Fintech: Targeting Services for the Bottom of the Pyramid

November 24, 2015

An investor’s perspective on what makes financial inclusion startups successful.

Widespread access to mobile communications, social media and big data have created new opportunities for financial technology firms – now popularly known as fintech – to deliver financial services to the poor.  Accion’s Venture Lab provides seed capital and management support to innovative tech startups that seek to expand financial access for the globally under-banked. We spoke to Venture Lab’s Managing Director Paul Breloff about the challenges facing fintech entrepreneurs. 

Q: What advantages do startups offer over more established firms in this space?

Fintech startups have a distinctive advantage in this environment because they are incentivized by long-term upside, usually have lower costs, and can change direction more quickly to figure out what models work.  Established firms, by contrast, are often burdened by legacy business models and existing structures and relationships that complicate their efforts to adopt new approaches.

Q: Are there particular trends you see as driving innovation in fintech for the under-banked?

The under-banked and poor are being empowered by better information and access to knowledge through mobile and social media.  Financial firms are changing how they interact with traditionally-excluded clients, and they put a premium on developing an understanding of evolving consumer behavior.

We are also seeing the unbundling of services traditionally provided by banks and other vertically-integrated service providers.  This is creating new opportunities for startups to specialize and innovate in delivering targeted financial products and services. These niche markets include digital payments, social network-based financial products, marketplace lending, and specialized credit analytics.

Paul Breloff

Q: What are the biggest challenges facing fintech entrepreneurs who target the bottom of the pyramid?

Fintech entrepreneurs often face the challenge of operating in heavily regulated environments in competition with well-capitalized, entrenched competitors.  Entrepreneurs seeking to deliver financial services to the poor face the added challenges of operating in markets with weak infrastructure and political/regulatory instability.  They also target a market segment that is hard to reach out to and communicate the value of financial services.  And perhaps even more than any of these challenges, we hear from startups the intense challenges in hiring the right people and attracting the right talent to build their companies –particularly without the benefit of a big stable brand, the ability to offer corporate salaries and perks, and often the lack of full-time human resources staff.

Q: How do the best entrepreneurs deal with these challenges?

Those who have the most success have a deep understanding of the needs of their target market and have had extensive experience working in the community where they want to operate.  This on-the-ground experience gives them an understanding of their potential clients, and the political and cultural dynamics which they need to navigate.

Q: Have you seen fintech startups successfully navigate relationships with large incumbent financial firms? 

Established financial firms have an increasing appreciation that their traditional ways of doing business are under threat and that they need to be open to partnering with startups testing new models.   We are seeing fintech entrepreneurs effectively leverage the distribution networks, brand reach, and marketing of the bigger companies, which are receptive to working with potential competitors because of the opportunities for learning about new approaches, gaining access to new technologies, and establishing strategic relationships.  As products mature, we are also seeing more acquisitions, JVs and other types of partnerships.

An example of the kinds of partnerships we are beginning to see is MasterCard’s Lab for Financial Inclusion in Nairobi, Kenya and the Start Path program, which supports local early-stage fintech companies with an eye to developing strategic partnerships with successful firms. We’re hoping our startups can plug into both these initiatives going forward.

Q: How do you think these startups can create an impact in financial inclusion? How do you articulate and measure this impact as an investor?

Successful fintech startups have a direct impact by ‘disrupting’ the financial services status quo and creating new markets or delivering better or less costly products and services.

In addition to these direct impacts, we believe that fintech startups have the potential to deliver broader indirect impacts within the financial inclusion ecosystem. These indirect impacts include inspiring additional “copycat” startups pursuing similar business models, stimulating a competitive response by more established financial firms, and bringing about positive changes in the broader financial inclusion ecosystem, such as better government policies or regulations, and increased capital availability.

Read more about Venture Lab in this case narrative recently published in MIT’s Innovations Journal.

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