This week the Fintech City Tour travels to India. I have lived and worked in India, so even though on this occasion I am traveling on the digit express, the sights, sounds and smells of India are vivid to me.
I went to India find the key to the Underbanked market. For Banks facing disruption in their home market, the 70% of the world that is currently without access to financial services may represent a big opportunity. Disruption usually happens at the edge, from people who have been excluded. At a global level, that clearly describes the 70% of the world that is unbanked.
I thought I might find this key in India for 5 reasons:
- One half of India is underbanked. That is a population bigger than the total population in America. Although 55% have savings accounts, only 9% have credit accounts. That is a massive opportunity.
- The Indian economy is the 10th largest in the world, GDP growth is recovering and may soon surpass China. At some point, some of those unbanked customers become the sort of middle class customers that banks like to fight over.
- India has strong software skills and the startup ecosystem is improving. This still has a long way to go, the risk aversion that makes developers prefer outsourcing firms still runs deep.
- The Unique Identification Authority of India. This tackles the biggest issue in including the unbanked into a consuming middle class with a bank account – a verified identity and address.
- Business Correspondents. In 2006, the Reserve Bank of India introduced regulation:
“allowing banks to use the services of third-party, non-bank agents to extend their services right to people’s doorsteps.”
Think of those roadside stalls that are key to M-Pesa success. They are like “business correspondents”. The difference is that M-Pesa is controlled by one company – Vodafone. Nobody (except Vodafone) would like to see that level of dominance by one company. Yet the economics of setting up traditional bank branches in a country like India are not attractive and fly in the face of the move to mobile branchless banking.
The startups that unlock the value in the Unbanked market could come from:
- The West. Although there is less intuitive understanding of how the Unbanked live and work, the West has greater access to capital and the skills to scale ventures.
- Africa. Although we don’t think of Africa as a place where tech startups are incubated, Africa is the home of M-Pesa, which is the single most disruptive force in the Unbanked market and there are already some interesting ventures such as Addis Ababa-based Kifiya. The Fintech City Tour will be taking a trip to Africa soon.
- A major emerging market like India or China. The Fintech City Tour will later take a trip to China. For now, the tour takes us to India.
So much for the theory, what startups are unlocking the Unbanked value in India?
- A Little World. “The ZERO platform converts new generation low cost NFC (Near Field Communication) mobile phones with large storage capacities as a secure, self-sufficient bank branch, with biometrics based customer ID, for customer enrollments for no-frills accounts and all types of transactions in the village with the local Customer Service Point operator acting as a Teller. Existing Mobile communications networks are used for all transaction uploads, downloads and application updates.”
The technology sounds exciting but they may have been too early and struggled to get traction. I don’t see much recent news.
- FINO PayTech This reads like a services firm (leveraging unique IP) focused on the Unbanked (or “financial inclusion” as it is called in India). They seem to be doing well and have clearly found a revenue model. However I don’t see any disruptive innovation.
- SKS Microfinance. The idea of Microfinance came from Bangladesh with the Gameen Foundation. They proved that lending to the poor had manageable default rates. SKS Microfinance turned that into a big business that went public (with a market cap nearing $1 billion) and have lent over $5 billion.
- Utkarsh Micro Finance. SKS Microfinance proved conclusively that the Unbanked is a good market. Utkarsh is a more recent entrant to the market, which raised $21 million in a Series D this month.
- Vaya. This is news because Vikram Akula, who was the founder of SKS Microfinance, recently bought a 26% stake. I cannot find exactly what they are doing, but they seem to be licensed as Business Correspondents but also looking to get a banking license.
- Inventure is tackling one of the toughest problems – a credit score for the unbanked.
This will be an interesting space to watch. What have I missed?