FinTech has emerged over the last few years as a leading innovation in delivering financial services. Using innovation to improve access to finance is one of the core objectives of MASSIF, a fund that FMO manages on behalf of the Dutch government.
In 2016, MASSIF invested USD 7 million in Accion Frontier Inclusion Fund (AFIF), the first global FinTech fund to focus on financial inclusion. AFIF is managed by Quona Capital, a venture firm investing in fintech for inclusion in emerging markets. Accion is the General Partner and anchor investor of the fund. The aim of MASSIF’s investment was to provide MSMEs in remote and financially vulnerable regions with access to finance. In 2018, FMO asked Dalberg to study the impact and effectiveness of AFIF through the evaluation of three of its MSME-focused portfolio companies in South Africa, India, and Mexico.
The study analyzed the impact of the investment in terms of financial inclusion and whether it was additional and catalytic.
Overall, the study found that AFIF and MASSIF were broadly aligned in terms of sectoral overlap, geographic fit and a shared understanding of financial inclusion. They also complemented each other, with AFIF’s risk profile fitting nicely with MASSIF’s need for a high degree of specialized knowledge.
Where the two diverge is in their customer target group – whereas MASSIF targets the ‘unbanked’ in rural areas, AFIF more broadly targets both the ‘unbanked’ and ‘underserved’ segments. This difference is also reflected in AFIF’s targeting of various emerging markets compared to MASSIF’s focus on low-income countries.
AFIF’s portfolio focuses on financing consumers and small and medium-sized businesses in emerging markets, and six of its 13 investments at the time of the study were in companies focused on underserved MSMEs.
The evaluation of Yoco, a mobile Point of Sale (POS) payments provider in South Africa, showed that Quona had a major catalytic effect, as it attracted additional Venture Capital and institutional investors, including from FMO itself in 2018. Yoco’s digital solution is greatly valued for its greater affordability compared to banks, due to the low operating and ownership cost of devices, and for the opportunity of using Point Of Sales data for business analytics. Yoco’s clients are primarily young retail and service MSMEs, a third of which are women led, and the majority of whom had never accepted card payments before Yoco. Yoco focuses primarily on urban, underserved MSMEs, rather than rural unbanked MSMEs. Since the 2019 study, Yoco has expanded its product offering and plans to expand into other African countries.
NeoGrowth, a thin-file lending company in India, benefited from a high level of catalysation, as AFIF attracted additional debt funding from FMO, and other funds, which is a positive indicator for future equity investments. Quona also delivered key strategic benefits as a thought partner and advisor. NeoGrowth is now able to provide more favorable and longer-term loans to informal creditors. In addition, it can provide faster, larger, personalized loans than the commercial banks, leading to NeoGrowth becoming one of India’s leading technology enabled lenders.
NeoGrowth’s clients are predominantly credit-constrained urban MSMES in retail and services, while it also aspires to focus on first-generation and women-led enterprises. At the time of the study, the company’s clients did have one complaint: the interest rates were higher than at a bank because of the high risk of clients in this segment, though the rate drops significantly after the first loan. The rates were competitive when compared to Non-Banking Financial Institutions and are lower than those charged through informal credit. Moreover, many of these businesses would typically not be eligible to obtain credit from banks. Clients do value the short-term loans, daily payments made through Point Of Sales and the high level of transparency. Though its clients benefit from increased creditworthiness and demonstration effects, half of them experienced a decrease in their credit score, likely due to economy-wide shocks and demonetization, which caused liquidity issues for MSMEs.
Konfio, which offers digital banking and software to MSMEs in Mexico, showed that AFIF was highly catalytic in attracting both debt and equity investors, which contributed to its stabilization. Quona, meanwhile, provided the lender with advice on the structures and systems needed to succeed. Konfio’s clients are primarily rural MSMEs that lack access to business loans and have benefited from the ‘no collateral’ loan requirements. Konfio’s clients have experienced positive revenue and employee growth, which in turn has allowed the lender to increase the size and tenure of its loans.
The findings of the 2019 study indicated that AFIF’s portfolio companies improved the financial inclusion of underserved MSMEs. In most cases, AFIF made financial services more affordable for MSMEs and helped them to grow in terms of revenue. An important learning is that Development Finance Institutions (DFIs) can play an important role in developing the fintech sector by driving collaboration and knowledge sharing across fintech firms, investors, and exports, possibly through a platform.
The key recommendations for FMO coming out of the study included expanding MASSIF’s Theory of Change to include a stronger focus on FinTech for the underserved as well as the unbanked. Tracking and consistency can also be improved by increasing sector–specific monitoring, evaluation, and learning (MEL) frameworks for thin-file lenders, digital payments and other FinTech subsectors. Moreover, FMO should continue to support sector development for FinTech by identifying further platforms and forums to support, such as the Quona and Accion Venture Lab CEO Forum & Summit financed by FMO in 2017 to enable Fintech practitioners to share experiences.
Since the completion of this evaluation, FMO has continued its commitment to invest in responsible FinTech and has built more internal capacity. Due to the global pandemic, a CEO exchange session planned had to be cancelled but is expected to be rescheduled once lockdown measures are relaxed.