The investor perspective on driving financial inclusion through technology

Creating new platforms, digitizing microfinance institutions, and catalyzing capital markets

At Accion, we’re focused on making sure technology transforms financial services in a way that works for everyone. So I was excited to join the conversation at European Microfinance Week on financial inclusion through technology from the investor perspective.

During the panel, I discussed Accion’s pioneering role investing in early- and growth-stage inclusive fintech companies, as well as how we’ve used our learnings from that work to help our microfinance partners integrate digital approaches. Through strategic digitization, microfinance institutions and banks can improve operational efficiencies, serve more customers with little to no formal credit histories, and increase their impact. We’re transferring successful models that we’ve helped develop in innovative markets and experimenting with bringing them to other parts of the world.

Convergence of fintech and traditional finance

One of our industry’s biggest issues in the provision of financial services is the cost of delivery — and the human intensity and limits of brick and mortar only models. Technology can help us solve this by reducing paperwork, human-driven analysis, and barriers to expansion. While earlier stage companies are often best poised to leverage technology because of their streamlined decision-making, entrepreneurial flexibility, lack of bureaucracy, and ability to experiment, microfinance institutions and banks can leverage technology to better serve clients. By reducing operating costs, they can pass savings along to clients in the form on lower interest rates on loans, especially for an institution’s highest quality customers. In market economies, this will happen as competition adopts similar efficiencies and institutions compete for clients. Technology can also improve customer experience by allowing institutions to expand their reach and capacity.

We’ve seen what traditional financial service providers around the world are capable of when they embrace digitization. Our long-time partner, BancoSol in Bolivia — which serves more than 650,000 savers, over 260,000 borrowers, and close to 190,000 microinsurance clients — is one of the largest microfinance institutions in the world.  The bank has maintained some of the lowest operating costs in the industry by digitizing its operations an effort that took a great deal of cultural change. Accion Microfinance Bank Nigeria took advantage of the country’s high mobile penetration and created a product that allows its clients to conduct essential banking services from their phones, driving increased access and usability.

While the potential for financial service providers to leverage technology is massive, there are still challenges. The cultural shift for traditional microfinance institutions from brick-and-mortar to digital isn’t always a smooth or comfortable change. The loan officer-client relationship that was successful for institutions in the past is still imperative for the future, and technology should be used strategically and selectively to automate processes, enable institutions to go deeper in the credit spectrum, and better serve clients.

New platforms for financial services

In addition to the digitization of traditional institutions, we’re also leveraging our knowledge to help build financial services platforms — business models that are driven by strategic partnerships between banks and underserved micro, small and medium-sized enterprises (MSMEs) to drive financial inclusion through technology and distribution networks. Sub-K, a tech-enabled agent network in India, partners with multiple banks to bring financial services to rural villages across the country. They do this by equipping local entrepreneurs with handheld banking devices — in essence, turning mom-and-pop shops into mini bank branches. Sub-K serves over 2 million customers through its platform, bringing financial services to people where they live and work in remote rural India.

Platforms like Sub-K, which are already heavily invested in technology, face unique challenges. They must create an incredibly robust database to underwrite credit properly and maintain low levels of risk. Since their business models are often unproven, it can also be difficult for these companies to build a scalable network and find banks that are willing to partner with them.

Investing in inclusive innovation

Accion plays a unique role in the investing space, acting as both an investor and a nonprofit, where our mission to create a financially inclusive world always comes first. We know we won’t reach the 3 billion financially underserved people alone. So we invest in scalable and commercially sustainable business models to help prove their viability. Often, we go where others will not and help companies build demonstration models, ultimately catalyzing private investment and capital markets for investment.

We’ve seen this strategy work across our portfolio. Three years ago in India, we invested in the small startup Aye Finance because of its industry-cluster approach to serving small businesses in Delhi and its vision of a data-driven approach to better serve entire industries of clients. The company has flourished in the past few years, and its latest investment round was led by CapitalG, an investment arm of Google.

Also in India, we’ve seen the growth of Northern Arc, formerly IFMR Capital. Northern Arc has catalyzed over USD 7 billion in funding to companies that provide financing for affordable housing, MSMEs, agriculture, and commercial vehicles. By demonstrating the viability of their borrowers’ underlying client base, they’re opening up a brand new source of funding from commercial investors. Today the company is backed by Eight Roads Capital, an early backer of Alibaba, and Standard Chartered Private Equity. We’re excited to see companies like Aye and Northern Arc generating broader interest through their innovative approaches to financial inclusion.

By continuing to catalyze interest in disruptive business models, leveraging technology-driven platforms, and making sure traditional institutions can unlock the potential of digital transformation, we believe we can make a definitive difference in the world. We can cultivate a financial ecosystem that brings accessible and useful financial services to the people who need them most.

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