The Best of 2013: What’s Game-Changing in Latin America?: How new financial technologies and business models are powering financial inclusion in the region
Editor’s note: As part of our Most Influential Post of 2013 contest, we are re-publishing the articles that attracted the most reads, social media shares and comments of the year. This article was the most-viewed for December. To see the full list of the most popular posts in 2013 and to vote for your favorite, click here.
At Accion’s Venture Lab, we often throw around terms like game-changing, disruptive, pioneering or revolutionary… after all, our job is to accelerate the world’s most innovative financial-inclusion startups. But what do these ideas mean in practical terms, out in the field?
For clients in Latin America, where I work, the answer is clear: they make all the difference.
Financial technologies, for instance, are quite popular right now. Throughout the region (particularly in Mexico), we often come across companies with “copycat” technologies, which have already been implemented in developed markets. Think card readers like Square, online processors like PayPal or peer-to-peer lending platforms like Zopa. Globally, these technologies are still new but are gaining broader acceptance and recognition. In Latin America, however, they’re at the cutting edge – and could prove revolutionary.
In the process of tweaking these established models for a new set of users, ventures tailored to the local operating context often have an advantage over global entrants. Take our portfolio company Clip, which enables Mexican merchants to accept credit cards with their smartphones. Only about 5 percent of Mexico’s 6 million merchants can process card transactions today – despite the 12 million debit cards and 25 million credit cards in the country – and penetration is even lower among smaller enterprises. Everything Clip does, from dongle design and risk management to marketing strategy and local bank contracts, is informed by its team’s personal networks and their deep understanding of Mexico’s unique user bases.
In most emerging markets, middle-class and middle-income customers are often early adopters for new financial technologies, and Latin America is no exception. Relative to Sub Saharan Africa or parts of Asia, countries like Mexico, Brazil, Chile or Colombia have particularly large and still-growing middle classes, which hold most of their countries’ purchasing power and are more technologically-savvy than the rest of the population. And because many Latin American entrepreneurs come from the upper and middle classes, they are more familiar with the pain points and behaviors of similarly-situated customers.
Our interest in these already-included markets may seem incongruous with our social mission, but in fact, these new financial technologies could over time disproportionately benefit people at the base of the pyramid – those who live in remote areas, have limited credit histories, or otherwise lack access to financial products and services. For example, while Kenya’s M-PESA originally started by targeting middle-class users in East Africa, the platform quickly filtered down-market. Venture Lab aims to accelerate this “trickle-down innovation” to broaden financial inclusion over the long term, even if the initial users of a given product don’t occupy the lowest rungs of the socioeconomic ladder.
But technology is rarely, if ever, an answer on its own, and Latin America still needs new business models to finance a plethora of basic services for the under-banked. While not as sexy as a new app, building an agent network or providing financial education over feature phones can have a huge impact on reaching the “last mile.” And with such innovations, we can offer low-cost financing for health, education or housing in markets where it simply does not exist. For example, we have invested in Salud Facil, which offers low-income customers in Mexico access to affordable credit for medical procedures through a partnership with a payroll lending agency. About 50 percent of working-age Mexicans have some form of health coverage through a network of notoriously inefficient government-run hospitals, but only 5 percent of these have private health insurance which allows patients to get quality treatment. Globally, neither health insurance nor payroll lending models may seem original – but in this local context, pioneering companies like Salud Facil that reassemble traditional models in a novel way are addressing a massive customer pain point.
That said, Latin America still has a long way to go in achieving financial inclusion, despite its generally positive trends. On average, its residents don’t save enough, have difficulty accessing credit, have limited credit histories, lack collateral to secure loans, and pay exorbitantly high interest rates when they do borrow capital. Many of them live in remote areas and end up paying higher fees for bank account usage and money transfers. As a result, they distrust existing financial institutions and rely on informal financing channels, which can often be harmful to their financial health.
Venture Lab impacts these customers both directly by investing in business model innovations, and indirectly by investing in innovative technologies that have the potential to more efficiently engage poorer customers over time, even if they initially focus on middle class consumers. In addition to Clip and Salud Facil, we’re particularly excited about directed remittance transfers that lower fees for senders and recipients, debt settlement platforms that help customers renegotiate their loans, new financial education tools that facilitate data collection and behavior change among users, as well as platforms that bring traditional savings groups online and that facilitate person-to-person or person-to-small business lending, which take advantage of the huge spreads between interest rates paid on deposits and charged for loans.
Our initial experiences in Latin America have taught us how to define innovation, promote financial inclusion and focus on unique local needs in each region. Now, we’re ready to apply those lessons to our global work.
Alina Kogan is an investment officer, leading Venture Lab’s work in Latin America.