Startup-Led Innovation for Financial Inclusion

> Posted by Paul Breloff and Nathan Gonzalez, Managing Director and Senior Analyst, Accion Venture Lab

The following post was originally published on the Ashoka Changemakers’ blog.

We are living an exciting time for financial inclusion. The microcredit model proved it’s possible to reach the poor and underserved masses with financial services in a profitable manner and at scale.

While there is still plenty of work left to be done to expand access to basic livelihood finance, the next natural question is: what’s next? The socioeconomic base of the pyramid (BOP) needs a full range of financial tools to improve their lives, from credit to insurance to savings, transfers, and more—and traditional “status quo” models will likely not be sufficient.

Where will this disruptive technology and business innovation come from to realize the promise of full financial inclusion?

Startups can drive innovation in this space. Certain characteristics of early stage companies put them in a great position from which to experiment and develop innovative products, technology, and delivery models.

Small, standalone companies are often more nimble and less saddled by complex hierarchy and bureaucracy (policies, decision-making, and red tape), and often have more lean cost structures.

These features enable startups to better course-correct and adapt based on customer or market realities, as well as pursue niche markets, products, or strategies which would not satisfy the investment criteria of bigger players. And these niche strategies may eventually mature into “disruptive” innovations that can steal market share from established players, or show the way for the incumbents to take the idea to scale.

However, this has not always been true of financial services, which has traditionally been a tricky area for startups to navigate. Financial services are heavily regulated, often requiring specialized licenses and protracted conversations with regulators to push big ideas.

New entrants must often bring significant money to the table, particularly for capital intensive lending businesses, or for business-to-customer (B2C) offerings that depend on an established distribution infrastructure and a big marketing budget to succeed.

Compare this to your average Internet startup that can launch from a garage with a couple programmers and an Internet connection. Finally, incumbents like big banks and mobile operators often aggressively guard opportunities in the space, and have focused on building vertically integrated financial service empires to cater to the full range of individual and corporate needs, rather than opening up their platforms to the offerings of smaller players that can plug into their existing distribution platforms.

But the times are changing. It’s now easier than ever to be a startup pursuing financial service innovation.

The increasing ubiquity of mobile phones—2.8 billion and counting!—offers a channel to reach people with financial services. Mobile payments platforms like M-Pesa can be used as the “rails” on which innovative financial services can be offered—for example, enabling people to pay for micro-insurance with micro-premiums, or “pay as you go” for solar energy or clean water access.

To read the rest of this post, visit the Ashoka Changemakers’ blog

Paul Breloff and Nathan Gonzalez of Accion Venture Lab are both “thought leaders” for the Changemakers “G2012 Mexico Financial Inclusion“ competition.

Image Credit: Ashoka Changemakers

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