You’ve been working towards financial inclusion for the majority of your career: as a loan officer, through to Accion, and now with Quona. Why is financial inclusion so important to you?
MBE: Financial inclusion resonates with me because it’s a powerful lever for change that works on both micro and macro levels. I grew up living in both “developing” and “developed” contexts, so the notion that innovation and markets have the power to influence people’s daily lives and economic systems became evident to me from an early age.
One of my mentors used to say, “We can’t be patient with poverty.” He instilled in me the idea that markets work much more quickly than governments or foundations.
I also fundamentally believe that to address a problem as massive as global poverty, we need to mobilize a resource that’s also plentiful: the world’s capital markets. Financial inclusion is about harnessing the power of these markets and putting them in the hands of everyday individuals and entrepreneurs.
Financial inclusion is about harnessing the power of markets & putting them in the hands of everyday individuals and entrepreneurs.
On the micro-level, financial inclusion is one of the most powerful mechanisms to change peoples’ daily quality of life. Innovations like mobile money have had an incredible impact on the lives of people all over the world. Rather than walking 20 kilometers to pay a bill and taking children out of school to watch the livestock, farmers in Kenya can now pay by entering codes on their cell phones. This has a huge impact on the farmers’ productivity, and it was only made possible within the past 10 years. Democratizing access to financial services to previously underserved populations has shifted the way people can expand their businesses and grow their household income.
The number of impact-driven investors, many of whom have a much broader focus on impact than Quona does, has increased globally. To what extent you think Quona’s narrow focus on financial inclusion has either accelerated or impeded success, both at a fund level and a company level?
MBE: When we created Quona, we were in an era of industry building, when the “impact investing” moniker had just been developed. It was early, and it involved a lot of well-intentioned people launching funds. It quickly became clear to us that we wanted to be a point of light in this field and have our social and financial performance demonstrate how profit and purpose can be mutually reinforcing.
The decision to focus Quona on fintech specifically within financial inclusion was quite deliberate, informed by over a decade of experience seeing microfinance be successful. Traditional financial services had hit a wall. We needed new approaches that balanced tech-and-touch in a more nuanced way so that we could achieve our goal of radically improving both access and quality of financial services to the underserved.
Coinciding with the early growth of impact investing – and the realization that fintech for financial inclusion should be our focus – were enormous concurrent technological and demographic trends that made it the perfect time to launch a fintech fund. First, you had the proliferation of mobile phones and smartphones in emerging markets, which put the power of a computer in the hands of an underserved person. Second, you had the expansion of internet access and 4G more globally, which allowed social media to take off and enable business models, like software as a service, and other cloud-based models, which dramatically changed the cost structure and what I call the “physics of business.” The third key trend is that the data created by this digital footprint and this massive demographic trend of emerging market consumers using this technology generated a tremendous data base of information to be mined for understanding, underwriting, and communicating with consumers.
All of a sudden, we had the power of analytics that could help reduce the cost of launching and running these business models, and also open new doors about the types of customers that could be acquired and served. These trends converged when we were deciding to launch our fund, and they have been key to our financial success and in our ability to invest in companies that are changing the game of financial services to include populations that were previously underserved at scale.
In terms of the impact that focusing on financially underserved populations has on our investees, there’s a big difference between a great idea, a good business, and a smart investment. As investors, we’re looking for the latter – smart investments – which requires ticking some different boxes.
In order to be a good investment, a company obviously needs to have a great business, great unit economics, and a compelling value proposition. But beyond that, a good investment requires the “defensibility” that technology innovation can bring and an enormous addressable market to earn the kind of risk-adjusted returns we’re looking for. That’s where focusing on inclusion is such a powerful proposition. The types of problems our investees are solving are basic, daily problems.
Consider fintechs doing small business lending in emerging markets. They’ve seen traditional banks and microfinance institutions fail to offer loans to small businesses profitably, because the cost to acquire customers is too expensive, or the cost to underwrite is too difficult. These fintechs focusing on underserved populations are leveraging their tech, information flows, total addressable market and lack of competition to become good businesses and more compelling for investors like us than the fintechs focusing on the top 1 to 10 percent of the population.
On top of having an enormous total addressable market, a good investment also needs to have a certain level of customer-centricity to have long-term success. The quality of services or products — i.e. how accessible, usable, expensive, etc. — that a fintech is offering is important to us, both from a returns perspective and from a financial inclusion perspective.
One of Quona’s driving investment themes is “profit meets purpose.” Are there any tradeoffs there?
MBE: We are lucky to work in a sector where there’s a lot of mutual reinforcement. Because we work where addressable markets are so large and critical, that leads us to places that are the most underserved or where quality suffers.
That said, there are tensions. Sometimes there are short-term decisions made that might seem like a company or investee is drifting from its mission in favor of profit. An example is on pricing and which segments a company serves. Most of Quona’s portfolio companies do not exclusively serve low-income segments. Many of them have a mix of customers that are predominantly low or lower income and predominantly underserved, as well as a percentage of middle or high-income customers.
Serving a broad spectrum of customers might mean, in the short term, that some of their resources are focused on folks that are not highly underserved, but that’s important for a few reasons. One is, it avoids concentration risk — if they were focused on a specific segment it would make them vulnerable to competition or price margin erosion. Two, it allows them to provide the full range of services or products, so as their previously underserved customers evolve financially, they have appropriate services to grow with them.
Serving a broad spectrum of customers is important.
There are many benefits — both social and financial — of not exclusively focusing on the lowest income segments. In the short term, there’s this resource allocation question, you can call it a “tradeoff,” but it’s a multiplicity of factors of companies having to answer business questions like:
- How do I make sure that I have a robust financial performance and ongoing defensibility?
- How do I make sure I have a cushion to deal with macroeconomic factors and the inevitable dips that happen in emerging markets?
- How do I make sure I can grow with my customers?
None of these questions have a clear answer in terms of what that means for customer breakdown, but it does require consideration. Our firm shies away from setting specific, time-bound outputs, because we’ve seen unintended consequences with targets, like establishing a target of reducing the number of unbanked consumers, only to achieve our goal of millions of dormant bank accounts. We also understand that the businesses our companies run and the markets in which they operate are complex, require nuanced appreciation of multiple factors impact outcomes.
How should we measure success in financial inclusion?
MBE: I’m a big believer in measuring, so I love what I see in impact investing, where there are greater calls for rigor in measurement, and a desire to build performance monitoring systems as comprehensive as what we have for operational and financial metrics. Measuring and evaluating are a core part of Quona’s DNA. We’re proudly nerdy in that way.
Measuring and evaluating are a core part of Quona’s DNA. We’re proudly nerdy in that way.
The way we think about success is along three dimensions:
- Access: How do you get more underserved people in the mainstream and provide them access to a suite of financial services?
- Quality: Affordability, accessibility, convenience, usage, etc. This is important to us because just focusing on access or targets can lead quality, usage and (ultimately) retention to suffer.
- Markets: From increasing capital flows to markets where the capital stack is thin, to making market rates more competitive, to giving small businesses more leverage, what is the indirect impact that our companies are having on their markets?