Growth of digital financial services has accelerated since the outbreak of COVID-19 as distancing measures forced customers to access financial services remotely. Fintechs have fueled this massive growth by using innovative delivery channels or business models to provide financial services to previously unserved or underserved customer segments.
In 2021, CFI conducted research to understand how early-stage fintechs and their customers coped during the pandemic. Most research on resilience focuses on either fintechs or customers but fails to account for their interplay. Based on this insight, CFI created the PACT framework. PACT stands for Preparedness, Access, Capability, and Ties – four key dimensions that influence one another and contribute to the resilience of both fintechs and their customers.
Most research on resilience focuses on either fintechs or customers but fails to account for their interplay.
As part of our research in shaping the PACT framework, we spoke to investors to better understand issues of resilience considering COVID-19. Our conversations revealed that most inclusive fintechs survived the pandemic either by continuing existing business operations or adapting their business models to changing customer needs and to new external conditions, such as extensive lockdown measures. While we spoke with dozens of investors, we closely examined the investment processes of three impact-driven investors that fund fintechs working to expand financial inclusion and promote financial health. To do this deeper dive, CFI worked with a team at Tameo Impact Fund Solutions – an independent consulting firm providing services to impact funds, fund managers, and investors with the aim of promoting accountability and transparency in the impact investing industry.
Our conversations aimed to identify best practices for processes implemented throughout the investment cycle and which indicators should be monitored to support resilience. These discussions provided the basis for our analysis on how investors can help strengthen the resilience of both their investee companies and the fintech customers served.
In this blog post, we discuss inclusive fintechs’ investment process, how investors monitor and evaluate inclusive fintechs, and identify three actions that investors – and other stakeholders – should take to build resilience into their business models.
Investor Processes and How They Monitor and Evaluate Inclusive Fintechs
The three investment firms we spoke with invest at various stages in fintechs’ development – from seed stage to Series A. The firms’ investment processes can be broken down into four stages: prospecting, due diligence and investment decision, post-investment and monitoring, and exit.
All firms integrate impact management throughout their investment processes. The indicators monitored by the impact investors vary depending on the type of investment, but largely focus on growth metrics (e.g., number and volume of transactions, loans, accounts, etc.), and ability to reach target customers (e.g., number of customers/MSMEs served). Other indicators point to competitiveness (e.g., product diversity and pricing), and business risk and sustainability (e.g., proportion of non-performing loans, customer satisfaction, and profit metrics). Fintechs must be able to demonstrate clear impact objectives, and investors must be able to affirm these objectives through due diligence and monitoring.
The table below summarizes the four stages of the investment process and includes a few examples of indicators monitored.