Fintech startups have leveraged technology to lower transaction costs and reach underserved populations. These technologies can <a href="https://www.worldbank.org/en/results/2013/04/01/banking-on-women-extending-womens-access-to-financial-services" target="_blank" rel="noopener noreferrer">expand</a> financial services to women, who are often <a href="https://www.ifc.org/wps/wcm/connect/news_ext_content/ifc_external_corporate_site/news+and+events/news/bridging+the+gender+gap+in+access+to+finance" target="_blank" rel="noopener noreferrer">excluded</a> from formal financial services. The COVID-19 pandemic makes it even more critical to address gender equity, as <a href="https://www.womensworldbanking.org/insights-and-impact/building-resilience-how-to-ensure-women-are-not-left-behind-as-a-result-of-covid-19/" target="_blank" rel="noopener noreferrer">evidence</a> indicates women have been disproportionately impacted by the economic impacts of the virus. While fintechs can play an important role in designing accessible and meaningful solutions for marginalized populations, they can also run the risk of exacerbating the digital divide, including the mobile <a href="https://www.gsma.com/mobilefordevelopment/resources/mobile-gender-gap-report-2019/" target="_blank" rel="noopener noreferrer">gender gap</a>.

This two-part blog post explores data from <a href="https://www.inclusivefintech50.com/" target="_blank" rel="noopener noreferrer">Inclusive Fintech 50</a> and <a href="https://www.themix.org/publications/fintech-benchmarks-report" target="_blank" rel="noopener noreferrer">Results of the Fintech Benchmarks Proof-of-Concept</a> to shed light on current gender disparities in the fintech industry – both at the management level and in their customer base. We provide initial insights and recommendations for investors and fintechs on overcoming some of these challenges. We hope the research community digs deeper into the disparities we highlight to understand the nuanced and sometimes intertwined barriers that female founders face, as well as how fintechs can serve the needs and preferences of female clients.

Two key insights emerge from the data focusing on early-stage fintechs:
<ul>
 	<li>Female-led fintechs face unique challenges when raising funds, but when they do, they demonstrate greater revenue generating potential compared to fintechs without women in leadership positions.</li>
 	<li>Perhaps not surprisingly, there is a gender gap in the customer base served by fintechs, and there is significant room for them to grow by addressing this gap.</li>
</ul>
In this first post, we will focus on the first point. Below are five broad observations.
<h2>1. Women are underrepresented among fintech CEOs and founders.</h2>
Female-founded companies are traditionally underrepresented in venture capital funding, and the fintech industry is no exception. In 2019, companies with a female CEO <a href="https://www.allraise.org/assets/pitchbook_all_raise_2019_all_in_women_in_the_vc_ecosystem.pdf" target="_blank" rel="noopener noreferrer">represented 11 percent of all venture capital deals</a> made globally (this increases to 20 percent if a female founder is included). However, only 7 percent of fintech VC deals had a woman in a CEO position.
<blockquote>Women are particularly underrepresented in fintechs founded in certain regions.</blockquote>
The 2019 Inclusive Fintech 50 data present a similar trend: 19 percent of the 400 applicants are female led, as defined by at least one female founder or executive. Women are particularly underrepresented in fintechs founded in certain regions – Middle East and North Africa (MENA) has the lowest share of female-led fintechs (only 8 percent), while Latin America and Caribbean and Sub-Saharan Africa stand marginally better at 15 percent and 11 percent, respectively. Furthermore, the data does not examine founders by country of origin, and female founders from developing countries may face unique barriers. As one female fintech founder from Sub-Saharan Africa explained: “A lot of the funding goes to foreign male founders. That’s one of the biggest challenges.”

<img class="aligncenter size-full wp-image-39748" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/08/Number-of-female-fintech-leaders-region.png" alt="graph" width="887" height="641" />

It’s important to put this data in the broader context of women’s representation in the workforce. Financial services have long been <a href="https://www.ftadviser.com/opinion/2019/12/04/financial-services-15-year-gender-diversity-failure/" target="_blank" rel="noopener noreferrer">dominated by men</a>. There is a misconception and unconscious bias that women do “better” in roles like HR, marketing and implementation versus strategy and innovation. For instance, according the <a href="http://www3.weforum.org/docs/WEF_GGGR_2020.pdf" target="_blank" rel="noopener noreferrer">World Economic Forum</a>, women make up about 26 percent of workers in data and AI roles, 15 percent in engineering roles and 12 percent in cloud computing roles, compared to 40 percent in marketing, 37 percent in sales, and 35 percent in product development.

It’s also no secret that women – particularly women of color – are underrepresented in educational programs, like MBAs, that can provide them a stepping stone into the financial services industry. While 2019 saw an increase in the number of female MBA applicants, socio-cultural values and norms can influence a woman’s ability and decision to attend higher educational programs. Programs like <a href="https://girlswhocode.com/">Girls who Code</a> and <a href="https://girlsintech.org/">Girls in Tech</a> are working towards eliminating the gender gap in technology and recruiting/encouraging young women to enter the tech industry.
<h2>2. Female-led fintechs generate higher revenues than those without women in leadership positions.</h2>
The 2019 Inclusive Fintech 50 data did not survey fintechs on revenue per customer, but preliminary evidence from the Fintech Benchmarks Proof-of-Concept reveals that female-led fintechs generate higher revenues. Among the sample of 45 fintechs, female-led ones had nearly three times the revenue per customer of non-female-led fintechs, but also three times the cost per customer. This year’s Inclusive Fintech 50 data will examine whether this trend holds true in a larger sample.
<blockquote>Among the sample of 45 fintechs, female-led ones had nearly three times the revenue per customer.</blockquote>
These findings add to the evidence of the strong relative performance of female-led fintechs, and are consistent with research across sectors demonstrating the revenue potential of female-led companies. For example, <a href="https://www.bcg.com/publications/2018/why-women-owned-startups-are-better-bet.aspx" target="_blank" rel="noopener noreferrer">research from BCG</a> finds that female-founded startups generate 10 percent higher revenue than their male peers over a five-year period. Similarly, a study of 3,000 top global companies by Credit Suisse shows that female leadership is associated with <a href="https://www.wgea.gov.au/sites/default/files/documents/csri-gender-3000.pdf" target="_blank" rel="noopener noreferrer">higher profitability and superior financial returns</a>.
<h2>3. Female-led fintechs are able to raise funds at similar rates to their counterparts, but disparities persist in certain regions, namely, those with wide financial inclusion gender gaps.</h2>
The BCG study also revealed that female-founded startups raise less than half of what male-founded startups raise. A Harvard Business Review piece <a href="https://hbr.org/2017/06/male-and-female-entrepreneurs-get-asked-different-questions-by-vcs-and-it-affects-how-much-funding-they-get" target="_blank" rel="noopener noreferrer">echoes</a> the same conclusion – female founders are asked more challenging and skeptical questions during pitches, which leads to lower funding. This practice may be traced back to the stereotypes women face of not being the “right fit” for the role/sector.
<blockquote>Female-led inclusive fintechs raise 24 percent more than non-female-led startups.</blockquote>
The data from Inclusive Fintech 50 presents a more optimistic picture. At the median, female-led inclusive fintechs raise 24 percent more than non-female-led startups. This trend is largely driven by funding in formal investment rounds, echoing research in the U.S. from the <a href="https://startupsusa.org/women-founded-venture-backed-startups/#main-findings" target="_blank" rel="noopener noreferrer">Center for American Entrepreneurship</a> that once a female-founded startup is funded, it receives similar funding to male-founded startups in additional fundraising rounds.

<img class="aligncenter wp-image-39735 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/08/meadian-annual-amount-raised-by-female-fintech-leaders-1.png" alt="" width="899" height="654" />

However, we again see that there are stark differences across geographies. The median female-led fintech raises approximately three-fourths as much as non-female-led fintechs in Latin America, two-thirds as much in East Asia and Pacific, and nearly one-third as much in South Asia. In Sub-Saharan Africa and North America, female-led fintechs raise more at the median than non-female-led fintechs, though they raise 74 percent as much in Sub-Saharan Africa when measuring the average rather than the median, as noted in this <a href="https://www.themix.org/publications/measuring-funding-flows-for-digital-financial-inclusion" target="_blank" rel="noopener noreferrer">white paper</a>. In Europe and Central Asia, there is no observed gap in funding.

Perhaps it is not surprising that these regions also have a large gender gap in broader financial inclusion. For instance, the <a href="https://www.gsma.com/mobilefordevelopment/blog/the-promise-of-mobile-money-for-further-advancing-womens-financial-inclusion/#_ftn2" target="_blank" rel="noopener noreferrer">gender gap in mobile money usage</a> is 25 percent in Latin America, 21 percent in East Asia and Pacific, and 75 percent in South Asia. In these regions, the same <a href="https://blogs.worldbank.org/voices/gender-gap-financial-inclusion-three-ways-shrink-it" target="_blank" rel="noopener noreferrer">regulations and social norms</a> that prevent women from opening bank accounts may also provide additional hurdles for female entrepreneurship in a male-dominated industry.
<h2>4. Female-led fintechs have less funds available to get started, but receive a boost from angel investors.</h2>
During the initial stage, female-led fintechs have less capacity to invest personal funds into their ventures than non-female-led fintechs – they can put in only 19 percent of what a non-female-led fintech does (see figure below). As a result, many female founders and CEOs can fail to make it to formal funding rounds, thereby reducing the number of female-led fintechs from the start.

<img class="aligncenter wp-image-39736 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/08/median-annual-amount-raised-female-led-fintech-BY-FUNDING-STAGE.png" alt="graph" width="891" height="647" />

These findings are consistent with a <a href="https://www.goldmansachs.com/citizenship/10000women/news-and-events/10kw-progress-report/progress-report-full.pdf" target="_blank" rel="noopener noreferrer">study by Goldman Sachs</a> that found that female entrepreneurs in emerging markets often do not seek external financing due to challenges of navigating the process or perceptions of likelihood of success.

Female-led fintechs have performed particularly well with angel investors. Another recent <a href="https://www.tandfonline.com/doi/abs/10.1080/13691066.2020.1747692" target="_blank" rel="noopener noreferrer">study</a> found that female entrepreneurs have greater success receiving funding from angel funders than from early-stage and late-stage VCs. The Inclusive Fintech 50 data show a similar trend, with the median female-led fintech raising 80 percent more than non-female-led fintechs at the angel investor stage.
<h2>5. The network effect is weaker for female-led fintechs.</h2>
Fintechs that are “networked” – part of a fintech hub, incubator, accelerator, or award – raise <a href="https://www.themix.org/publications/measuring-funding-flows-for-digital-financial-inclusion" target="_blank" rel="noopener noreferrer">more funding than non-networked fintechs</a>. However, female-led fintechs managed to raise only 8 percent more if they were networked. Meanwhile non-female-led fintechs raised 43 percent more if they were networked. This trend is consistent with a report which found that <a href="https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/venture+capital/vc-resources/vc-gender-financing" target="_blank" rel="noopener noreferrer">accelerators widen the equity financing gap</a>, with male-led startups experiencing a 2.6 times increase in funding raised post-acceleration relative to female-led startups.
<blockquote>Female-led fintechs managed to raise only 8 percent more if they were networked.</blockquote>
Additionally, a study that employed network analysis to <a href="https://endeavor.org/content/uploads/2015/06/Fostering-Productive-Entrepreneurship-Communities.pdf" target="_blank" rel="noopener noreferrer">assess the collective impact of entrepreneurship communities</a> found that start-ups that received experience, mentorship, or investment from an entrepreneur who has led a company to scale were approximately two times more likely to achieve top performance. It would be prudent to explore further what this means for female entrepreneurs who may face barriers accessing entrepreneurship communities that may be male-dominated.

<img class="aligncenter wp-image-39737 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/08/networked-multiplier-of-female-led-fintechs.png" alt="graph" width="845" height="614" />
<h2>Recommendations</h2>
<h3>For Investors</h3>
<ul>
 	<li>Investors have the potential to address this underrepresentation by investing in more female-led, early-stage fintechs, particularly in regions such as Asia and Latin America. Investors can not only seek out fintechs with strong programs that support female leadership, but also screen out those that do not. As described above, there is evidence that female-led fintechs produce higher revenues.</li>
 	<li>In order to address funding disparities for female-led fintechs in early stages, investors can adopt gender lens investing, particularly when providing grant funding. This will build upon work done by DFS Lab, Flourish Ventures, FinEquity, and Women’s World Banking, who have sponsored a female-focused fintech competition.</li>
 	<li>Incubators and accelerators can also support early-stage, female-led fintechs by actively recruiting female startups and supporting them in raising funding and also assessing whether their programs themselves are female-friendly.</li>
 	<li>Gender-diverse hiring practices and implicit bias training are vital for investors and incubators/accelerators to reach these goals. Moreover, while we were not able to distinguish between women of color founders and white women, evidence on the institutional barriers and discrimination that people of color face likely apply to the fintech space. Implicit bias trainings play an important role in raising awareness on lending practices.</li>
</ul>
<h3>For Researchers</h3>
<ul>
 	<li>Research organizations can provide valuable evidence to build a case for investment in female-led fintechs and the nuanced barriers that female-led fintechs face. Building upon work by organizations such as Women’s World Banking, researchers can demonstrate that female-led fintechs produce strong financial returns while also making unique contributions to financial inclusion.</li>
 	<li>Additional research is needed to examine the challenges faced by female fintech founders. Inclusive Fintech 50 data sheds light onto funding amounts received by female fintechs, but it does not address potential disparities in the likelihood of receiving funds, or other discrimination that female founders -- particularly women of color -- may face.</li>
</ul>
Be on the lookout for the next post, when we will discuss how fintechs may be able to close the gender gap in financial inclusion for their users.

Including Women in “Inclusive Fintech”

While the valuation of microfinance institutions (MFIs) may be more of an art than a science, the practice within the equity investment community remains opaque, inconsistent and overly complex. This paper summarizes the challenges impact investors face when valuing MFIs--from which methodologies to use and what assumptions to make, to how to factor in the social mission and fintechs. There is an urgent need for more shared, comparable and reliable data to effectively benchmark impact investments.
<h2>Why This Matters</h2>
With MFI valuations, the stakes are high<span style="font-size: 11pt;font-family: 'Calibri','sans-serif'">—</span>a high valuation may signal an overheating market while a low valuation can represent a missed opportunity. As <span class="wf_file_text">MFIs</span> and other institutions evolve and mature, and as social investors look beyond the known pool of investors for exit options, reliable valuation data and practices will only gain in importance.

Barring more transparent, consistent and precise valuation data and more robust valuation methodologies, microfinance will remain a less mature asset class and social investors will be limited to a relatively small pool of known actors with whom to transact.
<h2>Looking Forward</h2>
Impact investors need more reliable valuation data and standard valuation methods to make sound investment decisions and to pursue their financial inclusion objectives. The <a href="programs-a-projects/investing-in-inclusive-finance/financial-inclusion-equity-council">Financial Inclusion Equity Council</a> (FIEC) is working to address this need by developing a valuation database for its members to share valuation data confidentially and anonymously.
<h4><a class="wf_file" href="storage/documents/Valuing_MFIs_Brief_Final__Arabic.pdf"><span class="wf_file_text">Download the Report (Arabic) &gt;&gt;</span></a></h4>
<h4 style="text-align: left"><span class="wf_file_text"> </span></h4>
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Valuing Microfinance Institutions

This annual Global Microfinance Equity Valuation Survey, published jointly by CGAP and J.P. Morgan, provides benchmarks for the valuation of microfinance equity, to promote market transparency and identify industry trends. It examines the landscape of private equity (PE) deals and valuation trends in the public market for Lower Income Finance Institutions (LIFIs) in developing countries.

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Volume Growth and Valuation Contraction

<img class="alignright wp-image-6537" title="managed-service-provider-valuations" src="http://centerforfinancialinclusionblog.files.wordpress.com/2012/05/managed-service-provider-valuations.jpg" alt="" width="320" height="240" />For publically traded retail banks, valuations are at historic lows. In the microfinance industry, 2011 also saw the continued compression of valuation multiples from 2009 highs, according to the recently released Global Microfinance Equity Valuation Survey, <a href="http://www.cgap.org/p/site/c/template.rc/1.9.57511/" target="_blank" rel="noopener"><em>Volume Growth and Valuation Contraction</em></a>. CGAP and J.P. Morgan, with support from the <a href="http://www.cmef.com/" target="_blank" rel="noopener">Council of Microfinance Equity Funds</a> (CMEF), publish this report annually to address the scarcity of valuation data available in the public domain.
Including valuation data for both MFI private equity (PE) transactions as well as Lower Income Finance Institutions (LIFIs), which are publically listed companies providing financial services to lower-income clients, but not necessarily having a stated social mission, this report aims to provide benchmarks for the valuation of both private and publicly listed microfinance equity, promote market transparency and identify industry trends.
This year the survey finds a “wider trend where LIFI and microfinance valuations in the public and private markets are beginning to converge toward those of traditional financial institutions in emerging markets, and are probably closer to their true value.”
MFI asset quality began to recover from a crisis of client over-indebtedness and unsustainable growth in India, Bosnia, and Nicaragua toward the end of 2010. This recovery helped the microfinance private equity market experience stronger deal flow in 2011, with almost twice the number of transactions, and the largest flow of equity capital into microfinance to date, reaching US$292 million across 68 transactions, as reported by 29 investors.
Latin America continues to be the leading region, accounting for more than half of the amount of investments in private equity, followed by Asia. Notably, Peru and India account for around 70 percent of the total volume globally.
<img class="alignright size-full wp-image-6530" title="valuationgraph2" src="http://centerforfinancialinclusionblog.files.wordpress.com/2012/05/valuationgraph2.png" alt="" width="264" height="191" />The report concludes that this strong growth in transaction numbers and overall volume in 2011 was driven by:
<ul>
 	<li>Several large transactions (mainly in Latin America),</li>
 	<li>Expectations of an improved regulatory environment in India, and</li>
 	<li>Lower valuations, which continued to decline in 2011 (except Europe and Central Asia), having a positive effect on the number and size of transactions.</li>
</ul>
<p style="text-align: left">Valuations contracted in 2011 are measured by the forward book value multiple. The forward book value multiple, the key benchmark for equity valuation in the microfinance private equity market, dropped to an average of 1.4x book value from a high of 1.7x in 2009. Likewise, the price-to-earnings (P/E) ratio, a measure of the market price/share relative to the annual earnings/share, dropped to an average of 11.4 from the 2010 highs of 20.1.
<img class="size-full wp-image-6529 aligncenter" title="valuationgraph1" src="http://centerforfinancialinclusionblog.files.wordpress.com/2012/05/valuationgraph1.png" alt="" width="500" height="234" /></p>
So why did 2011 see the continued compression of valuation multiples for MFIs? Well, this is likely due to lingering uncertainties about asset quality in some markets and continued public scrutiny.
As for the public equity market, the comparables also declined with a drop in the average valuation of the Lower Income Finance Institutions (LIFIs) Index. The report found that the expected return on equity (ROE) of institutions included in the LIFI Index has been relatively stable around 27 percent, but book value contracted from 4.2x in last year’s edition to 2.7x using most recent data.
For 2012, the report concludes that microfinance equity valuations are not expected to decouple significantly from the valuation of emerging market banks. It predicts valuations will be stable in most markets, with the exception of Africa and certain countries of Latin America, which could see some increase in valuations.
<em>Image Credit: mspmentor.net</em>
<strong>Have you read?</strong>
<a href="http://centerforfinancialinclusionblog.wordpress.com/2012/03/29/business-tools-for-social-impact-continuous-improvement/" target="_blank" rel="noopener">Business Tools for Social Impact: Continuous Improvement</a>
<a href="http://centerforfinancialinclusionblog.wordpress.com/2012/01/05/social-performance-a-truth-in-advertising-approach/" target="_blank" rel="noopener">Social Performance: A Truth in Advertising Approach</a>
<a href="http://centerforfinancialinclusionblog.wordpress.com/2011/11/23/how-good-is-your-governance/" target="_blank" rel="noopener">How Good is Your Governance?</a>

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Including Women in “Inclusive Fintech”

Valuing Microfinance Institutions

Volume Growth and Valuation Contraction

What’s a Microfinance Institution Worth? The Latest News on Valuations