At Accion Venture Lab, we want to know we’re always investing in the most promising seed-stage fintech companies — startups with the power to transform communities and reach the underserved. That means we stay on top of the trends in our dynamic industry and the markets we work in, whether it’s the growth of neobanks in emerging markets, innovative models in insurtech, or renewed focus on financial health.
As we continue to track the forces shaping fintech for inclusion, we’ve seen that beneath innovations in products and services, the very tectonic plates of our industry are moving. As the world shifts, the landscape of fintech for inclusion will be affected — from the ecosystem startups work in, to the business models companies set up, to the customers they target. We’ve identified six fundamental factors driving these changes. As investors, these trends affect how we evaluate early-stage companies, but even as startups build and scale their businesses, they will need to adapt to succeed.
- Tech platforms take over. While traditional financial institutions continue to position themselves as digitally innovative, we’re seeing only incremental progress across the globe. Many banks in emerging markets haven’t figured out how to partner with fintech startups yet and have shown a limited ability to go at it alone. But outside of traditional finance, we’ve seen companies offering financial services in many of our markets — in particular, large tech platforms like Facebook, Google, Amazon, and Ant Financial. These companies will continue to expand into Africa, Asia, and Latin America. As they do, we expect that small business and consumer lenders, as well as digital payments companies, will have to explore ways to remain relevant in their markets. The threat of big tech is heightened as newer and more local platforms in sectors like ride-hailing or food delivery also get into financial services, which is already happening in Brazil and Indonesia. But fintech startups shouldn’t just look at tech platforms as a competitive risk. They also may offer an opportunity. As tech platforms enter new markets, existing fintech startups offer out of the box and locally relevant acquisition targets for expanding platforms.
- Protecting customers matters more than ever. With more underserved individuals and businesses accessing fintech products, there’s a growing awareness of the need for stronger consumer protection — preventing overindebtedness, ensuring data privacy and security, communicating transparency in pricing, and much more. The introduction of GDPR has shifted data privacy laws in the EU, and while data protection remains a largely unregulated space in many emerging markets, that is changing. We will see consumers, investors, and regulators take a closer look at the issues, and fintech companies should be proactive in evaluating their consumer protection measures. The Center for Financial Inclusion at Accion’s Smart Campaign recently drafted Client Protection Standards for digital credit. Expectations for startups to protect customers will continue to grow, but we’ve already been working with our companies to build out responsible practices, particularly around data protection (see our resource for fintech startups here).
- Customers have more fintech options. Fintech for inclusion startups are operating in an increasingly crowded space. Gone are the days when customers had limited options. As a result, it’s getting more expensive to acquire customers online and getting more important for companies to focus on the right acquisition channels. This will involve finding win-win solutions with channel partners who have direct relationships with customers and are looking for their own ways to build a stronger value proposition. We’re scrutinizing the success of startups working through the employer channel. We’re also learning from what our own portfolio companies are doing working with retailers (like Toffee, which sells ‘bite-sized’ insurance through retail partners in India), manufacturers (such as Pula, which sells insurance to smallholder farmers through seed and fertilizer providers in Africa), and supply chain players (like Tienda Pago, which provides inventory finance for MSMEs through FMCG distributors).
- New customers aren’t enough. If there’s one metric that’s often overlooked in the pitch decks we see for early-stage fintech companies, it’s customer lifetime value. Companies are often more focused on new customer growth metrics. However, with an increasingly competitive landscape in many markets and the cost of new customer acquisition increasing, the focus is shifting to how well a company can retain customers. There are many strategies startups can take to improve retention — such as introducing better terms or new products — but a major part of it will be improving the customer experience for underserved customers.
- Fintech needs to do more. While the vision of fintech was an unbundled world where customers could pick and choose what they needed from an a la carte menu of apps and websites, many people still have an appetite for an all-in-one solution. So, fintech companies are making moves to expand their offerings beyond their initial use cases — providing insurance on top of credit, business management tools along with payment solutions, etc. This rebundling creates challenges for fintech companies as they consider new strategic directions — when should they offer these new lines? How do they build the internal capabilities to offer these services? To whom do they offer them? But ultimately offering more comprehensive services may help solve the retention challenge fintechs face. We expect to continue to see new digital banks emerge, offering customers better services across all of their financial needs.
- All-digital isn’t always the answer. Customers are changing as technology becomes cheaper, faster, and more readily available and as customer attitudes to this technology and financial services in general shifts. These changes present tremendous opportunities for fintech for inclusion startups to reach more of the underserved, but it will require startups to take a more nuanced look of their specific customers’ needs and preferences. While customers are becoming more comfortable with using technology, things are still slow to change. Nearly 2 billion of the 5 billion mobile subscribers remain offline. Even where they have access to affordable handsets, reliable data connectivity, and stable power, many people find accessing digital financial services challenging. After all, these customers may not be familiar or comfortable with technology or financial products, and they may not have reason to trust financial service providers. The result is that fintech companies will need to continue balancing new digital technologies with appropriate human interactions to engage, educate, and support their customers.
Vikas Raj also contributed to this piece.