We’ve all heard about M-Pesa. At Wharton FinTech, we regularly chronicle new and exciting developments in financial technology, so it was only a matter of time before we assessed the trends that will impact digital financial services for the bottom billion. With innovations bubbling up from Silicon Valley to the Silicon Savannah, there’s a wealth of perspectives to choose from. We’ve selected the top three opportunities that have the potential to change the industry, expand financial services to millions, and generate attractive returns as well.
Trend 1: Using data to reach new customers
Two billion people globally don’t use formal financial services, which means they’re completely anonymous to institutions offering formal credit, savings, or other critical financial products. In the US, millions were assigned subprime credit scores as a result of the financial crisis. Although unbanked and subprime clients may be seen as a homogenous group by traditional financial outlets, a class of entrepreneurs has figured out a way to better differentiate these customers using new types of data, allowing banks, credit agencies, and others to offer loans or interest rates that better reflect their actual level of risk.
Lenddo takes advantage of the social media footprint of millions of young, urban people in emerging markets. Although this demographic has growing salaries, it has no financial identity, and experience difficulty accessing loans. Lenddo uses a proprietary algorithm to assess risk based off of their social network, using Facebook, LinkedIn, Twitter, and other sites. They then share this information with banks so they can increase their base of credit clients. Lenddo has unlocked over half a million loans so far, and is rapidly expanding to new urban markets.
RevolutionCredit creates financial literacy modules that banks, payment giants, and service companies use to better price rates for subprime clients. These literacy modules pop up when applying for a new loan or other services, and RevolutionCredit has found that by opting in to and completing these segments, companies can better differentiate among subprime clients. In the payments industry alone, using RevolutionCredit reduced chargebacks by double-digit numbers. (Full disclosure: The Wharton Social Venture Fund recently invested money into RevolutionCredit.)
Trend 2: Ecommerce in emerging markets
In the US, ecommerce is a common shopping experience. In many emerging markets, ecommerce is just getting started and looks set to explode. In the last year, Sequoia and SoftBank jointly invested $100m in Tokopedia, an Indonesian ecommerce company, India’s FlipKart raised over $1bn, and a whole range of niche Indian ecommerce startups received tens of millions of dollars. While the challenges for reaching scale are not insignificant (everything from logistics to the lack of formal addresses), more companies are emerging to tackle the challenge of payments for those who don’t have credit cards, and have subsequently been marginalized from participating in ecommerce.
Paytm was the most visible deal in this space this year. Alibaba twice invested in the Indian mobile wallet and ecommerce site in 2015: a reported $575m in February and $680m in September. Paytm has a plugin that enables users to pay through either mobile pre- or post-paid accounts.
VituMob allows mobile money users in Kenya to order directly from ecommerce sites such as Amazon or Best Buy. Purchases are linked to an M-Pesa account and orders are made through a plugin on normal sites.
Trend 3: Improving cash-in, cash-out access
For many in the US, when your salary is deposited into your bank account, your money is immediately digitized. Not so when you’re paid in cash. The challenge of transforming physical cash into digital currency has implications in nearly every market globally. Here are a few companies that are tackling that issue head-on.
GloboKasNet addresses the challenge of creating a ubiquitous network of cash-in, cash-out agents in Peru. In that country, banks, mobile network operators, and others have introduced a variety of mobile money products. However, there are few agent outlets to exchange cash for a virtual currency, and no one player is big enough to build the network on its own. GloboKasNet addresses this problem by creating a network of agents that can pool clients from as many as 14 providers, meaning the volume of clients allow for a more extensive network, and more people across the country can access the infrastructure for mobile money to work.
PayNearMe focuses on the issue of digitizing cash in the US, a market segment that makes payments of $22bn a year. In order to pay bills or make online purchases, PayNearMe partners with 7-11 and other outlets to translate that cash into a digital wallet. Having raised earlier this year $20m, it is poised to grow even more.
These are three major trends we’ll be watching in the coming 12 months. Let us know of any we may have missed in the comments section.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. You can read the original article here.