Scaling startups is hard no matter where they are built. However, in emerging markets, entrepreneurs face a range of unique challenges to succeed. This topic is close to my heart and the subject of my upcoming book, Out-Innovate: How Global Entrepreneurs – from Delhi to Detroit – Are Rewriting the Rules of Silicon Valley (Harvard Business Review Press).
A recent survey from MIX reinforced my thinking on some of the unique customer and infrastructure challenges that fintechs in emerging markets face. MIX surveyed nearly 50 fintechs across Africa, East Asia, and South Asia, representing different business models spanning credit, payments, savings, insurance and infrastructure. Three narratives stood out: emerging market fintech entrepreneurs create inclusive offerings, build multi-faceted solutions, and leverage partners to scale.
Emerging market fintechs create inclusive offerings
Over 1 billion people globally are unbanked and 3 billion are underserved. Many of them are in emerging markets. It is no surprise that nearly 90% of entrepreneurs surveyed mentioned accessibility as core to their mission. On average, from the study, 40% of their customers were below the poverty line. Furthermore, 51% are trying to improve the uptake of formal financial products among the underserved, and 18% are distributing financial services to new clients through their platforms.
Many of the companies’ operational KPIs are directly linked to the success in scaling inclusive solutions. If retention rate improves, then customers value the product and stick with the company. If customer acquisition costs (“CAC”) decrease, then customers are more amenable to sign-up, and organic traffic is likely to improve.
Of course, everything is not all rosy—particularly on diversity in the customer base. Startups surveyed reported a female customer base of only 36% at the median. This can certainly be improved, because microfinance institutions have, on average, 80% female users. As fintechs look to create markets, supporting diversity is not just the right thing to do; it is also an untapped opportunity.
Solutions are multi-faceted
One of the explanations for the magnitude of the underbanked challenge is the high cost to serve customers–especially those that are remote, have low account balances, or limited usage.
To succeed in addressing these customers’ needs and drive usage, entrepreneurs in the survey are using multiple reinforcing strategies across a range of product categories. Some of the key solutions include leveraging new types of data analytics (e.g. for real time credit scoring), building new lower cost engagement methods (e.g. chatbots), and customizing user interfaces.
It isn’t just product innovations that are aggregated. Often, products are bundled, which creates a platform that can serve a wider customer base and address more customer needs. Interestingly, among startups that bundled, the survey found CAC was 60% lower than single product companies.
Partnership and support is critical
In a way, emerging market fintechs have an incredible market opportunity. Unfortunately, they often have to build a range of infrastructure to succeed. The most important barrier for adoption among the underbanked according to the survey was the legal requirement for a national ID. Additionally, many target users do not have smartphones or access to 3G or 4G connectivity, so fintech startups are building solutions that do not exclude this cohort by leveraging SMS and 2G for their products. This is why startups need to build what I call the “full stack”, building enabling infrastructure to complement and enhance the core product.
They also partner with others to scale. Fintechs that used agents to scale were able to decrease their CAC by over 50% and improve their unit economics.
However, ecosystem players have an opportunity to support some of this infrastructure to catalyze innovation. India’s Aadhaar program is an example of an exciting government initiative. Aadhaar provides 1.3 billion Indian residents with a digital identity based on biometrics, along with a unified platform to access government benefits, open bank accounts, subscribe to telephones, and demonstrate their identity. Through Aadhaar, identity verification could be as easy as a plug-in. The government in India, aided by technologists from the volunteer group iSPIRT, are building IndiaStack, a portfolio of application programming interfaces (APIs). These tools may catalyze a whole new set of innovations.
What We Can Learn
Too often, it is easy to port perspectives and approaches from Silicon Valley to emerging markets. Yet the context could not be more different. Fintech companies in the US have a rich mosaic of support systems: mainstream customer identity, venture capitalists who offer not just capital but support teams, and even regulators who are increasingly looking to engage with innovators. Emerging market founders can feel isolated by comparison. Yet within this context, they are also building their own playbook for success. These offer us lessons for a more inclusive future.
I invest in, write about and teach global entrepreneurship and fintech. I am a venture capitalist with Cathay Innovation, a global venture capital fund that invests across North America, Europe, Asia and Africa, and affiliated with Cathay Capital. I teach entrepreneurship at the Middlebury Institute for International Studies at Monterey.
My upcoming book “Out-Innovate: How Global Entrepreneurs – from Delhi to Detroit – Are Rewriting the Rules of Silicon Valley ” (HBR Press) will be out in early 2020.