Can ‘asset-light’ fintech crack the code for base-of-the-pyramid business?
Say you’re a huge asset manager looking for growth. You might want to keep tabs on the business models and innovations pulling the next billions of customers into the financial system.
Or say you’re one of the world’s largest foundations, pledged to improving lives for the poor. You might want to nurture and hatch a whole flock of digital-native companies delivering ‘fintech’ to the next billions of people who are climbing out of poverty.
Cue JPMorgan Chase & Co. and the Bill & Melinda Gates Foundation. Their multi-million dollar Catalyst Fund supports young fintech firms in emerging markets that are building companies able to reach the poor. The accelerator helps them overcome early capital and talent gaps on their way to raising institutional venture capital.
‘Finance is ethereal,’ David del Ser, who leads the Catalyst Fund, told ImpactAlpha. ‘If microfinance institutions managed to get profitable – and many did – I want to believe fintech can do it faster, cheaper and with a more efficient process.’
Catalyst Fund’s high-leverage strategy of supporting early-stage fintech firms that can scale is no accident. High-quality, low-cost financial services – bill pay, cash transfers, credit accounts, remittances, insurance – can crack the proverbial code on the low-margin, high-volume business model required for emerging consumers around the world. In aggregate, those four billion represent tremendous purchasing power – and pent-up consumer demand.
Fintech services are the kind of digital, mobile apps and services called out by Deloitte in a recent report on successful strategies for serving low-income markets: ‘Asset light’ business-models with low up-front capital costs and low marginal costs were able to serve customers living on less than $2.50 a day and turn a profit.
The bank and philanthropy tapped financial inclusion specialists BFA and brought in del Ser, who earlier had co-founded Latin America fintech firm Frogtek, to run the accelerator.
Last year, Catalyst Fund began deploying $2 million in grant capital and another million in tailored advisory services. Thus far it’s backed 13 firms in 10 countries delivering mobile money services, pay-as-you-go energy, crop and health insurance, education savings products and other services to mostly new financial services customers in Latin America, Africa and South Asia. Two more firms are set to join the third cohort. A fourth cohort of five startups will join in 2018. Each gets up to $100,000.
Three out of five of the startups in Catalyst Fund’s first cohort have received follow-on funding (Catalyst Fund notes the other two firms had raised funds prior to the program and haven’t again begun to fundraise). Last month ESCALA Educacion, a Colombia-based startup that partners with businesses and universities to help low- and middle-income workers build education savings plans, closed a seed round of funding.
Fintech investor Quona Capital, which sits on Catalyst Fund’s investor committee, had introduced the startup to the accelerator. Accion Venture Lab, another committee member, backed ESCALA, along with Mountain Nazca Colombia, Invictum Capital, and several Colombian angel investors.
In April, Kenyan startup Paygo Energy raised $1.43 million in seed funds to expand its pay-as-you-go clean cooking fuel services to poor households. The firm attracted funding from Novastar Ventures, Energy Access Ventures, Village Capital, Global Innovation Fund, and Global Partnerships/Eleos Social Venture Fund.
In January, Accion led a seed round for Catalyst Fund startup, alternative credit scoring firm Destacame, in Chile. Alongside Accion, Mountain Nazca and several Chilean angel investors also contributed to the round. Destacame is one of many efforts to provide alternative credit-scoring in order to underwrite loans to underserved customers, helping them prove their ability to repay loans through things like utilities payment history.
‘We’re building the capital continuum for young fintech companies,’ said Colleen Briggs, the executive at JPMorgan Chase who oversees the Catalyst Fund. ‘That’s the model.’
The accelerator is feeding the pipeline for a growing number of emerging-market fintech investors who are looking for hard-to-find investable startups. And those investors are feeding Catalyst Fund’s pipeline.
Among the half-dozen investors riding the coattails of the Catalyst Fund so far are Accion Venture Lab, Gray Ghost Ventures, Omidyar Network, Quona Capital and 500 Startups. These firms make up an investor committee that brings startups to the accelerator to work with. The firms then provide mentorship throughout the program and commit to considering investment on the other side. With promising startups essentially ‘de-risked,’ already three have attracted follow-on funding. Catalyst Fund is now expanding its network of investors.
Whether Catalyst Fund can deliver the goods – investable and scalable financial services providers reaching deep into the bottom of the global economic pyramid for customers – remains to be seen. That global banks and data-driven philanthropists see such firms as a source of both growth and large-scale impact with the global poor, signals the arrival of ‘inclusive fintech’ as a disruptive innovation.
Sitting between financial services and billions of lower-income customers are a whole lot of business models and technologies that need time, support and capital to understand the nuances and spending patterns of a largely unserved population. Around the world, still roughly 2.5 billion adults still don’t have a bank account.
In underdeveloped markets, ‘there’s just not the ecosystem to support early-stage fintech companies,’ says del Ser, who co-founded Frogtek a decade ago to bring tech-based business tools to small shop-owners in Colombia. ‘There are not enough angel investors. Skill set gaps are everywhere.’
It’s not for lack of capital. If current run-rates hold, 2017 venture capital funding for fintech companies globally could top last year’s $12.7 billion. But little of that capital lands outside of startup hubs in the U.S., Europe and China. Less still ends up in firms delivering financial services to the poor.
The very early fintech deals in low-income markets are too risky and too small for many investors. Capable founders with good ideas have often been unable to raise the funds to attract the talent to build and demonstrate their products.
With some cash, no strings attached, tailored bootcamps and access to a network of mentors and investors, Catalyst Fund thinks it can plug the gap.
Building a profitable and investable company that reaches the poorest of the poor takes the proverbial village. But it appears it can be done.
About half of the 18 million customers of BIMA, the Leapfrog-backed mobile microinsurance firm, for example, live on $2.50 a day or less. About 70% of pay-as-you go solar firm M-KOPA’s 500,000 customers live on less than $2 a day.
The two firms were part of recent study from Deloitte (backed by Omidyar Network and the Rockefeller and MacArthur foundations) that looked at 20 enterprises delivering basic services such as power, sanitation, health care, financial services and education to those living on less than $2.50 a day. Researchers found that most of the companies were able to viably reach the poor and that ‘some are able to reach surprisingly deep.’
One strategy for serving low-income markets, according to Deloitte, was using ‘asset light’ business-models with low up-front capital costs and low marginal costs, or the mobile-based apps and services common in fintech.
Another enabler: subsidies. Most of the companies in the study received some sort of subsidized capital, at least in the early stages. In some cases, subsidized capital was then replaced by more market-rate funding, say the authors, ‘suggesting subsidy does not preclude businesses from eventually becoming self-sustaining.’
Catalyst Fund’s del Ser says 80 to 90% of WorldCover’s 100,000 customers, for example, are first-time drought insurance policyholders; 90% earn below $0.75 per day.
The bottom of the world’s economic pyramid and those just above that level who have escaped poverty but are at risk of falling back into it (del Ser calls them Cuspers) make up about half the world’s population. If you’re a firm looking for growth, ‘You cannot neglect those numbers,’ says del Ser.
For a firm like JP Morgan Chase, which has been investing in fintech for over a decade, programs like the Catalyst Fund, which it backs out of its foundation, ‘generate insights that can inform the landscape of what’s happening,’ says Briggs.
Catalyst Fund believes it’s sitting on a dozen or so use-cases for how low-income people spend digitalized money. ‘They’ll get their crop insurance from WorldCover. They’ll pay for energy with PayGo. They’ll take credit with PayLatr,’ riffs del Ser.
Briggs says Catalyst Fund has also uncovered a trove of insights. One lesson: a smart application for philanthropic capital. Non-dilutive seed capital and targeted technical assistance in the earliest stages allows ‘startups to validate the proof points before making big asks,’ reads one of the lessons. For follow-on investors, the program can reduce value proposition, financing, product and technology risks.
Source: Impact Alpha