Emerging markets have, to many western minds, been a place where technology trickles down. For technologies that require heavy capital investments, massive distribution costs and networks, this has and will remain to be true. But being unencumbered by existing infrastructure and customer expectations, the emerging markets also reveal a new opportunity. Customers can be nurtured differently relying on what they are now quickly becoming familiar with: rapid internet penetration, a mobile-first approach and an interwoven network of agents and channels.
This ability to implement leapfrog technologies comes out as a result of what is effectively a Blue Ocean strategy for commercial based organisations realising a new untapped market opportunity. Larger global banks suffered a major reputation and credibility setback with the financial crises of 2008. And with 2.5 billion people lacking access to basic financial services around the world, 3 billion people coming online and joining the global internet community by 2020 and over $150B revenue potential in the MSME market segment untapped in emerging markets. With a stumble of the giants and an untapped market, the timing is right for innovators from all corners to bring new financial services into these markets.
Microfinance Reveals a New Market
Microfinace, reaching its crescendo in the mid-2000, was famously regarded as a cure to poverty and an incredible financial investment vehicle. In truth it was both and neither. It in fact was the toe-in-the-water of both a social need as well as a massive market opportunity at the intersection of the two.
Where microfinance struggled was costs. Giving out loans for a few hundred dollars is, surprisingly, not that much cheaper than giving out loans of a few thousand dollar. And in countries that had almost no internet connectivity, not credit bureau, not payment channels, and barely and customer identification the costs exploded. They were pioneers and had discovered financial and social-impact goals, often confusing the two.
Yet, this is an industry now being blindsided by technology innovation and new entrants able to achieve unprecedented scale in this market. In a report to the Global Seep Microfinance Network (of which Mambu is a member), Shannon D’Onofrio raised a flag saying that technological innovation are “attracting a broader range of providers that will undoubtedly alter the financial landscape” and prompting their members to “to reflect about the future role of microfinance institutions” in this new world.
The Roots of Innovation
So what are these innovations, and why are they opening up new market opportunities? At the core of the issue the structure of a financial institution and what work it allocates to people and what it allocates to technology and how smoothly the two interact.
A western organisation, focused on online-only, like ING Direct or the newly launched My Community Bank in the UK clearly aims to reduce its physical and human footprint to a minimum. Everything is done digitally. Online loan origination, integration of credit bureau data, digital signatures instead of letter, sms and email instead of fax and phone calls and direct debit instead of cheques and cash. Yet these organisations have to fight hard to take away market share from their banked customers. The time is ripe for the same innovation to take place in emerging markets and move into the blue ocean underserved individuals and small businesses.
Rapid Growth on the Back of Technology
We at Mambu see the same innovation happening in emerging countries but with incredible rapid growth rates. We have customers in parts of the world growing at over 10% month on month. How? By starting with a blank slate and applying simple, cost-effective effective versions technology that are appropriate for the markets.
They automate processes like disbursements using any and all channels available: ATMS, M-PESA, Partner Banks. They automate credit assessment using both heuristic customer data as well as financial. They reduce transaction costs by bringing their services via basic smartphone apps, online client banking portal, USSD menus and agent networks.
So why is this all possible now? The simple answer is cost. To start a technology savvy financial institution was a very heavy investment. A million dollars on core banking software. A few hundred thousands on servers. And of course a team of experts to manage and maintain it all. For example, a core banking project in Mexico to transform a few small microbank’s technology into a "modern" banking solution equated to $300M from the World Bank's, 75% of which was on technology. And with so much money and time spent to put a good platform in place, there’s little will or resources left to really innovate.
Simplicity in technology enables transformation and leads to better integrations, faster deployments and lower costs. To customers who use our platform and any modern fintech startups in Europe and the US who build their own cloud technology integrated with new payment channels, building business automation engines, proprietary credit scoring algorithms is trivial.
Operationally, they put their technologists not as servants of the rest of the business but as equals. This enables them to see change as it’s coming, suggest ways to automate or reduce overhead and help drive the business. They can deploy and test new markets, products and channels rapidly, without having a large cost of ‘failure’.
They position themselves to grow with the market. They know everyone in emerging markets will soon have affordable smartphones. They know that internet and mobile access will be ubiquitous. And they know their customers won’t stand paying 100%+ interest rates for inefficient services. Their brand, the processes, their products, their pricing are, from the very beginning aligned with an emerging market. And when the emerging market is ‘the rest of the world’ from a western perspective, that’s a big opportunity ahead.
By Eugene Danilkis, co-founder and chief executive, Mambu