Investing in Financial Inclusion Through Start-Ups
Start-ups often drive innovation but can lack access to capital and strategic support. Particularly in emerging or developing countries. As a result, many promising ideas are never given the opportunity to enter the market.
Some two billion people, more than a third of the world's adult population, are financially excluded according to the World Bank. They are not offered financial services by main stream banks because they are not considered viable clients because they are poor or they choose not to use formal financial services due to the costs, travel distances or the often-burdensome or difficult to meet requirements involved in opening an account.
Accion, a global non-profit organization, strives to build a financially inclusive world and has over the last 55 years been working on giving the world's poorest financial tools to improve their lives. How? By providing technical expertise to microfinance institutions, and increasingly, by supporting financial technology products and services. The rapid adoption of technology – particularly mobile phones and the Internet – across income levels and geographies opens up new possibilities to deliver financial services. The new digital environment has led to the emergence of fintech start-ups worldwide developing novel, technology-enabled solutions to innovate and improve financial services. This inspired Accion to set up Venture Lab in 2012 as its in-house venture capital arm, focused on investing in early-stage start-ups that develop financial inclusion solutions focused on low income individuals and business at the base of the economic pyramid.
Seed Capital and Management Support
Start-ups often have difficulties obtaining access to capital to finance their businesses development. As a result, many promising ideas and products are never given the opportunity to enter or scale in the market. Venture Lab was set up with the aim of filling this gap by providing patient seed capital and non-financial support to start-ups worldwide. Venture Lab typically invests USD 100,000 to 500,000 in equity or quasi-equity instruments into each of its investee companies. In addition to capital, it provides portfolio engagement services to strengthen investees' systems and processes, such as risk management, talent recruitment, and strategy development.
Tackling the Financial Exclusion of the Underserved
Venture Lab focuses on digital lending (e.g., online lending for small businesses), the use of alternative data for credit scoring, digital payments, and customer engagement technologies. The venture capitalist also strives to achieve indirect effects, by enabling its portfolio companies to share insights from their business models and technologies with others. This way the lessons learned by the investee companies can extend beyond their immediate clients and markets.
Fintech Solutions across all Borders
The global flow of innovation and information from developed to emerging markets and vice versa as a result of the digital nature and scalability of such start-up business models can also be of interest to large financial institutions. The digital fintech solutions designed by the start-ups supported by Venture Lab are initially aimed at the base of the wealth pyramid. However, they could then also be extrapolated to target groups at the other end of the wealth spectrum: the world's wealthiest individuals – ultra-high-net-worth individuals (UHNWI). "The next revolutionary fintech solution shaking the UHNWI segment could at the outset have been developed for the base of the wealth pyramid," says Lara Warner, Chief Compliance and Regulatory Affairs Officer at Credit Suisse.
Eligibility Criteria for Investment
Venture Lab's investees need to be for-profit enterprises with new products or business models that ultimately expand the range of financial services for underserved customers. The eligible companies do not need to already generate a significant revenue stream but should have passed the research and development phase. They are also required to have a full-time team in place, and ideally have a pilot product or service, or at least a prototype available on the market. Venture Lab also strives to co-invest with like-minded investors, particularly for later-stage investments into its portfolio companies.
Existing Investment Portfolio
Twenty-four companies, with a wide variety of business models, currently benefit from Venture Lab's support: One of them is First Access, enabling traditional lenders, such as microfinance institutions, to better evaluate the financial risk of existing and potential clients with little or no traditional credit history. It does so by examining non-traditional sources of data, such as the demographic, geographic, financial and social aspects of clients' mobile phone usage to predict credit risk and then sends a credit score or recommendation to the lender. This not only helps financial institutions to make better credit decisions, but also increases their willingness to lend to people with no credit history, in due course leading to increased financial inclusion.