We met Maria, a corner shop owner in Chorillos, a popular neighborhood in south Lima, as she was opening her shop and starting off her business day. We were surprised that within 15 minutes of chatting with her, three salesmen from different distributors visited to check the status of her inventory or deliver more stock. Small shop owners don’t have the cash liquidity to make large inventory purchases all at once, so distributors need to visit frequently – sometimes multiple times a day – to deliver small batches of orders. For example, one salesman brought only five cans of cat food per visit. However, things are changing since Maria started borrowing from Tienda Pago. Maria has grown her store substantially from a simple window to an entire floor. She plans to convert it to a full self-service store in a few weeks.
Tienda Pago’s loans enable small shop owners like Maria to make larger purchases and keep their shelves fully stocked while carefully and gradually grow their businesses. Through a mobile-based platform and by collaborating with fast-moving consumer goods distributors such as Cola-Cola and Backus, Tienda Pago provides short-term working capital for small mom-and-pop shops to purchase inventory from those distributors. These shops represent more than 70 percent of consumer goods sold in emerging markets, and in Peru, there are more than 200,000 of them. For the fast-moving consumer goods distributors, these local shops are a key part of their strategy to maintain margins and negotiation power against large retailers.
Venture Lab, Accion’s seed-stage investment vehicle, partnered with Tienda Pago in December 2015 to provide capital and strategic support to the company as they build and scale operations in Peru and beyond. We were excited by their innovative approach that enables micro and small businesses to access working capital by leveraging technology and relationships with distributors. Small businesses typically lack a credit history which often prevents them from accessing low-cost financial products from traditional players such as commercial banks. The average loan provided by Tienda Pago is less than $400, which banks and other lending institutions would find too costly to serve. By harnessing distributors’ and small shop owners’ longstanding transactional relationship, Tienda Pago is able to leverage the strong intangible collateral that incentivizes borrowers to make timely repayment of loans, therefore enabling Tienda Pago to maintain a very low default rate.
We later spoke with Carlos, a logistics manager working with Coca-Cola, one of Tienda Pago’s partner distributors. After delivering two crates of Coke to a local shop, Carlos shared how distributors’ employees also benefit from their company’s relationship with Tienda Pago. Logistics teams like Carlos’s usually have to collect the cash payments from the shops where they deliver inventory. This poses significant security risks. Carlos’s driver, Miguel, took a moment to step out of his truck and speak with us; however, he quickly returned to keep an eye on the cashbox containing that day’s sales from other stores that are not yet Tienda Pago’s clients.
Tienda Pago helps relieve distributors’ burden of cash collection and reconciliation of invoices as it facilitates payments from shop owners to the distributors. This helps reduces the number of shops paying by cash and thus reduces the risk of carrying cash for the distributors.
We hope to see more innovations like Tienda Pago’s emerging from Peru. Similar to the rest of Latin America, Peru is still largely underbanked: of a population of 30 million, only 8.5 million have credit products. Financial institutions struggle with default rates, which are as high as 30 percent on average. We believe there is a big opportunity for financial technology to transform the sector into becoming more inclusive and more robust.
The Peruvian fintech ecosystem is nascent, yet dynamic. With just a couple of active venture capital funds and only a handful of accelerators, a primary bottleneck for startup growth is the lack of funding. We’re looking forward to collaborating with partners to develop a greater capacity to help nurture and grow innovative ideas and spur entrepreneurship in Peru that would help catalyze financial inclusion in the country.
Learn more about Tienda Pago in the fifth episode of VentureKast, Venture Lab’s podcast.
This post originally appeared on the Wall Street Journal’s Multipliers of Prosperity, in partnership with the MetLife Foundation.