Fintech Companies in Emerging Markets

State of Play, Financial Inclusion Potential, And Your Role

Gayatri Murthy Financial Sector Specialist, CGAP The Enabling Environment For Fintech Fintech continues to explode globally, and in emerging markets Many services appear as do ecosystems of incubators, accelerators, etc. But things shift fast! Mexico Nigeria India

Indonesia

Enabling Regulation CGAP Research Shows 4 Enablers are crucial: • Non-bank e-money issuance • Use of agents • Risk-based customer due diligence • Customer protection Mexico Fintech Law

P2P legislation in India and Indonesia

M-Pesa enabled by Kenyan E-money issuance 4 © CGAP 2018 Robust financial and physical infrastructure is also key to fintech development

Robust financial and physical Account Holders infrastructure: (Findex) 2011 2018 • Mobile phone • Mobile internet connections Indonesia 20% 49% • Reliable electricity India 35% 80% • Digital ID system Kenya 42% 82% • Real-time, interoperable payments • Data sharing regimes (rare) Mobile Internet Penetration (GSMA) 2014 2018 Indonesia 21% 43% India 19% 35% Kenya 16% 24%

Mexico “Co-Di” 5 Payments Scheme India Stack

Enabling Regulation Robust financial and physical infrastructure:

Reach BOP or not: • Example: Nigeria’s BVN number • Example: Most agents, merchants and drivers focused in rural areas

Fintech can diversify the Enabling regulation market if allowed to compete

Fintech goes mass Financial and physical market where rails exist infrastructure

B2B Payment e.g: GoJek, Payments Solutions Mercado Libre Insurance Wallets Domestic remittances POS devices Credit Payment processing for merchants P2P versus balance sheet Individual, MSMEs, Agri Factoring, crowdsourcing Digital Service Banks Marketplaces

B2B B2C The fintech explosion (Serving banks, MFI) (Serving End customer) is varied and uneven

Focus is on classifying services and creating Payments- wallets, taxonomies remittances, POS Pay Payment distribution, machines, payment agent management, processors Many good taxonomies exist- World Bank, the BaaS, Digital Digital credit for Mix and the Cambridge SaaS, Banks Center Borrow Credit scoring, data chatbots SMEs, individuals, analytics, KYC agri, P2P, factoring, asset finance checks Market- places Save Micro-saving Inclusiveornot Literacy tools apps, social- savings Platforms

Protect Regtech, Suptech P2P insurance, voucher Cyber-security tools insurance, automated claims,

• Individual • MSME Segment • Agriculture • Asset finance This level of detail is • P2P key to understanding Business Digital Credit Model • Balance sheet viability, innovation lending and inclusivity

• Invoice Frontier/ Discounting early- stage • Crowdfunding • Digital ROSCAs

Product Innovation Value

Allows many to pay easily; merchants to digitize; Payments creates digital footprints QR Codes Easy-to-use apps POS

Reduces risk to lend; P2P lenders connect connects unused funds funds with borrowers; with lenders take on risk. Credit Alternate credit scoring using phone data and bank Creates creditworthiness transactions to assess people where it didn’t exist before and firms 12

Payment Remittances wallets Large variations in Digital consumer models and their credit maturity by market. Payment processors

Replicability Digital SME credit chatbots

P2P credit Digital Banks Payment aggregators P2P insurance Automated claims Asset finance Marketplaces Insurance Micro-savings marketplace Financial literacy tools Voucher insurance Invoice discounting

Early Stage Growth Stage Mature Stage

Model validation Customer use & behavior Financial inclusion effects Concerns Customer risks Scalability and market effects Seed Series A-C Series D+ Funding Large variations in capital availability.

Fintech could improve access for the underserved

POTENTIAL FOR IMPACT

“Micro and Small Enterprises”, and “Women” were the two project themes that received more funding than “Digital Finance”, in that order.

Private funding Global VC-Backed fintech deals by continent, numbers Q3'18-Q3'19

US Asia Europe Africa Australia South America

Q3'18 Q4'18 Q1'19 Q2'19 Q3'19

Source: CB Insights Report 2019 Source: Pulse of Fintech H1’19, KPMG (2019) So hard to assess gaps in market-making when full picture is not evident

• Total African venture investments reached a record high in 2019: USD 1.340 Bn in investments through 427 deals in equity and debt financing and a total of 203 investors • Funding is uneven within the continent. More than 75% of the deals were concentrated in Nigeria, Kenya and South Africa creating a funding gap in francophone. In 2018, only 1% of the $1.16 billion raised in equity by African Tech Startup in 2018 was allocated to francophone Africa. • Fintech retained its top position as the sector with most funding: USD 678.73 Mn, a 138.48% increase compared to the previous year

Over the past years, a handful of sectors and products (e.g. payments and credit) attracted more funding than other sectors

Example: Payment and Credit in India

Source: Microsave

Insurtech Deals and Dollars $10.0 160 133 139 $9.0 125 140 $8.0 120 $7.0 94 $6.0 100 Funders are now beginning to 71 $4.6 $5.0 63 80 invest emerging models like $4.0 47 60 $3.0 $2.5 40 $2.0 $1.4 $1.4 $1.2 Insuretech, but in select markets $0.7 $1.0 $0.2 20 $0.0 0 2013 2014 2015 2016 2017 2018 2019 20 Source: CB InsightsInvestments Report 2019 ($B) © CGAP 2018 There is lack of early-stage funding

Quarterly Deal Share by Stage to Global VC-Banked Fintech Companies 100%

10% 12% 10% 11% 17% 90% 4% 2% 3% 2% 5% 3% 4% 2% 3% 80% 6% 3% 7% 6% 8% 7% 13% 70% 14% 15% 15% 20% Other 60% Series E Series D 50% 28% 26% Series C 22% 29% Series B 23% 40% Series A Seed/Angel 30%

20% 37% 34% 35% 30% 31% 10%

0% Q3'18 Q4'18 Q1'19 Q2'19 Q3'19

Source: CB Insights Q3’19 Report 21

Broad source of Constant Active pipeline: Market disruption, funding pipeline for Large valuations, influencing Developed available: angel VC maintained follow-on equity incumbents, M&A investors, rounds, debt activity friends/family, capital markets own funds accessible

Seed Mature Venture Growth (prototype, (Pilot, iterate, companie (sales, founding marketing, impact) s (expand, team) sales) diversify)

Small set makes Constrained Scarce funding: Little or no it this far. Focus pipeline: Few Little to no angel pathways to scale is mostly on larger follow-on Emerging investing. Small and exit for proven models equity rounds, grants are very ventures like credit and focus on markets competitive (acquisitions by payments demonstrated incumbents are rare) models, little debt financing available

Valley of death 22

At all levels of maturity, we are not sure of our effects. Insight buried within firms, investors and few actors. No one sees the whole picture.

Mature Stage Growth Stage Early Stage

Low Public-Funder Participation Medium Public-Funder Participation High Public-Funder Participation

E.g.: Digital credit in E.Africa Experiments at the frontier

New models: savings, pension, etc that don’t break even early. Copycats New variations

Harder-to-reach segments like Big payment wallets P2P agritech MSME

Asset

• Do maturing products • What is the viability and risks • What innovations in see cost reductions and in growing models? early models can work secondary effects and scale? among the poor? 23 © CGAP 2018 Fintech’s Effects on the Underserved We assessed fintech activity against four key inclusion criteria

Cost Access Fit Experience

Makes services more affordable Makes financial services more Makes financial services better Offers an improved user accessible: suited to the needs and wants experience: Lowers operating costs of underserved customers. Expands eligibility through Has product features that are Lowers end user fees innovative means of CDD Addresses a customer need not easier to access, understand and served by typical products compare Offers more flexible payments Expands eligibility through innovative means of risk Aligns better with the needs and Has an interface easier for most Reduces the need for expensive assessment wants of underserved customers customers to understand and use devices Requires less interaction at Allows greater customization to Delivers clearer value to users Requires less or cheaper physical transaction points different contexts, user needs and connectivity preferences Helps users identify, understand Expands or improves the and resolve problems Reduces the need for collateral distribution of physical transaction Has a higher degree of suitability points for target customers Gives users control over data

Enjoys higher general trust and Stronger technical security satisfaction from users

Type of access Experience Cheap, real-time payments • Existing rails and long-term equity investments (despite being pre-revenue) offset costs and low price. • This gives the companies time and space to generate vast amounts of observable data, gain market share and offer bundled % of services. phone owners Digital individual credit • Leverages comfort and trust with mobile with a money. digital • Using alternate data such as mobile loan payments behavior and mobile use to offer tiny, non-collateralized loans

Fit

• Generally early- Agritech supply stage. chain For excluded • Need patient capital groups: informal domestic to develop scores, workers creditworthiness.

• Products are new and Micro-insurance with complex; require For long-term flexible premiums capital to ascertain finance: viability. • Don’t give returns for Micro-savings with a long time. bite-sized contributions 27

• If basic digital credit (Branch, Tala, Mshwari, etc) is extended to agriculture and SME loans, and are higher ticket, then the fully digital model does not work as well. Cost • Costs go up as partnerships, additional checks and deep context are needed on the ground if loans involve input financing for farmers or invoice factoring for SMEs.

Farmers More KYC High operation costs Higher interest rates

Credit

MSMEs Ground partners Need for debt finance 28

Policybazaar makes Paytm’s money manager GoPay’s platform insurance easy to pick expands use cases

Especially for complex products and for excluded groups, fintechs and their customers need to meet physically

MSME lenders in India assess firms Access bank transactions but also needs to “see” businesses and build sector expertise. Growth is restricted to few geographies as expertise develops Experience

Shared network of roaming agent throughout the territory that can Few companies have perform in person visits to people at figured out how to do their homes. provides a physical this at scale. front to a range of services that are natively digital.

• Funding for “large” companies going downstream, e.g.: Paytm, Policybazaar, etc • Funding “difficult” products aimed at: excluded groups (developing scores for farmers, MSMEs, etc) • Models that combine tech and touch E.g.: Kobra, Aye • Funding riskier models such as long-term finance— (insurance for gig workers, bite-sized savings)—where returns slow or not guaranteed. Questions for you

• Does this “state of play” for fintech resonate with you? • What factors that you have noticed are missing? • Are you satisfied with what you know about fintech? What are other knowledge gaps? • How do you measure market effects? For further reading

Main paper Case studies showcasing pilots with summary lessons 18 fintechs

http://cgap.org/fintech