points-of-sale. Adoption has plateaued and only a small fraction (~5%) of users in a recent mobile payments survey use the leading services (Apple, Android, and Samsung-Pay) once or more a week. Fintech’s growth in China is not limited to payments. Even though P2P innovators like Lending Club were stars in Silicon Valley just a few years ago, China has shown it has a much larger appetite for P2P lending.
At DFS Lab, we work with the best fintech entrepreneurs and investors in Sub-Saharan Africa and South Asia. However, Silicon Valley’s influence is never far with constant mentions of a new venture being the “Lending Club of Pakistan” or the “Affirm of Kenya.” What we don’t often hear are entrepreneurs looking to be the next Alipay or WeChat Pay. Up and coming Chinese startups ushering in the next wave of fintech like Qing Song Chou (轻松筹), a crowdfunding platform that is integrated into WeChat, are relatively unknown to the entrepreneurs we talk to.
Qing Song Chou is an especially good example of the missed opportunity to learn and adopt. With a $20 million Series B round of funding, the startup is cracking the challenge of digitizing informal lending based on social relationships. It’s an unsolved challenge often discussed in our sector and there’s a team in Beijing solving it for tens of millions of people who we aren’t talking about.
Obviously, there are major differences between markets. China has a higher GDP per capita and literacy rate than countries in Sub-Saharan Africa and South Asia. More distinctly, it has a centralized government that invests in digital infrastructure and protects nascent companies. These elements are difficult to emulate. However, it would be foolish to ignore the power shift in fintech from West to East and there’s certainly a lot we can learn. Here are three major trends from Alipay and WeChat that we should keep an eye on:
1. Apps as the internet
The next billion to come online will see Facebook, WhatsApp, WeChat or an equivalent as the internet. In Myanmar, DFS Lab’s Ben Lyon saw mobile phone dealers pre-loading Facebook contacts onto <$30 smartphones because customers demanded it. The debate of designing for web vs. mobile is over.
2. Apps within apps
If you’re going to become the internet, you have an opportunity to cater to the long-tail of consumer demand. WeChat has responded to that opportunity and is now described as the “one app to rule them all.” It has set an example of how a messaging app can evolve and much of its success can be attributed to its “app-within-an-app model.”
WeChat offers access to over 10 million smaller apps in its ecosystem. Each can be officially authorized to access WeChat APIs for payments, location, direct messages, voice messages, user IDs, and more. The smaller apps run like a full web experience without ever leaving WeChat itself which means users do not have to download anything new and developers do not have to worry about compatibility across mobile operating systems.
The New York Times produced a great video highlighting some of the smaller apps within WeChat and how they benefit each other by keeping the user within the larger app. It also touches on privacy concerns that shouldn’t be ignored as we consider how others will try to emulate this trend.
It’s not surprising that Facebook’s plan for Facebook Messenger focuses on a creating a central directory for businesses and chatbots, keeping users in the app by integrating third-party services into the conversation, and the use of QR codes to interact with the physical world — it’s right out of Tencent’s WeChat playbook.
3. Finance in the background
In 2015, more than 1 billion “red envelopes” were sent over WeChat Pay during Chinese New Year. In the following year, the number grew eight fold to over 8 billion red envelopes sent over Chinese New Year. In comparison, PayPal had a total of 4.9 billion transactions in all of 2015.
The feature spawned from WeChat’s own team who wanted an easier way to pay small monetary bonuses around Chinese New Year as part of a broader tradition to give out red envelopes to family and friends during the holiday. They wanted to remove the pain of the financial transaction while highlighting the joy around the tradition. This resulted in a WeChat feature that allows users to send red envelopes in group chats which grew into a social phenomenon that jump started WeChat’s mobile wallet WeChat Pay. It continues to be popular with 88% of users citing it as a use case.
Designing experiences around users’ lifestyles and minimizing finance into the background is not only good practice, it’s at the core of how China’s fintech leaders see themselves. To add a new service in WeChat, users add them using the same process they use to add their (human) friends. Alipay describes itself as a “global lifestyle super app.” A 2016 Alipay promotion video highlights the app as the first stop for not only payments and investments, but also for dining, leisure, and transportation. Finance itself becomes a seamless process in the background for services that matter more to users.
At DFS Lab we advise our entrepreneurs to consider these lessons. Teller designs chatbots for financial service providers, preempting the “apps as the internet” role we think messaging apps will serve for new mobile data users. Utilizing a hybrid of hyper-local satellite and ground-based data sources, Pula will offer timely and personalized advice to farmers while providing crop insurance and other financial services as a seamless background feature.
The success of fintech within our markets in Sub-Saharan Africa and South Asia will not exactly mirror China’s fintech expansion. However, the major trends we can observe from a market onboarding hundreds of millions of new digital finance users tell us a lot about what a leapfrog in financial services looks like.
We are already seeing China’s fintech giants look to expand into markets outside of the mainland. Alibaba’s Ant Financial has invested in HelloPay in Southeast Asia, Mynt in the Philippines, Paytm in India, and most recently, put in a $1.6 billion bid to purchase MoneyGram in the U.S.. WeChat has expanded into Europe and is taking on WhatsApp in South Africa.
It’s likely that the mass adoption of digital financial services in Nigeria or Pakistan will look more like Alipay and WeChat than ApplePay or PayPal, and we’ll be paying attention.
Eight startup teams joined us for a week to tackle some of the most difficult problems in fintech — here’s what we saw.
We landed in Sri Lanka really excited about the week ahead. Against the background of the country’s western shore, eight incredible entrepreneur teams were about to embark on a design sprint to prototype and test their fintech concepts. The teams were excited to get going — there was the possibility of up to $100,000 in funding and a spot in our next cohort, a 6-month accelerator where startups would gain access to a network of world-class mentors and additional advisory from the DFS Lab team.
DFS Lab’s first bootcamp attracted strong fintech entrepreneurs and now a year into building the Lab, we were lucky enough to garner interest from an even larger pool of talent. Out of hundreds of applicants, eight teams were chosen to hit the ground in Sri Lanka ready to work with the Lab to bring their concepts to life:
We use a modified Design Sprint methodology for our bootcamps. Teams move rapidly from mapping the problem, to sketching possible solutions, to deciding what to test, to building a prototype, to validating with real customers. They landed in Sri Lanka with a startup problem and leave Sri Lanka with customer feedback on a solution — all in a week’s time.
Our bootcamps is the last step of our selection process prior to our investment committee. Teams are not competing with each other during this phase, but instead are working with us in a mutual due diligence process — we want to know how well they fit with DFS Lab and they want to know what we can offer. Throughout our selection process, we noticed some interesting trends in the sector:
1. The rise of digital financial service marketplaces As more digital financial service providers enter the landscape and offer a larger menu of choice to customers, the need for DFS marketplaces grows. Consumers need marketplace comparison apps to discover, filter, compare, and connect with the myriad of services. We’ve seen a number of such marketplace startups apply, and we invited one of them, Bloom Impact, to join us in Sri Lanka.
2. Insurance startups are becoming more common
We think there is a huge opportunity in insurance startups and insure-tech. This cohort is the first where we’ve seen a rise in promising applicants try to tackle insurance. Offering health insurance through remittance products was a trend. Pula, another one of our bootcamp participants, is revolutionizing crop insurance with their seeds that insured against drought.
3. Ingredient branding matters
More and more, we are seeing startups looking to improve the current DFS experience for low-income users. Some, like Pula mentioned above, hope to define their own brand in an industry where distribution is dominated by global seed giants. Others, like My Oral Village, want to extend existing DFS products to innumerate users, but risk a complete disconnect from their end-users unless they can brand themselves separately from financial institutions and mobile operators. We referenced the “Intel Inside” case study frequently during this bootcamp.
4. Chatbots get attention
It is always interesting to see how our bootcamp startups interact with each other and what they look to learn from each other. We invited Teller, a startup that creates AI banking assistants, to the bootcamp because we wanted to drive innovation around chatbots to developing economies. During the bootcamp, the Teller team was anointed resident messaging platform and chatbot experts by teams and mentors alike. There’s some straightforward value that chatbots bring to DFS providers by alleviating some customer service costs, but they are also a very interesting channel to increase customer engagement through messaging platforms many customers are familiar with and use everyday.
5. The continued explosion of alternative credit
Alternative credit continues to flourish and was the most represented type of startup during our application process. Direct to consumer models, now a bit more mature thanks to the teams like Jumo, Saida, Tala, and Branch have given way to a flood of MSME lending ventures. We’ll continue to experiment with alternative credit models to better understand what works, but are certainly now more cautious than ever about the dangers of such a unchecked expansion of credit.
We’re excited to see our bootcamp startup teams continue to grow and will be announcing the teams joining DFS Lab in its second cohort shortly. You can follow us @theDFSLab on Twitter and at www.dfslab.net for more about our startups, our future bootcamps, and more about our work in fintech for developing economies.
Thanks to Ben Lyon and Arunjay Katakam.
The DFS Lab team is excited to announce the nine incredible entrepreneurial teams that will attend our second Design Sprint bootcamp in Sri Lanka. These teams are coming to us from India, Canada, Kenya, Ghana, and Nigeria. Meet the companies and team members who will be participating below!
I’m going to violate Betteridge’s law and come right out with it: The answer is yes, probably.
If we look at the current state of FinTech and fast forward 3–5 years, it’s likely that we’ll see a few emerging trends become commonplace:
So what’s behind these emerging trends? In a word, economics.
Savvy FinTech startups have succeeded in bringing new distribution methods, models, and user interfaces to market where traditional financial services providers have historically fallen flat.
Take Square, for instance, which flipped the merchant acquiring industry on its head by enabling anyone with a smartphone and 3.5 millimeter headphone jack to accept card payments via a simple, beautiful app. Square may have sprinted out of the gate, but competitors caught up quickly, replicating its innovation from Kenya to India to South Africa (not to mention its home turf, the US). Today, with a swarm of competitors on its heals, Square is increasingly focused on extending its moat via value-added services and loans (see Square Capital).
Another example is Lending Club, an early pioneer of the marketplace lending model. Lending Club leveraged a simple asymmetry: Credit card issuers often charge APRs in excess of 20% and deposit taking institutions pay APYs well under 5%. By giving retail investors an efficient way to diversify small investments across multiple borrowers, Lending Club gave investors a better return and gave borrowers lower rates. But Lending Club’s ‘secret sauce’ wasn’t enough to keep competitors at bay, and its model has now been replicated by banks and startups across the globe. Lending Club has responded by focusing on new verticals like auto loans, but the defensibility of these new verticals remains to be proven.
Competition validates that the early FinTech pioneers were on to something (and they were), but it also leads to thinning — if not vanishing — margins. And that begs the question: Who makes money in a world where transaction fees approach zero?
Why? Because at their core banks are just payments companies with deposit-taking and lending licenses, which gives them the ability to cross-subsidize lower-margin services like payments with higher-margin services like loans. And when it comes to lending, you can’t beat a bank’s cost of funds.
Just look at Equitel in Kenya, the mobile virtual network operator (MVNO) run by Equity Bank on Airtel’s mobile network. It only costs Ksh 60.5 (~$0.59) to transfer Ksh 35,000 from Equitel’s MyMoney to an M-PESA account, whereas M-PESA charges Ksh 187 (~$1.82) to transfer Ksh 35,000 to an M-PESA account. Equitel has opted to forgo transaction revenue in order to source new accounts and grow its loan book.
FinTech pioneers aren’t oblivious to where this all leads. In fact, more and more are beginning to talk about acquiring banks or banking charters. In a recent episode of ACCION VentureKast, Kopo Kopo CEO Ken Kinyua said:
“There is a point where we’ll be struggling with how to maintain competitive margins for the business, which brings you to a very interesting conversation: What is the cheapest way to get funds? And that is to take public deposits… Do you not then convert and become a bank?”
(Disclosure: I’m a shareholder in Kopo Kopo.)So, my title and opening sentence might have been a little dubious. It’s not that banks will destroy FinTech startups; it’s that FinTech startups are either going to partner with, be subsumed by, or become banks.
Will banks win the FinTech race? Yes, probably.
Once it’s just banks competing with banks, won’t the margins in lending disappear too? Yes, probably. That’s the subject of my next post.
In October 2016, we launched the first DFS Lab Fintech Bootcamp in Dar es Salaam, Tanzania — a one-week event where a diverse group of innovators came together from around the world to try and crack some of the toughest fintech challenges in their markets.
After an extensive search that included hundreds of potential candidates, DFS Lab selected a handful of exceptional entrepreneurs to join us in Dar es Salaam. We had a diverse group including former startup founders, the CEO of a mobile money company, heads of mobile for major banks, engineers, UI/UX (user interface and user experience) designers, and even a Tanzanian television star — all with the ambition to create the next successful fintech solution.
We were also lucky to have enthusiastic participation from great mentors such as Nick Hughes (co-founder of M-Kopa and M-PESA), Matt Flannery (CEO of Branch.io and co-founder of Kiva), Peter Zetterli (CGAP) and Dennis Ondeng (CTO of Kopo Kopo), among others.
We quickly decided to structure the week around running several design sprints for each team and each individual entrepreneur who would join us. It is a methodology we used to great success within our own team before and knew it would help us get to know our bootcamp participants quickly.
Our goal was two-fold: (1) to help our participating startups and entrepreneurs successfully prototype and test new concepts, and (2) to work alongside potential DFS Lab portfolio companies as a final stage in our selection process.
What did we learn about running design sprints?
1. Context matters but also limits
We had entrepreneurs from around the world working on startups that not only spanned geography, but also industry, language, culture, and regulatory environment. However, we were all working in the same conference hall in Tanzania.
Our participants came from emerging startup communities where entrepreneurs are excellent at zeroing in on local issues and solutions. This spirit of focusing on the real customer at the end of the day was never forgotten throughout the week but something special happened when we mixed everyone together — the limits that come from a hyper-focus on local constraints started to dissolve.
Over breaks and meals, morning walks and evening drinks, the cross-pollination of ideas was inevitable. A mobile money CEO from Sierra Leone brought incredible perspective to teams looking to attract and partner with mobile money operators in their own regions. Digital credit pioneers from Pakistan pointed out barriers for others looking at the potential of alternative credit scoring. These collaborations flowed all the way down to the sketches that were imagined during each team’s design sprint.
2. Running multiple design sprints in one room stimulates ideas and keeps the energy going
Just like the mixing of ideas during downtime, we tried our best to encourage sharing during the sprint too. We turned the team-only “art museum” to one that was more public — at least being open to the other attending teams. Obviously we were only able to do this because none of the teams saw each other as market competitors.
During points in time where there was work that was being displayed (after sketches are complete, after customer testing notes are put up, etc.) we set aside some time for teams to take a walk around and check out the gallery of ideas stuck to the walls. These breaks sparked conversation and “ah-ha!” moments. When teams reconvened, there was a renewed excitement and an injection of even more ideas. As a side note, these compare and contrast sessions also helped people place a bit more trust in the process, having seen the similar results of others’ creative struggle.
3. Remote testing can be extremely powerful
With customers who were thousands of miles away, many teams looked into remote testing of their prototypes. The DFS Lab team had actually tried this methodology during our own design sprint to prototype a mobile money concept in Tanzania while sitting in our offices in Seattle. We used InVisionto create our app mockups, Lookback to record remote interactions and facial reactions, and hired a local consultant to help us carry out the tests.
Testing with the right customers, even when done remotely allowed our participants to create realistic mockups that they could pick back up after their flights back home. In contrast, the non-Tanzanians who were unable to test remotely back home found that they had to quickly adapt their thinking and prototypes after settling back into their local markets.
Even though the feedback from our participants was really positive, we did make mistakes, and we want to continue to get better at running sprints. We’re figuring out the optimal size for each team we bring, how to more quickly zero in on the right issues to tackle, and better ways to evaluate entrepreneurs while they work with us for the week.
We’re excited to support entrepreneurs around the world to push the boundaries of fintech and we know the design sprint methodology will continue to be an important tool for our teams.
Interested in our next fintech bootcamp?
Much has been made of the fact that a new breed of financial technology (or fintech) companies is unbundling banks in the developed world. Startups are attacking all of the components of the traditional bank value proposition (e.g., accounts, portfolio management, mortgages, car loans, person-to-person payments). Over the past five to six years there has been a rush of capital and talent into startups; investment in them has grown nearly eightfold since 2011. While their innovative products have been a boon to consumers in mature economies, the resulting efficiency and security benefits have largely bypassed the 2 billion consumers in the developing world who lack formal banking services altogether.
However, there are signs that this is changing. Encouraged by the dramatic increase in the number of people with mobile phones in the developing world, new fintech players are attempting to disrupt the existing financial order in these markets: the money lenders and informal remittance services that often have been the only option for much of the population.
Our initiative, the Digital Financial Services Lab, is trying to be a catalyst for this transformation. To that end, it is working with entrepreneurs to introduce innovative solutions to the developing world. A number of the companies mentioned in this article are in DFS Lab’s portfolio.
To succeed in these markets, these startups must overcome three challenges: lack of cloud infrastructure, users who are “less digital” than rich-world users, and users who live economically chaotic lives based primarily in the informal sector.
Lack of Infrastructure and Efficient Cloud ServicesThe fact that many developing countries lack infrastructure that exists in advanced economies presents an opportunity and a challenge. It has prompted some fintech companies to jump in and try to fill the gap by creating “regtech” and “Infrastructure as a Service” (IaaS).
One of the companies doing this is Trulioo, which is making individual government identity databases around the world accessible through a single streamlined interface online. Another is Flutterwave, which is creating payments and banking interfaces to power fintech offerings in Nigeria.
Users Who Don’t Have a Digital FootprintWhile some people in the developing world have a rich and intricate set of online behaviors, there are many whose only form of access to the digital world is phones with limited data connections or internet cafés, and plenty don’t use digital products at all. Their resulting limited (or nonexistent) digital footprints mean that the sophisticated algorithms that some fintech companies use to generate risk scores or personalized offers in the developed world aren’t useful in these markets.
To succeed in this environment, local players are evolving models that tap into and create new sources of data on users, often by giving users tools that encourage them to expand their digital lives.
One example in India is SERV’D, which is building an app that helps households and the informal workers they employ (e.g., nannies, drivers, cooks, delivery services) create simple formal work contracts and pay them online. The data generated as a byproduct will capture the wages and other payments of the more than 400 million informal workers in India who previously had no way of demonstrating their income for loans and other benefits.
Another possibility comes from the data that Uber and other ride-sharing companies are collecting on their drivers’ incomes. CreditFix is tapping into this kind of data to lend to Pakistani drivers, allowing them to own their auto-rickshaw or taxi and to go into business for themselves rather than work as employees. Sidian Bank in Kenya has a similar program.
Still another example is Cowlar, a Pakistani company that has created a wearable device for cows. It collects data on their temperature, mobility, location, and activities and translates this into real-time intelligence for farmers to help them better manage livestock. Cowlar is now considering how it might translate this “internet of cows” data into financial products, potentially by discounting insurance for well-managed cows or by using data on the amount of milk produced to justify loans.
Consumers Who Lead Chaotic and Cash-Based LivesFew consumers in developing countries have the luxury of regular paychecks. Often they live payout to payout, which might come from selling farm produce one month and from temporary work in picking tea the next.
They also struggle to deal with unpredictable expenses, including medical emergencies, motorcycle breakdowns, and demands from friends who need help. Consequently, their financial lives are orders of magnitude more complex than those of consumers in the developed world. In these situations, standard, rigid insurance premiums or loan-repayment contracts often don’t work, resulting in missed payments and defaults.
But some companies are creating clever offerings to help people through the difficult times. One example from the developed world is Uber’s Xchange, which allows drivers to participate in very-short-term leasing programs (just a few months) and requires little money up front. As the company put it in a blog post, “The key to flexible earnings is flexible financing.” Another example is Malako, an early-stage startup in Uganda that has been experimenting with flexible lines of credit, managed through mobile phones, that low-income consumers can pay off when they have the money and that allow them to make only minimum payments when they don’t — like a credit card.
Fintech companies are proving that they can create workarounds for the infrastructure of developing countries. They can develop flexible products tailored to the lives of the people in those markets. And they can figure out how to generate data streams that shed more light on potential customers’ finances. They can play an important role in bringing the 2 billion consumers into the digital world and improve both their lives and their countries’ economies.
Originally published in the Harvard Business Review on January 20, 2017. See the original article here.
DFS Lab's Jake Kendall and Stephen Deng wrote an article for NextBillion, an industry-leading community of business leaders, social entrepreneurs, NGO managers, policy makers, and academics that explores enterprise's role in development.
They summarized the outcomes of DFS Lab's inaugural bootcamp in Dar es Salaam and the cutting edge fintech trends that emerged during the event. Notably, they found that cheaper is not enough; that the mass market is complex and cannot be effectively served in its entirety; that identity continues to be critical; that one mobile operator is the future of mobile fintech; and that it is paramount to show value ASAP.
The article was the most viewed post in December and was nominated for the "Most Influential Post of 2016." Read the full article on NextBillion.
by Jake Kendall, Dean Karlan, Rebecca Mann, Rohini Pande, Tavneet Suri and Jonathan Zinman
For the 2.5 billion people who live on less than $2 per day, shocks such as illness, crop failures, livestock deaths, farming-equipment breakdowns and even wedding or funeral expenses can be enough to tip them, their families, or even an entire community below the poverty line. A major challenge for international development efforts is determining which financial tools provide durable buffers against such setbacks.
While meeting this challenge is a clear priority for policy makers and donors, it is also a major profit opportunity for commercial players who can solve market failures and create real value. Personal savings, insurance, credit, cash transfers from family and friends and other financing mechanisms offer promising opportunities to create security and steady employment but they require a nuanced understanding of product design and the local market conditions in order to be effective.
We recently conducted a literature review of rigorous academic studies of financial service innovations among the very poor to find out what services and products would unlock the most value for those at the bottom of the pyramid. Our findings are captured in a working paper which we summarize below.
Traditional microcredit hasn’t lived up to expectations, but we are learning how to improve it.
The Grameen model of microfinance gained a great deal of attention in the international development field after early data showed that it was associated with high repayment and low default. This model makes small loans, usually to women, without requiring collateral. However, seven randomized evaluations from around the world show that this type of ”one size fits all” microcredit product did not increase the average incomes or consumption of households. Expanded access to microloans did lead some entrepreneurs to increase business investments, but rarely to increased profits. Only one study found that microloans increased women’s decision-making power.
Recent evidence suggests that relatively simple tweaks to microcredit products—including flexible repayment periods, grace periods, individual-liability contracts, or the use of technology—may change their impact on poverty and financial institutions’ bottom line.
Savings accounts are effective safety nets—especially if they apply insights from behavioral sciences.
People don’t need to borrow money during a personal crisis if they have their own savings. One study showed that just eliminating the costs associated with opening a savings account in Kenya significantly increased uptake, overall savings, and investment levels among market vendors. However, while replication studies in Uganda, Malawi, and Chile also found that removing account opening costs increased savings, this was partially offset by a reduction in informal savings and there were no observed impacts on business investment or income. In Nepal, offering female-headed households a no-fee basic account with deposit collection service (i.e., tellers came to their home) led to high uptake and usage and real improvements in welfare. Households responded better to health shocks and spent 20 percent more on education and 15 percent more on meat and fish.
Often, the beneficial impacts of savings accounts can be enhanced by features that help people overcome behavioral biases by, for instance, fortifying willpower. So-called “commitment savings” products have lock-up periods, fees, or other penalties for early withdrawal that “commit” the client to a savings goal. These types of features increased decision-making power for women in the Philippines, with even larger effects for women who started out with below-median decision-making power. In Kenya, a simple “Safe Box” that allowed users to save for preventive or emergency health in a metal box to which they had a key increased achievement of health savings goals by 14 percentage points.
Insurance is highly valuable to protect against shocks but is difficult to scale.
In Ghana, farmers who received rainfall index insurance cultivated more land and spent 13 percent more on fertilizer and labor than those who received just cash, implying that uninsured risk — not lack of access to capital — is a primary constraint on investment by farmers. In India, when farmers were given rainfall index insurance, six percent more farmers focused production towards higher-return, higher-risk cash crops.
However, despite the potential of insurance products to provide a “risk floor” for farmers and encourage higher-productivity investments and behavior, uptake at market prices is extremely low and commercial offerings have not found a profitable delivery model. Micro-insurance is not at scale anywhere except when heavily subsidized by government, a market we hope technology may change in the future.
Digital financial services let people help each other.
Digital payments—for instance, by mobile phone or app—can significantly strengthen people’s financial resilience by enabling an informal risk-sharing network through loans or gifts from friends and relatives. In Kenya, users of mobile-based money-transfer service M-PESA maintained their consumption and spending in the face of economic shocks; non-users of M-PESA had to reduce consumption by 7 percent when facing these shocks. During these hard times, users were more likely to receive domestic remittances—more money from a larger number of people. These improvements in risk-sharing led to higher savings, higher consumption and changes in occupation for user households.
Digital platforms have the potential to change financial services in three ways. First, they may reduce financial institutions’ costs. Second, they can increase the reach of financial products, as traditional brick and mortar channels make it difficult to deliver financial products to people in remote areas. And third, digital platforms can facilitate innovation in product and service design. For example, digital platforms can be configured to improve the customer experience by offering sub-accounts or labeling accounts, and they can provide bank managers with real-time information and other decision aids that can help banks provide better service to clients. Yet there are potential downsides for the bank and the client, since digital products are accessed and disbursed digitally without any face-to-face interaction. Financial institutions must adjust how they analyze client risk, collect payments, optimally cross-sell products without getting to know customers in person. Lack of customer contact could drive up default rates, if not dealt with properly. Ultimately, digital finance may alter client behavior dramatically—for better or worse—with instant access to financial products and information, new user interfaces, and other accompanying changes. Researchers are now studying how digital financial products should be optimally designed to address these potential risks.
We believe that understanding the underlying market failures is the key to designing effective financial products and interventions. Economic theory suggests that we only fully tap the potential of financial markets when information flows freely and symmetrically, when participants choose rationally, when property rights are enforceable, and when transaction costs and barriers to entry are low. In developing economies, market failures and distortions are so strong that all five conditions often fail at once. For instance, lack of information about credit-worthiness—as well as lack of consistent screening ability among lenders—hinders the efficacy of loan programs; traditional bank accounts often are not profitable without high transaction costs that can deter poor borrowers such as long wait times, poor service, high withdrawal fees and high required minimum balances; women often do not have control over their own property; many rural markets are served by monopoly providers, and so on.
Understanding the roots of these market failures—and the evidence on the efficacy of existing financing interventions— will allow the next generation of financial services to better serve the world’s poor. To do so, donors, governments, and private sector players will have to answer some challenging questions: Can we find new technology-based models for digital credit that will succeed where microcredit has failed? Is there a viable way to scale insurance for small farmers? How can we encourage the delivery of well-designed saving products? Can financial products be used to empower women consumers and entrepreneurs?
With the advent of fintech, there is now an active community of scholars, donors, practitioners and technologists working together to find answers to these questions. With continued effort and innovation, we can continue to develop the right financial tools to support the world’s poorest households in resisting shocks and seizing opportunities to climb out of poverty.
Originally published in the Harvard Business Review on October 5, 2016. See the original article here.
What factors predict success for mobile money? New evidence from cross-country multi-variable regression analyses
DFS Lab's Jake Kendall, along with Nika Naghavi and and Shawn Cole, conducted a cross-country study that examined the importance of key business and market characteristics on the growth of active mobile money accounts and mobile money transaction volumes and values.
The rapid, early success of M-PESA in Kenya led some to predict that low-cost, digital financial services would quickly spread throughout the developed and developing world. M-PESA reached one million active mobile money accounts in 2008, just after a year of launching their service, however it took a further three years for a second service to reach the one million active accounts mark. The initially slow rate of growth has increased, starting in about 2012. By the end of 2015, 17 services had surpassed one million active accounts on a 30-day basis. On a 90-day basis, 30 services had passed one million active accounts, and five services had more than five million active accounts.
This growth suggests that the industry may be getting smarter about how to succeed in the business. The GSMA, along with other stakeholders and scholars, have published a number of research papers on determinants of success for mobile financial services, highlighting the role of adequate investment, operational best practices, organisational design, and enabling regulation to drive uptake and usage. However, the industry lacks a comprehensive, cross-country analysis which evaluates the relative importance of firm and market-level factors in a rigorous manner.
To better understand the success factors for mobile money, the GSMA partnered with Shawn Cole, a professor at Harvard Business School, and Jake Kendall, the Director of DFS Lab at Caribou Digital, to examine the relative importance of key business and market characteristics on the growth of active mobile money accounts, as well as on mobile money transaction volumes and values through multi-variable regression analyses.
Today, we are publishing highlights of this research that we believe is the first-ever large-sample quantitative analysis of the expansion of digital financial services. Some of the key findings from the analysis include:
These facts are remarkable and suggest that an enabling regulatory framework can promote the growth of the digital financial services industry, that MNO-led services may be better suited to offer widely adopted digital financial services. Indeed, by allowing additional number of countries adopting an enabling regulatory frameworks, the mobile money industry can further extend the reach of financial inclusion, with services achieving greater scale and improving the lives of low-income population.
We hope this quantitative assessment complements existing research on market- and firm-level characteristics behind the success of mobile money services.
This is the first comprehensive cross-country analysis that evaluates the importance of firm- and market-level factors in a rigorous manner, and was originally summarized in a blog post for GSMA in November 2016. See the full post or download the publication.
Lara Gilman is a fintech entrepreneur specializing in mobile money solutions. She was a participant in DFS Lab's inaugural bootcamp in 2016 and a winner of one of five competitive DFS Lab grants to further iterate her company Yooz. See more of Lara's writing on Linkedin.
Demonetization in India has been anything but straightforward and the jury is still out on whether the controversial move will prove worthwhile. The global chatter has been mixed, ranging from bold to foolhardy. Bold because demonetization could trigger a much-needed step-change in the long-term exposure to black money (which some have argued could only have been influenced by something dramatic); foolhardy because the risk/reward coefficient seems lopsided. India risks as much as a full percentage point in GDP and most of the black money seems to have found itself back in the system anyway.
The experience on the ground is no less complicated. On the one hand, queues around the block have made the cash experience almost impossible, particularly for those who would feel it most. On the other hand, the painful cash experience is driving the adoption of digital, something that any fintech or financial inclusion enthusiast could find cause to celebrate. Whether or not you support the decision to demonetise, it’s clear this move has given fintech start-ups an unprecedented advantage against cash.
It’s the Modi lift. Wallets, payroll companies, acquirers, gateways and payment bank providers will have all had a pretty epic month as Indians look to digital solutions in the absence of the 500 and 1000 rupee notes. PayTM, an obvious front runner, reported signing up 20 million new customers since Modi’s announcement. Removing a significant amount of grease from the cash economy, the government has created a unique opportunity for fintechs to on-board merchants and customers to services which can not only solve their cash pains, but also address their broader financial needs. The question is, will customers stay engaged once the cash pains aren’t quite so acute?
From the standpoint of the digitisation of cash, the Modi lift will be temporary. Particularly as new 500 rupee notes increase in circulation, Indians will have the option to go back to cash. While fintech providers have this window of opportunity, it will not be a panacea for long-term digital adoption. In fact, with increased attention on digitisation, any security hack or financial loss in the fintech space could have an amplified impact on Indian consumers’ journey toward digital adoption. The biggest challenge of rapid growth is not getting caught off-guard by rapid growth.
For customers to thrive beyond cash, providers must remain focused on creating and reinforcing consistently positive customer experiences. The digital players who could move the needle will be those who remain invested in offering a relevant, reliable, transparent and accessible service. What is clear is that India is poised to make a potentially radical and permanent shift to digital. Whether India can make this shift is, largely, in the hands of the ecosystem players building it.
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