Paul Breloff

Amee Parbhoo

Article

As fintech futurists, we’re often cast in the role of cash killer and digital champion. But on our recent visit to West Africa, digital payments weren’t an option and we were forced back to old-fashioned paper.

It started when we landed in Ghana without transit visas for our connecting flight to Lagos. We cajoled the kind airport staff to walk us through customs into the departure hall to try to buy new onward tickets from Accra to Lagos, so as to avoid a seven-hour layover. Success! An airline called Aero had our tickets…but no way to accept our credit cards. Out into the Ghanaian morning air, we went, in search of an ATM. After one was out of order, we found another one and withdrew a wad of cedis too large to stuff in our pockets. Tickets procured, and we were off to Lagos.

In Lagos we had to buy a return flight, to get back home from Accra later that week. We were assured in Accra that Lagos would have a credit card machine, and initially, things were looking good – until we handed over our international cards and their faces changed to the “I-hate-to-give-bad-news” scrunch. Alas: while we saw point of sale (POS) terminals at many shops in Lagos, very few terminals seem to accept international cards. Back to an ATM, a wad of bills, and a good old-fashioned paper ticket.

This theme continued all week. On our last night in Lagos, we ate a fantastic meal at a hip new restaurant called Nok. The cocktails and cuisine were world class, but the payments were still stuck in the past: we tried a total of five different credit cards on at least four different POS machines, and all of them failed. They debated whether to conscript us into labor as dishwashers to work off our tab, but ultimately let us return to our hotel, and planned to send someone to our hotel the next day to pick up cash. Of course, when we got to the hotel, the ATM was of course… out of order.

Our saga finally came to an end thanks to a tech-savvy entrepreneur who offered to give us nairas in exchange for a PayPal payment in dollars. Despite our best negotiating efforts, he sensed our desperation and got away with a pretty great exchange rate.

<img class="alignnone size-large wp-image-6720" src="http://blogs.accion.org/wp-content/uploads/2016/04/cash-is-kind-accion-venture-lab-digital-finance-receipts-1024x222.jpg" alt="cash-is-kind-accion-venture-lab-digital-finance-receipts" width="1024" height="222" />

In many places we work, a digital payments infrastructure is emerging and functioning and increasingly widespread. Particularly for the neighborhoods, hotels, and restaurants we spend the most time in, we can use our credit cards and debit cards seamlessly. In Nigeria, this simply wasn’t the case: the challenge of using digital financial services was real and was clearly an issue for banked and unbanked alike.

So what did we take away from our experience?

First of all, it seems clear to us that some of the hype about Nigeria’s digital payments infrastructure is way ahead of the reality. According to <a href="http://www.kpmg.com/africa/en/issuesandinsights/articles-publications/general-industries-publications/pages/payment-developments-in-africa-2015-volume1.aspx" target="_blank" rel="noopener">KPMG</a>, there are 170,000 POS terminals deployed in major cities in Nigeria in 2014 and growth of POS terminals is a primary objective of the Central Bank’s Cashless Nigeria initiative. Yet connectivity issues remain a key barrier to their use and reliability. While our experience is probably not reflective of the market, it does make us wonder about the impact that unreliable networks can have on usage long term. How much will customers put up with before ignoring their plastic and just sticking with cash?

Second, we were fascinated by the currency situation, with the Nigeria naira trading at very different rates officially (i.e., banks) and the black market. Our hotel would exchange our US dollars at a rate of $1 to 196 naira – but they were also willing to call a contact to come to the hotel “unofficially” and exchange for us at a rate of $1 to 315 naira. <a href="http://www.economist.com/news/leaders/21689544-president-muhammadu-buhari-repeating-economic-error-he-made-dictator-30-years-ago-hope" target="_blank" rel="noopener">A lot has already been written</a> about the Nigerian government’s currency policies, but the repercussions are significant and cause some inefficient behaviors — it not only massively chills foreign direct investment but also leads to foreigners like us converting “unofficially” and paying for everything we can in cash, rather than digitally. And our challenges as visitors pale in comparison to the challenges faced by the thousands of small businesses who buy and sell goods in different currencies. This will get even worse as the naira further devalues.

For us, the challenges we faced reminded us that this stuff can actually be quite important in day to day life. It’s easy to take for granted the ability to pay for things digitally, whether through credit/debit cards or mobile money, but when it’s gone, you miss it. We are now that much more excited to find and grow businesses tackling these problems and others in the financial inclusion space in West Africa.

Cash is still king in Nigeria

How life without a bank account means always weighing bad options

Recently, Paul Breloff participated in an activity hosted by FinX designed to simulate the experience of someone who is excluded from the traditional banking system in the U.S. due to economic circumstance. What follows are his notes on the experience.
On November 18, 2014, a group of about 25-30 financial service folks (a handful each of bankers, startup executives, investors, tech company reps, journalists, and nonprofit leaders) gathered in the Mission [in San Francisco] to put ourselves in the shoes of underbanked customers in the U.S.
Part scavenger hunt, part ethnography, FinX was a great chance to see the bewildering array of frustrating financial options available to underbanked customers in the U.S. who are short on liquidity, short on time, and short on attention. Here’s the limited description I got before showing up:

<blockquote>
“This experience is not your traditional workshop or walking tour of a local neighborhood. It’s an actual step into the shoes of consumers making real-time decisions about fees, expediency, time, and convenience. The 2-hour in-the-field challenge is a rare opportunity for executives of financial institutions, FinTech innovators, and nonprofit leaders to go beyond simply hearing about the challenges that consumers face, and experience the real-life constraints and options they have. With your team, you will attempt to complete financial transactions, such as cashing a check, acquiring and using a prepaid card, or seeking out a small loan.”
</blockquote>
Once we arrived, we were split into about nine teams of three and were given a packet of materials describing our situation. We were to pretend we were on a two-hour break between shifts and had to get done a variety of things before our 12:00 p.m. shift started again. We were to assume we didn’t have a bank account, and had to cash a check, get a money order, pay rent and electricity, load a prepaid card, purchase a gift for our niece, and grab a snack — this was, after all, our hypothetical lunch hour. We also had to figure out the best rate we could get on a $500 loan from anywhere we wanted.
I was on a team with Ariel Schwartz, Senior Editor at Co.Exist/Fast Company and Ethan Bloch, CEO of a fintech startup called Digit. We got off to what we thought was a fast start, finding a pawn shop and quickly negotiating a $30 value on my watch — which I was pleased with, given the fact that it was 15 years old and not worth much to begin with. We were also in high spirits when we located a shop called Ria (a chain across the U.S.) to cash our check. It seemed like it would be quick and easy and we could get everything done at once with only a $0.99 check cashing fee — our customer service representative, safely hidden behind a plexiglass wall, encouraged us politely that this would only take a couple minutes. But alas, they couldn’t get a hold of the payer of the check to verify by phone, and AML/CFT checks on me got tripped up. (Apparently, they couldn’t figure out why I lived in DC but was cashing a check in San Francisco.) We lost 40 minutes hanging around being told it would only be “three more minutes.” We were all a bit (politely) pissed off. So that didn’t work.
Next, we went to an Ace Cash Express. We waited in line about twenty-five minutes (precious lunch hour minutes ticking away), but once it was our turn, we were thrilled to learn we could indeed get most of our tasks done, but at a cost: $6 to get the $90 check cashed, a one-time membership fee with Ace, and other fees to get money onto a prepaid. Unfortunately, we couldn’t pay our rent check because their system “couldn’t find the payee.” They said this “happens all the time” and that we should “come back later.” A not-so-fantastic option if you’re working two shifts a day and still want to eat, sleep, and see your family.
Next, we had to send money to a family member, so we had to find a Western Union. We were able to do it, but again, were shocked by the cost: a flat-fee of $5 to send $30 to our friend in the U.S., who was going to pick it up later that day. That’s the going flat rate for a domestic remittance under $50: the equivalent of nearly 17 percent! This in an era where most of us can send value via PayPal or SquareCash or Venmo for no or little cost, riding on ACH or debit rails — if you have a bank account, of course. Unfortunately, our family member was told when she went to pick up the money that, “the systems were down,” and that she should, “try coming back in two hours.”
On the hustle back to our 12:00 p.m. shift, we had to pick up a gift for our niece. We chose a beautiful yellow hula hoop and Brazil soccer ball from the dollar store, where, thank goodness, they accepted our MasterCard prepaid card. We were running short on time so only had time to grab a coconut water and banana on the trek back to our second shift.
None of this was rigged; these were all real stores, processing real transactions with real checks and GPR prepaid cards, treating us like real customers. And it was a great experience. It made me think quite differently about the tradeoffs between fees, convenience, and dignity. As the clock was ticking, considerations of cost, quite frankly, went out the door as we desperately tried to just get things done and not show up late for our shift. In some ways, perhaps, “done is better than cheap.” Also, it was just amazing to confront the bewildering array of choices. Walking down Mission Street, there are quite literally dozens of check-cashing spots, pawn shops, big signs promising fast cash, each with its own confusing set of matrices outlining prices based on a ton of variables. Who has time for that — and who really cares at some point?

Closed bank accounts, closed doors: Life without a bank account

Accion Venture Lab made its first investment just about three years ago. We’re not necessarily a new name any more: we’ve built a team, looked at over 1,000 companies, invested in 22 pretty awesome financial inclusion startups, collaborated with great partners, and more.

At the same time, we still have so much to learn and so far to go before we reach our potential.

All in all, it’s a great time to pause, reflect on where we’ve been, and think about the best path forward. With this in mind, our team was excited when an invitation came from the MIT Innovations Journal to author a <a href="http://www.mitpressjournals.org/doi/pdfplus/10.1162/inov_a_00231" target="_blank" rel="noopener">case narrative</a> on the launch and work of Venture Lab.

This <a href="http://www.mitpressjournals.org/doi/pdfplus/10.1162/inov_a_00231" target="_blank" rel="noopener">case narrative</a> is an attempt to share the vision, the struggles, the little victories, and, perhaps most importantly, the lessons learned from our first three years.

Accion has decades of experience building more than 60 microfinance institutions (MFIs) in more than 30 countries that today serve millions. It was and continues to be a good – and sustainable – business model in its own right.

What caused Accion to evolve its thinking and expand its business beyond MFIs? What has Accion been hoping to achieve by investing in early-stage startups that are working on cool, but largely unproven, fintech solutions? What’s been going on in the broader financial services and financial inclusion landscape to shape the current opportunity for Venture Lab? And how could Accion use Venture Lab to explore cutting-edge innovation and eventually harvest insights to feed strategy for the rest of the organization? You’ll find out all that and more in the <a href="http://www.mitpressjournals.org/doi/pdfplus/10.1162/inov_a_00231" target="_blank" rel="noopener">case narrative</a>.

In our piece, we also try to situate Venture Lab within the broader impacting investing space, which is itself evolving – and increasingly evolving away from small, seed investments to bigger vehicles mobilizing ever more capital, now reaching into the hundreds of millions of dollars. With this in mind, how can our $10 million Venture Lab hope to make a difference; how can we hope to change the world with small investments in pure startups?

We talk a lot about the unique challenges of navigating these various dynamics to articulate an investment thesis, build a team, source great opportunities, and invest in and support game-changing entrepreneurs, technologies and business models.

Paul Breloff

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