Nancy Widjaja

Article

<p class="graf graf--p">We, Accion Venture Lab, are by definition an impact investor. Our overarching goal is to invest in and provide support to seed-stage innovative fintech startups that increase access to, improve the quality of, or reduce the cost of financial services for underserved customer segments at scale. Grounded by this intention, our first and foremost step in screening for a prospective investment is to diligently assess the company’s potential in creating such impact. If our impact considerations are satisfied, we then move to carefully assessing the returns potential of the business. We only proceed with full-on due diligence if we see a strong promise of both impact and returns. Finding companies that we think can generate both is not a walk in the park, but we have yet to find ourselves in a situation where we need to consider trading one for the other.</p>
<p class="graf graf--p">We were therefore intrigued by Mara Bolis and Chris West’s take on the state of impact investing, <a class="markup--anchor markup--p-anchor" href="https://ssir.org/articles/entry/marginalized_returns" target="_blank" rel="noopener noreferrer">“Marginalized Returns”</a>, on SSIR that impact investing has been inundated by a false narrative that there is no tradeoff between social impact and financial returns. Our experience so far has given us a more nuanced perspective on this. We have seen that both social impact and financial gains can indeed go hand in hand. Last year we made two successful exits from <a class="markup--anchor markup--p-anchor" href="http://varthana.com/" target="_blank" rel="noopener noreferrer">Varthana</a> and <a class="markup--anchor markup--p-anchor" href="https://clip.mx/" target="_blank" rel="noopener noreferrer">Clip</a>, startups that not only scored on our financial impact goals but also delivered “market-rate” returns.</p>
<p class="graf graf--p">We share Bolis and West’s sentiment that while impact investing offers a spectrum of financial and social returns, too many impact investors have predefined expectations of financial return that are both too high and too short term. However, we believe that the question should not be whether setting certain financial returns target means that social returns need to be sacrificed.</p>
<p class="graf graf--p">Here are a couple of our thoughts:</p>

<h3 class="graf graf--p"><strong class="markup--strong markup--p-strong">Impact investing is not one big monolith of an asset class</strong></h3>
<p class="graf graf--p">It’s worthwhile to note that impact investing is a nuanced space instead of a one-dimensional initiative. Stage, geography, sector, and other factors play a key role in determining potential impact and financial returns. The earlier the stage you invest, the riskier it is, and the longer the expected returns would be. Some sectors, such as education, are inherently more complex. Investing in a startup in South Sudan would present different economics than investing in one in Mexico. We commend Omidyar Network’s thoughtful <a class="markup--anchor markup--p-anchor" href="https://ssir.org/articles/entry/across_the_returns_continuum" target="_blank" rel="noopener noreferrer">Returns Continuum</a> framework that helps the breakaway the conversation from impact-returns tradeoffs.</p>
<p class="graf graf--p">We see a need for the industry to move away from a single umbrella to define impact investing and to develop and agree to a better framework to define the multi-dimensional nature of the space.</p>

<h3 class="graf graf--p"><strong class="markup--strong markup--p-strong">Impact investing is still at a nascent stage — and so is the way we evaluate its performance</strong></h3>
<p class="graf graf--p">Being relatively nascent, impact funds have been raised based on GPs’ own narratives rather than vintage performance. Our northern star so far has been “market returns”, while many actually still struggle to define what that means or how that is applicable to them. How do we think about what is actually an “acceptable” rate of return for different types of investments — and how do allow for room for a figure to percolate up and down? How does the market hold funds accountable while there is there is little benchmark information?</p>
<p class="graf graf--p">The notion of a “subsidy”, a factor that also determines the rate of returns, is also a nuanced one. Our beyond capital support for our portfolio, ranging from bespoke strategic projects on developing a credit risk process to fundraising advice and strategic communications support, could be categorized as a “subsidy” — although for us it’s a way for us to enhance a company’s chance of success and generate returns.</p>
<p class="graf graf--p">We agree with Wharton Social Impact Initiative’s <a class="markup--anchor markup--p-anchor" href="https://socialimpact.wharton.upenn.edu/wsii-news-thoughts/impact-investing-seduced-thats-one-hypothesis/" target="_blank" rel="noopener noreferrer">Nick Ashburn and Katherine Klein</a> that there isn’t yet enough rigorous research to refuse or to refute Bolis and West’s hypothesis. Today, there is still not much public data available on impact funds’ portfolio-level performance, and we are fully behind the assertion that there needs to be a greater transparency in reporting social and financial returns.</p>

<h3 class="graf graf--p"><strong class="markup--strong markup--p-strong">Shifting the perception: Acknowledging that the underserved can be a profitable customer segment and that technology enables new business models to better serve them</strong></h3>
In our effort to provide better access to financial services for underserved segments, we try to move away as much as possible from the timeworn perception that they are a destitute population in need of a helping hand. Instead, we see them as an empowered population with needs, wants, preferences, and drive to improve their wellbeing. These customers represent real market opportunity waiting to be tapped. We hold this view against the companies we invest in. A company’s keen understanding of their target customers and how they come up with innovative solutions to serve these customers’ needs and solve their persisting pain points in a way that is significantly better and attainable is what is most appealing for us. Unilever made a big breakthrough in emerging markets by <a class="markup--anchor markup--p-anchor" href="https://hbr.org/2016/12/how-unilever-reaches-rural-consumers-in-emerging-markets" target="_blank" rel="noopener noreferrer">offering low-cost, single-use sachets</a> of consumer goods such as shampoos and deodorants that were previously too expensive for the rural populations.

We see a similar wave of innovations going on within financial services, and they are particularly driven by the advancements of technology and connectivity. Across the world, fintech startups and other financial services actors are taking advantage of the rapid adoption of mobile phone, digitization, the increased capacity of computing power, and so on, to come up with solutions that enable them to offer savings, credit, payments, and insurance to previously excluded customer segments in a way that existing players weren’t able to. In Kenya, <a class="markup--anchor markup--p-anchor" href="https://apolloagriculture.com/#home" target="_blank" rel="noopener noreferrer">Apollo Agriculture</a> uses remote sensing technology, data science, and mobile money to more efficiently and affordably finance the fertilizer and seeds that smallholder farmers need to increase crop yields. In Mexico, <a class="markup--anchor markup--p-anchor" href="https://konfio.mx/" target="_blank" rel="noopener noreferrer">Konfio</a>’s entirely digital platform allows for low-cost customer acquisition and rapid credit assessment which enables the company to offer lower rates for micro and small business loans compared to traditional brick and mortar lenders.

Coming up with an offering with a strong value proposition that is affordable for underserved customers while making the economics work well for the company is not an easy feat. But this ability is what differentiates game-changing innovators from the rest of the pack, and for scalable impact to be achieved. Over the three years of us making active investments, we have reviewed over 1,300 potential deals and have only invested in 31.
<h3 class="graf graf--p"><strong class="markup--strong markup--p-strong">Broadening the definition of impact</strong></h3>
<p class="graf graf--p">We question the definition of a “social enterprise” and the notion that only companies with such label are able to generate social impact. Many of our companies probably don’t see themselves as a social enterprise, but we invest in them because we believe in the inherent value of their offering for underserved segments. We also view impact achievement as beyond solely impacting end-customers’ well-being. How a company’s innovation can help us learn, raise a broader awareness, or influence other stakeholders is meaningful to further drive the sector.</p>
<p class="graf graf--p">Instead of the ever-percolating question of whether there is a tradeoff between impact and returns, we strongly believe that such binary view is not helpful for the industry. Rather, we’d like to engage actors in the space on thinking further of how we can create an industry-level spectrum of both impact and returns achievement — while being mindful of the wide variety of initiatives in the space.</p>

The many shades of impact and returns

[caption id="attachment_7915" align="alignnone" width="1024"]<a href="https://www.facebook.com/4uno.org/videos/1295081240538091/"><img class="wp-image-7915 size-large" src="http://blogs.accion.org/wp-content/uploads/2017/09/catalyst_fund_quote_1_update-1024x576.png" alt="Catalyst Fund lessons" width="1024" height="576" /></a> Miguel Duhalt, CEO of Comunidad4Uno in Mexico City[/caption]
<p class="graf graf--p graf-after--figure">When we met Miguel Duhalt, CEO of <a class="markup--anchor markup--p-anchor" href="https://4uno.org/landing" target="_blank" rel="nofollow noopener noreferrer">Comunidad4Uno</a> in Mexico City, he was working day and night to launch a company that sought to change the financial lives of domestic workers. His goal was building a platform that could offer financial services such as insurance, direct payments, and bank account access to low-income domestic workers in Mexico. With Comunidad4Uno, people who employ domestic workers in their homes would be able to sign up for the service and, with a small annual fee, insure their domestic workers and give them access to medical check-ups. They would be able to pay their employees electronically via a smartphone app into a newly-opened bank account. Leveraging technology and the personal relationships between workers and employers, Miguel wanted to formalize access to insurance and other financial services for domestic workers in Mexico.</p>
<p id="3ef1" class="graf graf--p graf-after--p">But to achieve his ambitions, Miguel needed two things: to raise enough capital to take his enterprise off the ground and to validate his idea in the market with more users. Like many other startup founders, he faced a Catch-22. Investors wanted to see traction and a proven business model before endorsing his company, but his small team had a hard time focusing on reaching proof points because they needed to raise capital to keep the lights on. Raising seed funding is particularly challenging in Mexico and many other emerging markets. Moreover, challenging regulatory environments, inefficient infrastructure and connectivity, costly supply chains, and consumer distrust add to the operational difficulties.</p>
<p id="22b4" class="graf graf--p graf-after--p">So Miguel, like other talented entrepreneurs, needed to find an aligned investor who could look beyond quick financial returns and help meet important milestones to attract institutional funding at a later stage.</p>
<p id="dbc5" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">Catalyst Fund: Catalyzing investments in inclusive fintech</strong></p>
<p id="2f04" class="graf graf--p graf-after--p">This is where the <a class="markup--anchor markup--p-anchor" href="http://www.catalyst-fund.org/" target="_blank" rel="nofollow noopener noreferrer">Catalyst Fund</a> came in. Catalyst Fund is a $2 million program of <a class="markup--anchor markup--p-anchor" href="http://bfaglobal.com/" target="_blank" rel="nofollow noopener noreferrer">BFA</a>, funded by the Bill &amp; Melinda Gates Foundation and JPMorgan Chase &amp; Co. <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/how-we-work/invest/accion-venture-lab/" target="_blank" rel="nofollow noopener noreferrer">Accion Venture Lab</a> is a founding member of the Fund’s Investor Advisory Committee. It aims to help ‘pre-seed’ inclusive fintech startups like Comunidad4Uno address barriers to early venture development while demonstrating how the financial products and services of these ventures can serve and benefit underbanked customers. Investees receive grants up to $100,000 (no strings attached), tailored technical assistance, and mentoring from a group of impact and mainstream investors.</p>
<p id="34d2" class="graf graf--p graf-after--p">One year down the road, Catalyst Fund has provided grant funding and technical advice to 10 investees. Investees’ innovative business models range from insurance and payment services in Mexico, to pay-as-you-go gas cooking stoves in Kenya, to a peer-to-peer lending insurance platform for low-income farmers in Ghana, mobile-based micro-credit for middle and low-income households in India, to alternative credit scoring in Chile.</p>
<p id="cda2" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">What we learned about how Catalyst Fund best supports startups</strong></p>
<p id="f06a" class="graf graf--p graf-after--p">We want to arm our Catalyst Fund investees with the data points they need to prove to their next round of investors that the risks they are being asked to take on are commensurate with potential returns. To do so, we help startups reduce a number of risks typical of early-stage ventures, such as value proposition risks, execution risks, financing risks, and technology risks. Of course, developing our approach to technical assistance and mentoring has been a process. We built on initial ideas and continually refined what kind of support was most appropriate. Here is what we learned so far.</p>
<p class="graf graf--p graf-after--p"><img class="alignnone wp-image-7917 size-large" src="http://blogs.accion.org/wp-content/uploads/2017/09/catalyst_fund_quote_2_blue-1024x576.png" alt="There are no cookie-cutter solutions" width="1024" height="576" /></p>
<p class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">There are no cookie-cutter solutions to make startups investment-ready</strong> <strong class="markup--strong markup--p-strong">— tailor-made and hands-on support works best in the early days. </strong>At the outset, we run through a risk framework to identify which risks the company is facing and how we can best support them. Do they know their customers well enough? Is their technology solid? Is the team capable of executing and working efficiently together? Getting to “key milestones” and reaching proof points means different things for various startups and business models, and they uniquely require myriad resources and support to do so. Some examples of our tailored support include:</p>

<ul>
 	<li id="ee63" class="graf graf--p graf-after--p">Perfecting the startup’s technology by <a class="markup--anchor markup--p-anchor" href="http://bfa.works/medium-worldcover" target="_blank" rel="nofollow noopener noreferrer">crafting product and service roadmaps</a> and <a class="markup--anchor markup--p-anchor" href="http://bfa.works/medium-paygo-CTO" target="_blank" rel="nofollow noopener noreferrer">sometimes serving as interim CTOs</a></li>
 	<li id="3f34" class="graf graf--p graf-after--p"><a class="markup--anchor markup--p-anchor" href="http://bfa.works/medium-escala" target="_blank" rel="nofollow noopener noreferrer">Identifying opportunities for behavioral nudges in their customer journeys</a></li>
 	<li id="8a5d" class="graf graf--p graf-after--p"><a class="markup--anchor markup--p-anchor" href="http://bfa.works/medium-destacameML" target="_blank" rel="nofollow noopener noreferrer">Testing the performance of machine learning algorithms</a></li>
 	<li id="8585" class="graf graf--p graf-after--p"><a class="markup--anchor markup--p-anchor" href="http://bfa.works/medium-worldcover" target="_blank" rel="nofollow noopener noreferrer">Building customer service blueprints</a></li>
 	<li id="a695" class="graf graf--p graf-after--p"><a class="markup--anchor markup--p-anchor" href="http://bfa.works/medium-trust" target="_blank" rel="nofollow noopener noreferrer">Engendering customer trust</a> by integrating elements like transparency and proper data management</li>
</ul>
<p id="d64d" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">Startups are better positioned to take advantage of Catalyst if they have already piloted with at least one client and generated initial data for analysis. </strong>We help startups run lean startup experiments as early as possible to validate learning, even with very rudimentary value propositions. We’ve worked with companies to identify the best market fit for their product or conduct early customer discovery to refine their core offering and communication strategy. With Comunidad4Uno, for example, we visualized core customer personas, building each customer journey and tweaking the product, marketing, and user experience for each persona.</p>
<p id="4a82" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">B2C and B2B startups exhibit different operational models, requiring different technical support and knowledge resources. </strong>Creative partnerships are emerging that leverage the respective strengths of incumbents and innovators. But companies need support on how to best forge successful partnerships. Accion Venture Lab created a primer to advise B2B startups on forming partnerships with banks (see <a class="markup--anchor markup--p-anchor" href="https://www.accion.org/venturelab/resources" target="_blank" rel="nofollow noopener noreferrer">“Enterprise Sales for Fintech Products and Services”</a>). For investee ESCALA Educación, which provides long-term savings plans for higher education tailored to lower and middle-income individuals in Colombia, we helped think through what financial services partner would be best for a painless customer experience and for their long-term business goals. For Atikus, we helped build an ROI simulator to show microfinance banks in Rwanda the value of using the Atikus loan management platform and worked on KPIs to track bank performance over time.</p>
<p id="fcff" class="graf graf--p graf-after--p">Given the common challenges faced by many of our startups, we are now also packaging what we learned into practical <a class="markup--anchor markup--p-anchor" href="https://www.cftoolkit.org/" target="_blank" rel="nofollow noopener noreferrer">toolkits designed for early-stage companies</a>. These toolkits help management teams think through how to build trust with low-income customers, how to manage their internal and external risks and how to achieve product-market fit in emerging markets.</p>
<p id="2b20" class="graf graf--p graf-after--p">So, has it worked? Has Catalyst Fund’s combination of philanthropic capital and TA been enough to make our startups investment-ready?</p>
<p id="28aa" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">The $100,000 grant seed funding, coupled with the tailored technical support, makes a big difference in the trajectory of a startup at this early stage.</strong> It helps keep the lights on and allows the management team to focus on running the startup and gaining traction. Catalyst Fund’s investees have been using the capital to reach important milestones, ranging from hiring a capable sales team to financing data collection efforts or pilot projects. While we’re flexible about how the funding is spent, we fully expect each investee to have a clear, transparent plan on the use of the grant capital. Moreover, funding is connected to certain milestone achievements, in conjunction with the TA plan.</p>
<p id="0d68" class="graf graf--p graf-after--p">And some startups have quickly received follow-on investments. <a class="markup--anchor markup--p-anchor" href="https://www.destacame.cl/" target="_blank" rel="nofollow noopener noreferrer">Destácame</a>’s successful achievement of milestones through Catalyst Fund eventually convinced Accion Venture Lab to invest in a seed round. ESCALA Educación was able to <a class="markup--anchor markup--p-anchor" href="https://www.crunchbase.com/organization/escala-educacion#/entity" target="_blank" rel="nofollow noopener noreferrer">close a seed round led by Mountain Nazca</a>, a prominent Latin American venture capital firm. <a class="markup--anchor markup--p-anchor" href="http://catalyst-fund.org/news-home/2017/4/25/paygo-energy-cooking-on-your-terms" target="_blank" rel="nofollow noopener noreferrer">PayGo Energy</a> closed a round with a key investor in Kenya.</p>
<p id="3c74" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">However, there is still a persistent gap in the funding continuum for these startups after they graduate from Catalyst Fund.</strong> Currently, only a limited number of seed stage fintech investors exist, underlining the need for more creative ways to bring funding into this space. Commercial investors often wait until they can make bigger ticket investments and startups, quickly find themselves back in a dire funding environment. To help address this issue, Catalyst Fund has created the <a class="markup--anchor markup--p-anchor" href="http://catalyst-fund.org/circle-of-investors" target="_blank" rel="nofollow noopener noreferrer">Circle of Investors</a>, a group of investors who follow the startups’ progress and are matched with firms that fit their investment criteria. Some 19 mainstream (e.g., Index Ventures) and impact investors (e.g., Goodwell) have already joined this group and we hope to see many introductions turn into real investments.</p>
<p id="96ad" class="graf graf--p graf-after--p">Measuring the impact of our kind of model on a startup’s trajectory is not easy. Catalyst Fund is not a typical accelerator and there are no directly relevant benchmarks. While Catalyst Fund can certainly reduce a number of risks for a company on its growth journey, we don’t solve all of them. But after over a year, we are ever more convinced that against the backdrop of an investment continuum, de-risking early-stage startup trajectories is critical for attracting investors and capital to inclusive fintech. For now, we’ll continue to unpack the indicators and feedback sessions about how Catalyst Fund makes a difference in the life of the startup and their likelihood to thrive.</p>
<p id="c2b3" class="graf graf--p graf-after--p"><a class="markup--user markup--p-user" href="https://medium.com/@carrarom" target="_blank" rel="noopener noreferrer"><strong class="markup--strong markup--p-strong">Maelis Carraro</strong></a><strong class="markup--strong markup--p-strong"> of Catalyst Fund co-authored this post.</strong></p>
<p id="34fd" class="graf graf--p graf-after--p"><em class="markup--em markup--p-em">A version of this post appeared previously on the</em><em class="markup--em markup--p-em"> </em><a class="markup--anchor markup--p-anchor" href="https://blog.catalyst-fund.org/catalyst-fund-lessons-on-getting-early-stage-fintech-startups-investment-ready-a571c5a4e3a0" target="_blank" rel="nofollow noopener noreferrer"><em class="markup--em markup--p-em">Catalyst Fund</em></a><em class="markup--em markup--p-em"> blog.</em></p>

Catalyst Fund: Lessons on getting early-stage fintech startups investment-ready

<p id="2135" class="graf graf--p graf-after--figure"><a class="markup--anchor markup--p-anchor" href="https://www.accion.org/venturelab" target="_blank" rel="nofollow noopener noreferrer">Accion Venture Lab</a>’s mission is to support early-stage fintech startups in scaling innovations that enable underserved customers to access better and cheaper financial services. We work closely with the CEOs and management teams of these companies and are able to understand their day-to-day challenges. So in addition to providing them with much-needed capital, we also provide support in other non-monetary ways. One is bringing our CEOs together as peers to trade stories and share the solutions they’ve learned on their individual journeys.</p>
<p id="0331" class="graf graf--p graf-after--p">In June 2017, 40 executives from the companies we work with around the world gathered in The Hague, Netherlands. Startup founders face a journey of “figuring things out” (which is much less sexy than coming up with a great idea) with limited resources (funding, staff, business connections…). It’s a long road and it takes a village to make it through. Our recent CEO Forum was such a village.</p>
<p id="1bf9" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong"><em class="markup--em markup--p-em">Building a community of leaders</em></strong></p>
<p id="3ae0" class="graf graf--p graf-after--p">This was our second CEO Forum (<a class="markup--anchor markup--p-anchor" href="https://nextbillion.net/how-to-get-30-fintech-ceos-to-open-up-about-financial-inclusion/" target="_blank" rel="nofollow noopener noreferrer">the first took place in London in 2014</a>). We would like to thank <a class="markup--anchor markup--p-anchor" href="https://www.fmo.nl/" target="_blank" rel="nofollow noopener noreferrer">FMO</a>, the Dutch Development Bank, for their support in hosting and organizing the event, in collaboration with <a class="markup--anchor markup--p-anchor" href="http://www.quona.com/" target="_blank" rel="nofollow noopener noreferrer">Quona Capital</a>. <a class="markup--anchor markup--p-anchor" href="http://www.cgap.org/" target="_blank" rel="nofollow noopener noreferrer">CGAP</a>, sponsor of the 2014 Forum, was again a major supporter, joined by the <a class="markup--anchor markup--p-anchor" href="http://www.newventurefund.org/" target="_blank" rel="nofollow noopener noreferrer">New Venture Fund</a>, <a class="markup--anchor markup--p-anchor" href="http://catalyst-fund.org/" target="_blank" rel="nofollow noopener noreferrer">Catalyst Fund</a>, <a class="markup--anchor markup--p-anchor" href="http://www.citigroup.com/citi/inclusivefinance/" target="_blank" rel="nofollow noopener noreferrer">Citi Inclusive Finance</a>, <a class="markup--anchor markup--p-anchor" href="https://www.rabobank.com/en/home/index.html" target="_blank" rel="nofollow noopener noreferrer">Rabobank</a>, and <a class="markup--anchor markup--p-anchor" href="https://www.triodos.com/en/about-triodos-bank/" target="_blank" rel="nofollow noopener noreferrer">Triodos</a>.</p>
<p id="3c36" class="graf graf--p graf-after--p">The participating entrepreneurs represented pre-seed, seed, and growth-stage startups that cover a variety of financial inclusion themes and models, from credit building and rehabilitation services to agricultural input financing.</p>
<p id="9c49" class="graf graf--p graf-after--p">The Venture Lab team ran a pre-event survey to identify the most pressing challenges and issues to discuss. We then sorted the most commonly mentioned issues into three broad categories: Delivering value to customers, leading a growing team, and fundraising.</p>


[caption id="attachment_7834" align="aligncenter" width="613"]<img class="size-full wp-image-7834" src="http://blogs.accion.org/wp-content/uploads/2017/07/vlabquery.png" alt="CEO Survey" width="613" height="451" /> Responses from our CEO survey asking about their key challenges[/caption]
<p id="2919" class="graf graf--p graf-after--figure">Below are a few key takeaways from the discussions that took place at the Forum:</p>
<p id="7127" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong"><em class="markup--em markup--p-em">Delivering value to customers</em></strong></p>
<p id="2cd4" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">Innovating from 0 to 2.0 and beyond</strong></p>
<p id="fbbf" class="graf graf--p graf-after--p">The power of startups lies in their ability to identify a consumer problem and come up with an innovative solution. CEOs discussed key questions around product and service innovation such as: How do you look at existing products and think about how to make them even better? What does your customer discovery process look like? How do you design and test a new innovation? Here are some of the insights shared:</p>

<ul class="postList">
 	<li id="cbf0" class="graf graf--li graf-after--p">A product should solve a real problem for customers. Therefore it’s key to have a human-centered design approach that places our target customers at the center of the design, innovation, and implementation processes.</li>
 	<li id="7f08" class="graf graf--li graf-after--li">User experience is not just about an app or a website itself, it’s the whole way a customer experiences the service or product, from point of purchase to using, renewing, and possibly even leaving.</li>
 	<li id="4b90" class="graf graf--li graf-after--li">Strong leadership and CEO-Board alignment are critical to creating a culture of design and innovation throughout the organization; design can’t sit alone in any one function or area.</li>
</ul>
<p id="59cd" class="graf graf--p graf-after--li"><strong class="markup--strong markup--p-strong">Winning customers</strong></p>
<p id="3a82" class="graf graf--p graf-after--p">The CEOs exchanged insights and tips on identifying, understanding, and engaging with target customers. Some of the key takeaways that we gathered were:</p>

<ul class="postList">
 	<li id="571d" class="graf graf--li graf-after--p">Startups targeting individual customers need a strong value proposition for target customers’ specific needs and should focus on niches that allow for low-cost acquisition strategies. Marketing partnerships with strategic partners (such as telecom businesses for mobile phone-based services) can enable scale, low-cost structure, and brand association.</li>
 	<li id="4ec1" class="graf graf--li graf-after--li">Startups targeting business customers face notoriously long enterprise sale cycles, which can be somewhat inversely related to market size. Companies need to set a clearly defined expectation: Set minimum revenue targets, get a product person to sit with the new customers early on, provide an implementation toolbox, consider a softer sell to set client expectations, ensure and maintain direct communication channels.</li>
</ul>
<p id="9f29" class="graf graf--p graf-after--li"><strong class="markup--strong markup--p-strong"><em class="markup--em markup--p-em">Leading a growing team</em></strong></p>
<p id="7579" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">Leadership</strong></p>
<p id="2ba7" class="graf graf--p graf-after--p">The CEOs discussed ways they can strengthen their leadership skills to maximize the well being of their businesses, and employees. Insights included:</p>

<ul class="postList">
 	<li id="760b" class="graf graf--li graf-after--p">Company culture is a product of how management reacts to challenges. Startups are often very task-oriented and anxious to scale. It’s necessary to step back, reflect on the journey so far, and think about the bigger picture.</li>
 	<li id="4b4f" class="graf graf--li graf-after--li">Startup leaders need to give employees the tools and resources they need to execute their responsibilities. Coach and develop others in order to build trust when delegating tasks.</li>
</ul>
<p id="f046" class="graf graf--p graf-after--li"><strong class="markup--strong markup--p-strong">Managing talent</strong></p>
<p id="f53b" class="graf graf--p graf-after--p">Sourcing and attracting the right people is every CEO’s number one responsibility and number one challenge. Some effective strategies discussed were:</p>

<ul class="postList">
 	<li id="5fb1" class="graf graf--li graf-after--p">Startups need to provide a differentiated mission and employee value proposition (EVP). This helps compensate for offering lower salaries than larger, more established institutions. A strong and compelling EVP is important for employee retention and engagement.</li>
 	<li id="d3ce" class="graf graf--li graf-after--li">When hiring, ensuring cultural fit is first and foremost. Link EVP to customer experience to drive performance and ensure that there’s a clear performance feedback process.</li>
</ul>
<p id="01f3" class="graf graf--p graf-after--li"><strong class="markup--strong markup--p-strong"><em class="markup--em markup--p-em">Fundraising</em></strong></p>
<p id="26aa" class="graf graf--p graf-after--p">Attracting new investors and raising money is a never-ending process for a startup CEO. In emerging markets, raising money can be difficult as next round equity investors aren’t always easy to identify. CEOs discussed insights on the funding landscape, as well as how to be smart and strategic in the selection of the raise target, timing, and valuation according to their growth stage, and walked away with a couple of key takeaways:</p>

<ul class="postList">
 	<li id="7f35" class="graf graf--li graf-after--p">Attracting new investors and raising money is a never-ending process for a startup CEO. In emerging markets, raising money can be difficult, as next-round equity investors aren’t always easy to identify. CEOs discussed insights on the funding landscape, as well as how to be smart and strategic in the selection of the raise target, timing, and valuation according to their growth stage.</li>
 	<li id="642c" class="graf graf--li graf-after--li">Companies seeking to raise series A capital face a shift in investors’ expectations as they exit the seed stage. Common series A expectations include an emphasis on sustainable scalability, quality of credit, and having the right team in place to execute.</li>
 	<li id="6019" class="graf graf--li graf-after--li">For companies looking to raise a Series B, having the right investor come in is more crucial than ever. Companies need to be clear on their objectives before entering the round. The incoming investor should fit the company and should provide room to actually run the business.</li>
</ul>
<p id="06c1" class="graf graf--p graf-after--li"><strong class="markup--strong markup--p-strong"><em class="markup--em markup--p-em">What’s next?</em></strong></p>
<p id="445b" class="graf graf--p graf-after--p">At the end of the Forum, we ran another quick survey and discussion on what the future holds for fintech for inclusion. Participants voted that artificial intelligence for data analytics and customer engagement, and open API are the key enabling technologies for driving innovation for inclusion. Participants also underlined that connectivity is fundamental to scaling these innovations.</p>
<p id="da11" class="graf graf--p graf-after--p">We were encouraged to receive feedback from participating CEOs that they found great benefit from being among peers “in the same boat.” One CEO mentioned that he was pleasantly surprised (stunned!) and energized by the sheer wealth of creativity represented at the event.</p>
<p id="d5ca" class="graf graf--p graf-after--p">Following the CEO Forum, we held a <a class="markup--anchor markup--p-anchor" href="https://www.fintechinclusionsummit.com/280037" target="_blank" rel="nofollow noopener noreferrer">Fintech for Inclusion Global Summit</a>, where the CEOs had the opportunity to showcase their companies' innovations to over 200 investors, entrepreneurs, funders, and other field builders in the space. Stay tuned for our recap of this event!</p>

When fintech founders get together

Chatbots enable customers to interact with a product or brand in ways that mimic two-way human conversations. As a computer program, chatbots have been hailed as a tool that would enable companies to serve customers in meaningful ways at a substantially reduced cost. At Accion Venture Lab, we believe customer engagement is a key factor in driving underserved, low-income individuals to both gain access to financial services and use them effectively. We’re intrigued by the investments banks and insurance companies are pouring into chatbots for customer engagement. But, we are particularly curious about what this technology can do for financial inclusion.
<h2>Chatbots for financial inclusion</h2>
As a seed-stage investor in fintech for inclusion, we are constantly on the lookout for innovative, cost-effective, tech-enabled modes of customer engagement. It’s easy to get excited about chatbots: they can be embedded into existing popular channels such as Facebook Messenger, WhatsApp, or Skype – enabling immediate reach of customers. They are available 24/7 on a smartphone or a webpage, making them uniquely positioned to provide the sort of anytime, automatic information that customers demand. Chatbots enable customers to be “delighted” by a service or a brand, leading to increased conversion and loyalty – all at a lower cost.

Here are several applications of chatbots that we’re excited about today, and what we hope to see in the near future:
<h2>“Humanizing” financial services: Making banking and insurance explicable and relatable</h2>
Trying to understand the terms and conditions of a credit card or mortgage can be intimidating. Pages of fine print with undecipherable technical terms pose a challenge even for the savviest customers, let alone for customers who have little or no experience with these products and services. This can deter potential customers from completing the process or push them to apply for something without fully understanding the service.

Chatbots can potentially help customers better understand financial services via interactive discussions on pricing, repayment terms, or coverage. The “robo-friendliness” of chatbots can help raise customers’ comfort level in making inquiries while avoiding embarrassment and without having to physically visit a branch or deal with a long wait time to speak to a customer service agent. A customer can post a question and review the response at a convenient time.

In India, online insurance players such as Policybazaar and EasyPolicy <a href="http://timesofindia.indiatimes.com/trend-tracking/When-chatbots-help-sell-insurance/articleshow/55815481.cms">found that chatbots are enabling them to better understand customers’ requirements and help the customers choose the right policy</a>, at a fraction of the cost and with a substantial increase in conversion rates, compared to human agents doing the same tasks.
<h2>Helping customers enhance their financial capabilities</h2>
Economies benefit from financially capable customers. However, financial education is consistently a challenge. Using chatbots, financial education content can be personalized and engaging. For example, users can subscribe to topics, such as budgeting, and receive information that matches their interests in a fun, conversational way. Providers can also design chatbots to send customers insights on their spending habits or automated loan repayment reminders. Bank of America has made headway through their <a href="https://www.forbes.com/sites/quora/2016/10/28/meet-erica-bank-of-americas-new-voice-ai-banking-system/#658e6a0750db">Erica bot</a>, and we’re excited for similar bots to be tailored to underserved customers in emerging markets.
<h2>Providing customers with the right financial solution at the right time</h2>
Artificial intelligence-powered chatbots can be designed to get “smarter,” developing a better understanding as they interact with users and “learn” from data from past interactions. This presents an opportunity for financial services providers to offer solutions that are tailored to customer needs. For example, if a customer makes frequent queries about his checking account balance, a bot can suggest budgeting or money management tips. Such “prompts” would enable customers to be aware of, and consider, the options that are available to them.
<h2>Helping staff deliver better services</h2>
Chatbots hold the promise of enabling staff of financial services providers to better deliver customer service. <a href="http://www.avaamo.com">Avaamo</a>, an enterprise bot platform, provides banks with bots that help sales staff in the field plan their prospecting activities and customer visits, as well as update their customer relationship management software with notes and visit reports from their smartphones. Avaamo’s bots can help field sales staff present appropriate offers to customers and clarify questions about new products – all in a conversational interface. Imagine how valuable this could be in helping <a href="http://www.accion.org/agency-banking-technology-gap-nigeria/">banking agents in rural areas</a> or microfinance field officers better serve their clients.

We’re still in the early days of chatbots making their way in transforming how customer engagement is delivered within financial services. As with all new technologies, potential challenges must be considered. In the case of chatbots, we’re particularly interested to learn more about the security and use of customer data, as well as the cost-benefit analysis of using chatbots to cater to traditionally underserved customers. In the meantime, we are excited to see more chatbot innovations in financial inclusion.

<em>This post originally appeared on the <a href="http://partners.wsj.com/metlife/multipliers/articles/talking-the-talk/">Wall Street Journal's Multipliers of Prosperity</a>. </em>

Can chatbots like Siri advance financial inclusion?

Micro, small and medium enterprises (MSMEs) in Kenya face an estimated US$2-5 billion funding gap, representing one of the largest constraints to the country's economic development. Kenyan MSMEs struggle to get access to affordable working capital and to meet stringent bank requirements – such as a proven track record and collateral – when seeking working capital. Those that do meet traditional banks’ criteria usually face lengthy approval and disbursement time frames, as well as costly terms. Furthermore, a recent government cap on commercial lending rates will likely mean <a href="http://www.reuters.com/article/kcb-group-results-idUSL5N1GM0EW">even fewer loans to MSMEs</a>.

This financial hindrance stands in direct contrast to Kenya's reputation as the Silicon Sahara – a supportive environment for flexible, fast-moving, tech innovators. Kenya is home to a number of tech and innovation hubs and incubators, like <a href="https://ihub.co.ke/">iHub</a> and <a href="http://nailab.co.ke/">Nailab</a>. As the birthplace of M-Pesa, <a href="http://www.economist.com/blogs/economist-explains/2013/05/economist-explains-18">the biggest name in mobile money</a>, some even say Kenya is <a href="https://www.bloomberg.com/news/videos/b/f966dd74-872d-4b82-b2ef-d0cb4c0e148a">paving the way for the future of mobile payments</a>. What if Kenya's most promising innovators could use digital technology to close the funding gap, or at least make it a little smaller?

<img class="size-large wp-image-7607 aligncenter" src="http://blogs.accion.org/wp-content/uploads/2017/03/Kopo-Kopo-business-model-1024x597.jpg" alt="Kopo Kopo business model" width="1024" height="597" />

<a href="https://www.accion.org/venturelab">Accion Venture Lab</a>, Accion’s seed-stage investment initiative, partnered with two early-stage companies, Umati Capital and Kopo Kopo, which are trying to do just that. Venture Lab provides seed capital and strategic and operational support to innovative startups such as these that expand financial access to the underserved. Both Umati Capital and Kopo Kopo are fintech innovators working to serve the so-called missing middle, those MSMEs caught in this massive funding gap. Kopo Kopo <a href="http://www.accion.org/kopo-kopo-mobile-money-kenya/">enables small business owners to accept mobile money payments</a>, as well as other tech-driven financial services to help small businesses grow, like their <a href="http://www.accion.org/kopo-kopo-fintech-small-business-owners/">merchant cash advance product</a>, which is based on digital transaction data. Umati provides invoice discounting and supply chain financing that serve as an affordable and swift solution for businesses to convert unpaid or outstanding invoices into cash, helping them manage their supply chain and ease pressure on an already tight cash flow. This means that Umati Capital helps businesses bridge payment gaps that arise after they sell goods to buyers, but before they collect payment for the sale. The company does this by enabling businesses to convert unpaid or outstanding invoices into cash via their digital platform.

Whereas Umati works with actors in the agriculture value chain and Kopo Kopo works with a variety of urban merchants, both bring innovation to acquisition and underwriting. The two companies offer capital that takes the business cycle of their customer base into account, which is innovative, compared to other existing credit products. Banks usually have more rigid product offerings that do not cater to the vast variety of small business needs, such as natural ebb and flow of a farmer or restaurateur's business.

<img class="alignnone size-full wp-image-7608" src="http://blogs.accion.org/wp-content/uploads/2017/03/Umati-business-model.jpg" alt="Umati business model" width="975" height="891" />

Moreover, both companies have found creative ways to underwrite credit for segments that usually have few low-cost, convenient options. For example, By factoring customers’ electronic receivables, Kopo Kopo can anticipate their repayment capacity and recognize any unusual or suspicious variations. This transforms a customer’s transaction history into a pseudo-credit history. When entrepreneurs aren't able to access financial services from traditional institutions like banks, they are limited in their ability to grow their business, and many turn to informal sources of credit, such as friends, family, or loan sharks. Companies like Kopo Kopo and Umati provide a much-needed alternative, which is good for the entire economy since in emerging markets, most formal jobs are with MSMEs, which create four out of five new positions.

These two Kenyan startups are using technology to make high-quality financial products available to MSMEs. However, similar to the MSMEs they serve, startups like these are themselves in need of broader support: advice and mentoring, well-targeted research, more conducive regulatory environments, capital investment and debt financing.

<em>This article is part of our global series on MSMEs in seven key countries where we work. </em><a href="http://www.accion.org/bridging-the-small-business-credit-gap-through-innovative-lending/"><em>Read the paper </em><em>Bridging the Small Business Credit Gap Through Innovative Lending</em></a><em>.</em>

Kenyan startups creatively bring capital to MSMEs

How data flows, tech tools, and niche marketing can expand financial access for the world’s underserved MSMEs

<img class="alignnone wp-image-7421 size-large" src="http://blogs.accion.org/wp-content/uploads/2016/11/MSME-paper-bridging-the-small-business-credit-gap-1024x497.jpg" alt="DIagram from Accion Venture Lab MSME paper: Bridging the Small Business Credit Gap" width="1024" height="497" />
The International Finance Corporation (IFC) <a href="https://www.ifc.org/wps/wcm/connect/4d6e6400416896c09494b79e78015671/Closing+the+Credit+Gap+Report-FinalLatest.pdf?MOD=AJPERES">estimates</a> that in emerging markets, the MSME financing gap stands at more than $2 trillion. But recent developments like the rapid adoption of smartphones, growth in online commerce platforms, the digitization of small business processes, and enabling regulatory environments are reducing the longstanding hurdles to close this gap. Driven by the vast and untapped market opportunities, pioneering lenders are leveraging these trends to identify, assess, and serve these long-underserved small business clients.

Informed by its investments in and work with fintech startups in the MSME finance space, <a href="http://www.accion.org/how-we-work/invest/accion-venture-lab/">Accion Venture Lab</a>, seed-stage investment initiative of financial inclusion leader Accion, released a report, <a href="http://www.accion.org/bridging-the-small-business-credit-gap-through-innovative-lending/">Bridging the Small Business Credit Gap through Innovative Lending</a>, that captures how tech-enabled lenders are using new financing models to effectively market to, acquire, underwrite, and capitalize small businesses.  These lenders use niche marketing, digital, or mobile platforms, and enterprising partnerships — and often a combination of all three — to make capital available in ways that are cheaper, faster, and more convenient for MSMEs.

To date, <a href="http://www.accion.org/how-we-work/invest/accion-venture-lab/">Venture Lab has invested in a dozen innovative early-stage startups</a> in the MSME finance space since it was established in 2012. The breadth of this work, alongside Venture Lab’s investment model — which pairs capital with extensive strategic and operational support — gives it a unique viewpoint to assess trends and opportunities in the field.
<h2>Acquisition, underwriting, and funding innovations</h2>
Broadly, new lenders in the MSME finance field are making inroads in this market by innovating across three dimensions deemed to be critical to success in the lending business: acquiring new customers to ensure scale, tailoring loan underwriting to MSME characteristics and needs, and attracting affordable debt financing or investment to on-lend to MSME borrowers.
<h3>Customer Acquisition</h3>
Acquiring MSME customers has historically been a resource-intensive process, which could include multiple client visits and frequent engagement with a sales or loan officer, leading to acquisition costs outweighing potential returns. By identifying, understanding, and engaging with their target customers in ways that go beyond traditional sales approaches, lenders not only grow their loan portfolios but can also more effectively assess the creditworthiness of clients. In India, <a href="http://www.ayefin.com/">Aye Finance</a> uses an industry cluster approach to gain insights and strong connections within specific manufacturing, trading, and service industries (e.g., shoes, brass works, garments). <a href="http://www.tiendapago.com/">Tienda Pago</a> leverages the relationships between fast moving consumer good distributors with mom-and-pop stores to acquire small businesses at scale across Peru and Mexico
<h3>Underwriting</h3>
In many markets, the formal and verifiable data that is necessary to assess a business’s credit risk, such as income tax records, is almost impossible to acquire. Additionally, the small loan sizes typical of MSME lending effectively rule out resource-intensive due diligence checks into an individual MSME’s financial health and creditworthiness. By leveraging alternative sources of data, partnerships, and new analytic tools, lenders can say yes to more customers while keeping a healthy risk profile. Mexico’s <a href="https://konfio.mx/">Konfio</a> uses its online loan platform and taps into new sources of data such as the country’s electronic invoicing database to gather more than 5,000 biographical, social, and financial data points. Konfio’s underwriting algorithm enables them to use this data to swiftly evaluate and process a loan application. <a href="http://kopokopo.com/">Kopo Kopo</a> in Kenya uses small merchants’ mobile money transaction data to assess these merchants’ business trends and variations. This transforms a customer’s transaction history into a pseudo-credit history that Kopo Kopo uses to extend unsecured merchant cash advance
<h3>Funding</h3>
Innovative, emerging MSME lenders often suffer the same constraints in obtaining finance that hamper their customers; funding for such groundbreaking firms can be scarce and more expensive than for traditional banks. MSME lenders need to provide investors and funding sources with a compelling business case. In the US, <a href="http://cim-llc.com/">Community Investment Management</a> uses a proprietary technology infrastructure to connect investors to technology-driven lenders that provide small business loans in the United States, providing investors with a transparent look into individual loan performance as well as the social impact of the funded loans.

The examples above, along with a number other innovative lenders in Venture Lab’s portfolio, are making strides in providing the financing needed for more than 200 million underserved MSMEs across the world.

Much like the markets they serve, these lenders are themselves in need of wider and deeper support: advice and mentoring, well-targeted research, more conducive regulatory environments, and capital investment.  Moreover, the majority of the innovations that we have seen are mostly in acquisition and underwriting, indicating that these innovative lenders are still reliant on traditional providers like banks as their funding source. Banks and other funding institutions can then play a key role in supporting innovative MSME lenders by providing them with access to onlending capital in the local currency at a reasonable cost. This is crucial in enabling these lenders to be able to serve more businesses, particularly during their early days of building their loan portfolio. Incumbents don’t have to engage startups in this space in a transactional or equity-based manner; instead, they could foster collaborative partnerships or develop a co-innovation relationship. Through partnerships, incumbent financial corporations can help smaller companies grow and expand their reach, learn more about emerging technologies, and create a robust ecosystem.

By combining forces of key actors in the space, the global MSME funding gap could be narrowed faster and in turn spur economies around the world.

<em>Venture Lab developed this report with the support of the Mastercard Center for Inclusive Growth.</em>

New report: Innovative lenders bridging the small business credit gap

Tahira Dosani

What are the greatest challenges that young businesses face?

Many might consider “getting funding” and “sales and marketing” to be most pressing of all.

However, a new report by Rippleworks confirms what we at <a href="https://www.accion.org/venturelab">Accion Venture Lab</a> regularly encounter as we invest and support early-stage financial inclusion companies across the world: finding and keeping good talent surfaces as the most critical challenge that early-stage companies face, particularly in emerging markets.
<h2>The Human Capital Crisis</h2>
Fittingly, Rippleworks released “<a href="http://www.research.rippleworks.org/">The Human Capital Crisis: How Social Enterprises Can Find The Talent to Scale” </a>during the <a href="https://medium.com/global-entrepreneurship-summit/future-of-fintech-for-financial-inclusion-seven-trends-were-watching-dc59aeae12ac#.4lbqavic4">7<sup>th</sup> annual Global Entrepreneurship Summit (GES)</a> in Silicon Valley. Built upon a global survey and a series of in-depth interviews of over 600 social enterprises and 47 impact investors and entrepreneurs, the report highlights that more than a quarter of early-stage entrepreneurs considered accessing talent to be very or extremely challenging. This does not get any easier as the business grows; almost half of later-stage entrepreneurs indicated similar problems with <a href="http://www.investopedia.com/terms/h/humancapital.asp">human capital</a>. Recognizing the importance of the issue, Venture Lab contributed to the development of the report and shared the insights and experiences from our work with our <a href="https://www.accion.org/content/venture-lab-portfolio">portfolio companies</a>.

Having the right talent is a key determinant for an early-stage company’s success in developing and scaling its business. The challenges around recruiting, developing, and retaining strong talent are extremely salient,  for entrepreneurs and their businesses.  We see this as we sit in board meetings with our portfolio companies and provide strategic advice and operational support for our companies, as well as in our conversations with other startup CEOs in the fintech for inclusion space.

<img class="alignnone size-full wp-image-7140" src="http://blogs.accion.org/wp-content/uploads/2016/07/human-capital-crisis-report-wordcloud-by-IIF-Accion-Venture-Lab.jpg" alt="human capital crisis report wordcloud by IIF Accion Venture Lab" width="831" height="549" />
<h2>Facing challenges</h2>
Early stage startups face a number of particular challenges in acquiring and developing talent:
<ul>
 	<li><strong>Baseline lack of talent in </strong>market<strong>:</strong> There are huge issues of talent availability at all levels in many markets. Moreover, regionally, there is often a concentration of talent in certain industries and cities. In particular, many emerging markets face a lack of experienced C-level and tech talent.</li>
 	<li><strong>Internal organizational limitations:</strong> Early-stage companies often lack a formal HR structure and standard HR processes and guidelines. This means that they don’t always have the resources to provide career advancement opportunities, including training and skill enhancement opportunities.</li>
 	<li><strong>Competing with established, large, brand-name companies:</strong> Difficulty to attract key talent as established companies tend to offer more attractive compensation, better job stability, and higher prestige. A young startup without an established brand can often struggle to attract talent.</li>
</ul>
<h2>Venture Lab Resources</h2>
The importance of these issues drove Venture Lab to provide support that could help our companies navigate these challenges – for example, through direct support such as advising companies on developing their organizational structure and hiring plans, facilitating connections with local recruiters, and posting portfolio companies’ vacancies on our website and newsletter as well as on social media. We also developed a set of <a href="https://www.accion.org/venturelab/resources">open resources</a> that we hope can benefit not only our portfolio companies, but also other seed-stage startups, particularly those in financial inclusion. These resources provide a practical starting point to address some of the challenges the Rippleworks report surfaced.
<h3>Our human capital resources include:</h3>
<ul>
 	<li><a href="https://www.accion.org/sites/default/files/Accion%20Venture%20Lab%20-%20Hiring%20Manager%20Guide.pdf">Hiring Manager Guide</a>: Helps hiring managers through the process of defining a role, creating a job description, screening and interviewing candidates, and conducting reference checks for hires of any level.</li>
 	<li><a href="https://www.accion.org/venturelab/resources/job-description">Job Description Bank</a>: Provides sample job descriptions for 15 key roles at early-stage financial inclusion startups and highlights best practices across the postings.</li>
 	<li><a href="https://www.accion.org/sites/default/files/Accion%20Venture%20Lab%20-%20ESOP%20Best%20Practices.pdf">Startup Employee Stock Options Plans (ESOPs): Overview and Best Practices</a> and <a href="https://www.accion.org/sites/default/files/Accion%20Venture%20Lab%20-%20ESOP%20Model%20Example.xltx">Model</a>: Provides information and examples around employees’ options plans, how much equity to offer, creating terms, long-term strategies, as well as an excel model to calculate ESOP allocation as presented in the best practices document.</li>
</ul>
While we are making a keen effort to help our portfolio companies tackle these human capital challenges, we recognize that the path remains difficult. There is a multitude of high-potential early-stage companies in need of strong talent. In emerging markets where the quality of education is still poor or where the entrepreneurship ecosystem is nascent, the problems are further accentuated.

We greatly commend Rippleworks’s thoughtful initiative in this space, and we were honored to be able to contribute. We will continue to make our resources open to all companies and share the lessons from our portfolio.

For aspiring entrepreneurs and individuals interested in exploring working in the startup space, there’s an abundance of <a href="http://www.fastcompany.com/1824235/8-reasons-choose-startup-over-corporate-job">lists</a> or <a href="https://techcrunch.com/2014/09/20/5-reasons-you-should-work-for-a-startup-at-least-once/">advice</a> on why you should take the plunge. As impact investors who work closely with our entrepreneurs, we can testify to how deeply inspired we have been by the intelligence, drive, and passion of the talent currently working in the space. Check out <a href="https://www.accion.org/venturelab/resources/job-description">open roles in our portfolio companies</a>. We look forward to seeing and working with you in this space.

Human capital and early-stage financial inclusion leaders

How much are we aware of or do we keep track of our personal health record? Since birth, how many times have we visited a doctor or a hospital for an immunization, a nagging cold, perhaps a broken arm, or a bad allergic reaction? Each visit involves doctors taking note of our height and weight, body temperature, blood pressure, symptoms, and potential diagnoses. The summation of these medical records forms our personal health history and contains the needed information to assist any keen doctor in developing a nuanced perspective of our well-being. Though in a distinctly different industry, financial service providers also collect and record a great deal of disparate information that could provide an accurate story about and help build our financial health over the course of our lifetimes. With an existing model from the medical profession, the natural question that arises is what insights and learnings can we derive from the medical field to tactfully apply to financial services to better improve its product offerings?

The vast majority of our medical history is diffused between all the different urgent cares, primary health practices, and specialists we ever cared to visit in the United States. Though numerous projects since the 1960s have attempted to standardize the collection and dissemination of this medical information, a lack of technology and policy incentives led most, if not all, of those initiatives to fail. In 2009, however, the U.S. government implemented the <a href="http://www.cdc.gov/ehrmeaningfuluse/introduction.html">Health Information Technology for Economic and Clinical Health (HITECH) Act</a> to incentivize healthcare providers to digitize records and create a robust national network of electronic health records.

While not a silver bullet and still far from realizing its full potential, the HITECH Act has encouraged the healthcare industry to take a big step in the right direction. It also provides the financial services industry with some food for thought as there exist interesting parallels between the two distinct industries.
<h2>Digitization as a first step to unlocking a myriad of analytics-led innovations</h2>
The HITECH Act’s nudge for medical record digitization established a trove of aggregated information that new analytical techniques could surveil to <a href="http://www.fastcompany.com/3052842/elasticity/welcome-to-the-cloud-hospital-where-big-data-takes-on-mysterious-medical-conditio">identify patterns and improve overall public health</a>.  Imagine how granular, and arguably more accurate, we could get in assessing our physical condition if, say, people could input and analyze the combination of their heart rates, daily caloric intake, steps walked, hours slept, or really any relevant information that the thousands of health and wellness apps and digital trackers record nowadays.

While the financial services industry has yet to encounter a HITECH Act-like incentive, the quest for cheaper, more efficient and transparent ways of doing finance has led to intense competition and widespread innovation. This has led, for example, to a gradual reduction of the dependence on physical cash and checks in certain markets, and complemented the paper trail with digital footprints of transactions that were previously uncaptured.  Existing credit bureaus have made notable attempts to pull together certain pieces of our credit information, but many individuals are still barred from accessing capital because the way creditworthiness is assessed and reported today <a href="http://blogs.accion.org/fin-tech/what-do-you-do-if-your-credit-score-is-zero/">does not accurately reflect their true financial capacity</a> and, in some cases, is even <a href="http://www.forbes.com/sites/laurengensler/2016/04/11/john-oliver-credit-reports-last-week-tonight/#7dd8066f1628">erroneous to the point of being harmful</a>.

There is so much more to our financial capacity and behavior than just our credit repayment history. What if there were viable predictions to be made from our track record in paying our rent, utilities bill, cell phone subscription, insurance plans, or other such expenses patterns?  On top of that, beyond sifting through past records, what if we could demonstrate our creditworthiness through predictive behavioral assessment akin to an IQ test or a psychometric test for a job screening?
<h2>Individuals’ access to, ownership and portability of data</h2>
While the HITECH Act has successfully incentivized health providers to move from paper to digital records, it has yet to fully achieve its mission of seamless data-sharing between systems. <a href="http://www.fastcompany.com/3061125/is-it-fair-to-call-digital-health-apps-todays-snake-oil">Moving a patient's record from one health system to another is often an expensive and time-consuming feat</a>. Hospitals and clinics themselves frequently struggle to locate a complete, accurate, and up-to-date copy of patients’ medical records. <a href="http://www.motherjones.com/politics/2015/10/epic-systems-judith-faulkner-hitech-ehr-interoperability">The technology systems they use are often proprietary and lack the requisite interoperability infrastructure</a>. Then there is also the question around whether it's in the best interests of patients to access these records – what if they misinterpret the medical jargon or a doctor’s note (not uncommon given the stereotypical doctor’s handwriting)?

In financial services, the unequivocally key question is around data ownership. <a href="https://www.theclearinghouse.org/publications/2016/2016-q1-banking-perspective/the-looming-battle-over-customer-data">When a customer uses a credit card, who owns the information on what they purchased, where, and for how much? What rights do consumers have to access that data, to restrict its access, or even to remove it?</a> Designing a system that answers these questions and strikes a balance between the customers’ and providers’ needs is vitally important. While it remains to be seen what this system will look like, we envision that it could involve distributed digital data repositories that put customers in charge of their own personal information. We imagine it as a combination of secure personal accounts with digital keychains that allow us to populate verified data, establish a financial identity online, and provide financial service providers the ability to remotely and securely access that data with the individual’s permission.
<h2>Who’s at the frontier of innovation?</h2>
While the vision of a data repository with embedded predictive analytics where individuals are empowered to access and manage their information still seems somewhat distant, we’re optimistic that a proper mixture of policy, regulation, market incentives, and tech advances will foster the creation of the next generation of credit bureaus and inclusive financial service providers. Already, from our front row seat at Venture Lab, we are excited to see new players upping the data game on the financial services field. Fintech startups such as <a href="http://demyst.com/">DemystData</a>, <a href="https://www.destacame.cl/home/">Destacame</a>, and <a href="http://firstaccess.com/">First Access</a> are helping individuals and financial institutions sift through non-traditional sources of data for underwriting purposes, while <a href="http://aire.io/">Aire</a> and <a href="http://www.revolutioncredit.com/">RevolutionCredit</a> are advancing the development of behavioral data analytics to complement historical financial data.

We are excited to see more innovations coming out of both medical and financial services sectors that could further advance individuals’ physical and financial health by leveraging the use of data and technology while empowering individuals to understand and take control of their data for their well-being.

<em>Nikhil Garg co-authored this post.</em>

Digital financial health: What finance can learn from medicine

Amee Parbhoo

John Plaisted

For decades, traditional savings circles (also called <a href="https://en.wikipedia.org/wiki/Rotating_savings_and_credit_association">ROSCAs</a> in the U.S., <em>tandas</em> in Mexico, <em>chamas</em> in East Africa, chit funds in India, <em>arisans</em> in Indonesia, among other names) have been a widely popular alternative for individuals without access to formal bank accounts to save and borrow money with a group of people that they know and trust.

The concept revolves around the idea that each member of the circle contributes a chunk of money each month — and every month, a different member of the circle receives a lump sum.

Back in 2014, our team <a href="http://nextbillion.net/digitizing-savings-circles-for-the-base-of-the-pyramid/">wrote</a> about the trends and potential of digitizing savings circles for the base of the pyramid— how the rapid adoption of mobile phones and the internet across the world could bring the centuries-old concept into the digital space and eventually encourage the un- and under-banked to save.

We have since come across a variety of startups that are trying to take advantage of the idea of digital savings circles and grow them into impactful and sustainable businesses. In March 2014, we invested in <a href="https://www.emoneypool.com/">eMoneyPool</a>, an online platform that automates saving circles in the United States. By digitizing clients’ saving circles, the platform reduces group administration costs and time, enabling groups to be dispersed across wide geographical areas and encouraging participants to form pools with those outside their immediate network.

In addition to eMoneyPool, we have also been intrigued by a number of other models out in the market. <a href="https://moneyfellows.com/"><strong>Moneyfellows</strong></a> allows individuals in the UK, UAE and soon Egypt to leverage their social network to get cheaper loans. Money can be paid out to accounts all over the world or can be used to purchase items from a number of retailers at a guaranteed discount. <a href="http://www.mapan.id/"><strong>Mapan</strong></a>, a product of <a href="http://www.ruma.co.id">Ruma</a>, builds upon the widely popular arisan scheme in Indonesia, enabling a group of friends or community members to save money collectively to purchase consumer goods from Mapan’s catalog. <a href="https://chamasoft.com/"><strong>Chamasoft</strong></a> provides software for chama administrators in Kenya to manage member payments and loans and chama financial accounts. These models and other new entrants seek to harness digital savings circle user behavior and serve them more efficiently by leveraging increased access to technology, including:  <a href="https://www.ahorrolibre.com/">Ahorro Libre</a>, <a href="https://www.tutanda.com/">Tutanda</a> (Mexico); <a href="http://www.e-savings.club/">E-Savings Club</a> (Uganda, Benin); <a href="http://osusu.mobi/">Osusu Mobile</a> (Nigeria); <a href="https://chamasoft.com/">Chamasoft</a>, <a href="http://www.safaricom.co.ke/personal/m-pesa/do-more-with-m-pesa/m-pesa-chama-account">m-PESA Chama</a> (Kenya); <a href="http://banksousou.com/">BankSouSou</a>, <a href="https://clearstreetinc.com/">Clearstreet</a>, <a href="http://elikya.co/">Elikya</a>, <a href="https://www.emoneypool.com/">eMoneyPool</a> ,<a href="http://www.getmonkapp.com/">Monk</a>, <a href="https://www.puddle.com/">Puddle</a> (US); <a href="http://www.matontine.com/#home">Ma Tontine</a> (Senegal); <a href="https://moneyfellows.com/">MoneyFellows</a> (UK/Egypt); <a href="http://www.ngwe.su/">Ngwe.Su</a> (Myanmar); <a href="http://www.mapan.id/">Arisan Mapan by Ruma</a> (Indonesia)

We believe there is a huge need to provide individuals with options to save money, in particular, to weather potential shocks. A large population around the world does not have a savings account at a financial institution: in the U.S. only 54 percent of the adult population has a formal savings account, while in <a href="http://www.worldbank.org/en/programs/globalfindex">developing countries</a> the proportion of adults with formal savings account is even lower – 26% in Indonesia, 12% in Brazil, and as low as 9 percent in Tanzania. Digital savings circles could not only open access to accounts but reduce friction and time through automation.

Moreover, formalizing savings circles could address the lack of trust many users have for traditional savings circles. In the <a href="http://fsdkenya.org/wp-content/uploads/2016/02/The-2016-FinAccess-household-survey-report1.pdf">2016 FinAccess household survey</a> by FSD Kenya, even though many Kenyans use chamas/ROSCAs (over 36 percent use chamas weekly), only 2 percent of men and 7 percent of women consider them their most “trusted financial provider.” On the other hand, while a bank account is used by fewer Kenyans (only 16 percent have a weekly bank activity), 42 percent of men and 34 percent of women view banks as the most trusted financial provider. We do believe formalizing savings circles through digitization could create greater transparency to what is a <a href="http://nextbillion.net/news/about-70-of-susu-collectors-operating-illegally/">largely unregulated practice</a>.

Despite the sizeable number of people currently using traditional savings circles worldwide, startups have faced substantial challenges in transitioning these customers to the digital space. As we look at these new models, we see several key factors that are both the biggest challenges facing companies and the biggest opportunities for innovation:
<ul>
 	<li><strong>User experience:</strong> For many users, savings circles are an important link to their communities. Does digitizing take the appeal out of savings circles? How can companies transfer the social experience and the trust that exists within the communities, which is arguably one of the biggest benefits for traditional savings circles, to the virtual space and build upon customers’ social networks and connections?</li>
 	<li><strong>Customer acquisition:</strong> Digital savings circles require, not surprisingly, digitally savvy customers. What is the best way to find and sign up those customers in a cost-effective way? How can startups leverage partnerships with financial providers, mobile network operators, or distribution partners to access customers?</li>
 	<li><strong>Required conditions for adoption:</strong> Given the importance of customer engagement and automation, there are specific conditions necessary for digital savings circles. Customers may need to have access to smartphones in order to participate in a compelling user experience or require bank accounts (or mobile money accounts) to route payments and disbursements. Since many users do not have access to these products or services, how do new models effectively serve target customers? How much behavior change is required of customers to start using digital savings circles?</li>
 	<li><strong>Use cases for funds:</strong> We have started to see models tieing savings circles with e-commerce sites and other retailers, where customers benefit from discounted prices or simplified purchasing process. While this may strengthen the value proposition for some customers, we need to be mindful of the consumption nature of these models and carefully assess any potentially negative implications it has for its customers.</li>
</ul>
There is still a lot to learn about digital savings circles and we are eager to see more stakeholders experimenting with solutions all over the world.  The size of the global unbanked population indicates the need for alternative savings models that have the appeal of traditional, informal, socially-appealing methods but are done with greater benefit and efficiency. However, serving traditional savings circle users digitally requires immense behavior change for users, so we expect companies to need to innovate along several dimensions of the model.

As a result, we are excited to see how a broader area of stakeholders – donors, startups, existing financial institutions, telecommunications players — can come together and create innovative solutions to expand access to savings for base of the pyramid customers. While there may be a market for fee-for-service savings circle startups, we are eager to see other types of players get involved in this space and experiment. For example, the models that may have the best chance to scale might be tied to existing financial products rather than as a standalone offering. Rather than provide a savings circle on its own, providers instead could use savings circles to increase customer engagement with or as an activation tool for a broader set of products, such as bank accounts or credit cards.

Savings circles are an important tool for millions of customers around the world, and we believe that there is an opportunity to leverage this tried and true model to improve access to savings, whether through a startup or other consortium of players.

Digital savings circles: Challenges and the road ahead

According to the <a href="http://www.consumerfinance.gov/newsroom/cfpb-report-finds-26-million-consumers-are-credit-invisible/" target="_blank" rel="noopener noreferrer">Consumer Financial Protection Bureau</a> one in 10 adults in America in 2015 is “credit invisible,” meaning that they have no established credit with a nationwide reporting agency. Another 8 percent have insufficient credit history, or a history that's too old to track.

So what? Why does it matter for someone to be “credit visible”? And why do you even need a “good” credit score?

Your credit score — a three-digit number, generated by credit bureaus using your history of repaying debt — determines whether banks will extend you credit, how much, and at what interest rate. In the U.S., your credit score also determines your <a href="http://money.us/1LeoheH" target="_blank" rel="noopener noreferrer">employment candidacy</a> and your eligibility to rent an apartment, subscribe to utilities and services (e.g., cell phone, cable TV), or to even <a href="http://www.post-gazette.com/business/2014/10/10/Credit-inquiries-can-damage-scores/stories/201410100026">rent a car</a>. When you have poor access to credit, you have limited or no access to capital that is often critical to start a business, pay tuition, or help cover emergency expenses.

<a href="http://nyti.ms/1mWOzrs" target="_blank" rel="noopener noreferrer">The “credit invisibles” are disproportionately minorities, young adults, and new immigrants</a>, and many also happen to be economically vulnerable. What makes them “credit invisible”? Are they financially incapable, unreliable, or just sneaky?

I hope not, because I’m one of them.

Ironically, I also happen to work for an impact investment fund that is particularly interested in expanding access to thin-file customers. While my team is on the cutting-edge of fintech, I have no credit history in the U.S. That’s led to some interesting conversations.

Here’s my story. As of January 2016, my U.S. credit score is zero. That’s right: zero.

Many of my Venture Lab teammates thought it wasn’t actually possible to score lower than 300. I don’t have any credit score yet because I’ve only recently migrated to the U.S. I moved to Washington, D.C. from Bangkok, Thailand (where I was working with a United Nations agency based there), in November 2015 to join Venture Lab. Prior to this, my financial behavior has not been captured or assessed by any of the three major U.S. credit rating agencies — hence, I’m a “thin file” or “credit invisible” customer.

<img class="alignnone size-full wp-image-6547" src="http://blogs.accion.org/wp-content/uploads/2016/02/no-credit-score-Nancy-Widjaja-Accion-Venture-Lab-credit-report.png" alt="no-credit-score-Nancy-Widjaja-Accion-Venture-Lab-credit-report" width="994" height="756" />

I’ve paid off a car loan and a mortgage back in Indonesia. It is quite mind-boggling (and frustrating) that none of these factors could easily be taken into account to prove my creditworthiness to U.S. banks. I have almost a decade of mature financial activity under my belt, but because they took place in different countries, across different types of systems that track different information, every time I move to a new country I would always become a “thin file” or “credit invisible” customer.

Prior to moving to D.C. late last year, I have had experience living in the States for two years, from mid-2012 to mid-2014. You’d think I would have managed to find some credit history then, but I was a graduate student who was not earning any money and was trying hard to be careful about my finances. Moreover, I was relying a lot on my school’s facilities (e.g., campus housing) to get by. I managed to live in Manhattan for two years without needing credit or taking on any debt, happily using a debit card for transactions.

I didn’t care about my credit score then, and I probably never even gave it more than a couple minutes of thought. Back in Indonesia, where I’m from, a <a href="http://www.thejakartapost.com/news/2014/08/13/pefindo-aims-launch-indonesia-s-first-credit-bureau.html" target="_blank" rel="noopener noreferrer">credit score isn’t a thing</a>.

The awesome opportunity of joining the Venture Lab team brought me back to living in the States as a professional. All of a sudden, my credit score became one of the most important numbers in my life.
<h2>What it’s like to not have a credit score</h2>
Not having a credit score makes it harder to find a job, get utilities, or rent a car. Because I don’t have a credit score, I’m only eligible for a secured credit card. This doesn’t work like most plastic — I need to put down a $200 deposit to get a $300 credit line.

That’s not the only drawback. My credit invisibility forced me to put down four times the normal security deposit for my apartment. Something similar happened when I signed up for cable and a cell phone. Last weekend I was almost denied a rental car from Budget when they ran a soft credit check and found out that I don’t have a credit score.

To add more pain to the process, building — or rebuilding — a credit score takes time. A lot of time.

Not having a credit score in the U.S. really sucks. My personal complaints above are mostly "first-world problems," and I’m fortunate enough to have the resources and knowledgeable friends help me navigate through my credit invisibility. But what about new immigrants coming from a war-torn country, or those who have lived here for a while but are undocumented?

Then there are also minority millennials. <em>The Atlantic</em> ran a fascinating <a href="http://www.theatlantic.com/business/archive/2015/11/gifts-debts-inheritances/417423/?utm_source=SFFB" target="_blank" rel="noopener noreferrer">article</a> on the racial wealth gap faced by millennial people of color, noting that many are trapped in a vicious cycle of not being able to build assets due to a lack of family assets and greater family expenses.
<h2>Using alternative data to help thin-file customers</h2>
Credit invisibility became a fascinating topic for me as I learn and delve more into it. I lead Venture Lab’s work in capturing and articulating the insights we’ve gained from investing in and working with fintech startups that provide underserved customers with better access to finance. A number of our portfolio companies are working on innovative credit assessment mechanisms, with the aim of creating visibility for these “credit invisibles.” Ultimately, these new products should enable financial services providers to say “yes” to more applicants, while still managing a healthy risk level.

In the U.S., <a href="http://www.revolutioncredit.com/" target="_blank" rel="noopener noreferrer">RevolutionCredit</a> created an online platform which allows consumers to watch short and entertaining financial literacy videos to demonstrate and improve their financial capabilities – like a “traffic school for credit.” In India, <a href="https://www.creditmantri.com/" target="_blank" rel="noopener noreferrer">CreditMantri</a> helps consumers that are underbanked, have poor credit scores, or are new to formal financial services learn about their credit scores and improve their financial health through an <a href="https://soundcloud.com/accioninternational/episode-1-ranjit-punja-from-creditmantri-and-the-future-of-credit-scoring-in-india" target="_blank" rel="noopener noreferrer">automated web platform</a>. In East Africa, <a href="http://www.firstaccessmarket.com/">First Access</a> provides a credit scoring solution for microfinance institutions and other emerging market lenders, using data from consumers’ prepaid mobile phone histories to assess creditworthiness. Through these services, financial institutions can identify more creditworthy customers, extending access to a wider range of financial services at a better price.

We’re still at a relatively nascent stage of building business models for and realizing the full potential of alternative credit scoring for “credit invisibles.” There are a lot of challenges, ranging from regulatory restrictions to making a business model work and scale. Mark Hookey, CEO of <a href="http://demyst.com/" target="_blank" rel="noopener noreferrer">DemystData</a>, believes that a good use of data could be the <a href="https://medium.com/@demystdata/data-the-frustrating-silver-bullet-to-financial-inclusion-902ab9e6c82f#.jgn4egpv2" target="_blank" rel="noopener noreferrer">silver bullet to financial inclusion</a>, to address the required risks assessments in extending financial services. Hookey said he’s frustrated that financial institutions are just scratching the surface with alternative data, and that many emerging customers are kept out because of overly conservative regulatory frameworks and the perverse negative impact of well-intentioned privacy constraints. Great to hear that Mark’s frustrated and setting ambitious goals to address the issues — it’s encouraging to know that our entrepreneurs are working hard to crack the nut on such hard challenges.

Being an eternal optimist and someone who’s been living a rather peripatetic life, I have high hopes for more great innovations to help “credit invisibles.” Hopefully, fintech startups will soon come up with a global credit scoring mechanism, taking into account financial history from around the world.

In the meantime, I’ll try to be smart in using my secured credit card, paying my rent, utility bills, and gym membership on time. Most importantly, I’m very excited to work with our portfolio companies to build on and share the innovations on this space. And, of course, I’ll keep you posted on my credit score.

What do you do if your credit score is zero?

Alice Tang

China is undoubtedly a very appealing market for Venture Lab. The country’s strong economic growth, rapid adoption of technology, and growing pool of highly-educated talent complement the inherent potential coming from the sheer number of underserved customers across the country who are currently lacking financial access; that figure stood at 234 million as at end of 2014 <a href="http://www.cgap.org/blog/new-accounts-china-drive-global-financial-inclusion-figures" target="_blank" rel="noopener noreferrer">according to CGAP and the World Bank</a>.

As with other growing markets, we are excited to better understand what the Chinese fintech startup landscape looks like — and to explore potential opportunities for us to support those startups that have significant potential to extend better access and quality of financial services and products to the Chinese population.

High internet penetration in China has fueled the rise of the internet finance industry, which by definition, includes any organization that extends their financial applications to the public over the internet. According to the China Internet Network Information Center, in 2014, 48 percent of the Chinese population, or 649 million people, were internet users – with mobile phones being the top medium for access.

<a href="http://blogs.accion.org/wp-content/uploads/2015/12/internet_use_china1.png"><img class="size-full wp-image-246 aligncenter" src="http://blogs.accion.org/wp-content/uploads/2015/12/internet_use_china1.png" alt="Internet Use / Methods of Access China" width="972" height="558" /></a>

From our research, we were able to identify a number of factors that have helped drive the growth of internet finance in China:

<a href="http://blogs.accion.org/wp-content/uploads/2015/12/our-research1.png"><img class="size-full wp-image-247 aligncenter" src="http://blogs.accion.org/wp-content/uploads/2015/12/our-research1.png" alt="Our Research China Internet Use" width="956" height="621" /></a>

While internet finance in China is still in its infancy, it’s still very appealing to impact investors.

The online lending sector presents the most investment opportunities with the potential for social impact. There’s also a significant amount of potential in credit scoring and third party payment, but those markets are relatively difficult for startups to break in to.
<h2>P2P lending: Main driver of growth of China’s internet finance industry</h2>
P2P has been driving the growth of China’s internet finance industry, however, based on data collected by Wangdaizhijia, a portal that provides Internet lending information, P2P is also the most controversial as nearly 50 percent of the platforms have been found to be problematic, as many of them are fraudulent platforms that were established primarily for illegal fundraising activities and management teams are absconding to avoid liabilities.

<a href="http://blogs.accion.org/wp-content/uploads/2015/12/p2p_operating_plaftforms1.png"><img class="size-full wp-image-248 aligncenter" src="http://blogs.accion.org/wp-content/uploads/2015/12/p2p_operating_plaftforms1.png" alt="p2p Operating Plaftforms" width="968" height="548" /></a>

P2P platforms in China can be summarized into three categories, with most platforms adopting the online and offline model, where the online platforms serve to both acquire investors and source and review loan applications; they also partner with offline microcredit and guarantee companies to provide additional quality borrowers. These microcredit and guarantee companies will also provide a full guarantee to the loans they’ve sourced for the P2P platforms.

<a href="http://blogs.accion.org/wp-content/uploads/2015/12/p2p_platform_types1.png"><img class="size-full wp-image-249 aligncenter" src="http://blogs.accion.org/wp-content/uploads/2015/12/p2p_platform_types1.png" alt="p2p Platform Types" width="948" height="608" /></a>
<h2>Online third-party payment</h2>
Significant market potential also exists in China’s online third-party payment sector, with a rapidly developing e-tailing market, which encompasses online sales to consumers by merchants of all sizes, according to the <a href="http://www.mckinsey.com/insights/asia-pacific/china_e-tailing" target="_blank" rel="noopener noreferrer">McKinsey Global Institute</a>. Alibaba and Tencent are currently dominating the online third-party payment market.

<a href="http://blogs.accion.org/wp-content/uploads/2015/12/transaction_volume1.png"><img class="size-full wp-image-250 aligncenter" src="http://blogs.accion.org/wp-content/uploads/2015/12/transaction_volume1.png" alt="Transaction Volume E-tailing China" width="980" height="556" /></a>
<h2>Credit scoring</h2>
The credit scoring industry remains nascent and is primarily controlled by the government; 8 private companies obtained approval to initiate pilot programs to provide consumer credit services in January 2015.

<a href="http://blogs.accion.org/wp-content/uploads/2015/12/industry_overview.png"><img class="aligncenter wp-image-230 size-full" src="http://blogs.accion.org/wp-content/uploads/2015/12/industry_overview.png" alt="Industry Overview" width="956" height="555" /></a>
<h2>Potential investment opportunities</h2>
Reviewing the various subsectors within the internet finance industry in China, it’s clear that the industry has a great deal of potential to create positive economic and social returns by bringing financial services to the underserved individuals and enterprises. Still, it’s important to remember that there are still some unresolved issues that should be addressed:

<strong>P2P</strong>: Huge market and very active with lots of startups
<ul>
 	<li>Social impact angle with platforms lending to micro, small, and medium enterprises, as well as to China’s middle to low-income population</li>
 	<li>Requires comprehensive due diligence as many platforms are problematic and uninvestable</li>
</ul>
<strong>Online / mobile 3rd party payment</strong>: Relatively mature market with existing players capturing market from the majority of internet users
<ul>
 	<li>Possible to explore impact investing opportunities with payment startups focusing on meeting the needs of particular underserved population segments, such as farmers</li>
</ul>
<strong>Credit scoring</strong>: Underdeveloped sector, but it’s still difficult for small startups to enter, obtain necessary regulatory licenses, and reach scale with existing markets dominated by established internet companies and credit rating agencies
<ul>
 	<li>Opportunities may come from ancillary segments (i.e. credit buildup and management)</li>
</ul>
<h2>Other considerations</h2>
Sector regulations are expected to be released by respective commissions later this year or early 2016 to provide a more detailed framework for industry players to both promote the growth of the industry and consumer interest.

Whatever regulations come about, the new policies could bring industry reshuffles and may raise entry barriers for new startups. Still, we remain hopeful that any new regulations will guide the industry toward healthy and sustainable paths.

Nancy Widjaja

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