Financial inclusion through technology: The investor perspective

  • Sachin S VANKALAS, LuxFLAG / e-MFP
  • Speakers
  • Radhika SHROFF, Accion
  • Lonneke NOTEBOOM, FMO
  • Emilie ALLAERT, Luxembourg House of Financial Technology (LHoFT)
  • Edmund HIGENBOTTAM, Verdant Capital

    Sachin S VANKALAS started the session by asking the panellists to introduce their companies and how they are involved in investments in financial inclusion and technology. Emilie ALLAERT explained that LHoFT is a public-private sector initiative that drives technology innovation for Luxembourg’s financial services industry, with a current focus on financial inclusion. They do not directly invest in companies. Lonneke NOTEBOOM presented the Dutch Development Bank FMO whose focus when it comes to FinTech is twofold: it supports the traditional financial sector to develop FinTech strategies or cooperation, and it directly invests in FinTech companies themselves. Radhika SHROFF explained briefly about ACCION, an NGO which supports microfinance institutions and FinTech companies in their work to provide financial services to low-income clients. Edmund HIGENBOTTAM introduced Verdant Capital, a specialist advisory firm operating in two segments: mergers and acquisitions and financial institutions.


    The moderator then asked the panellists how in their view, FinTech is going to change financial inclusion. Shroff argued that FinTech’s role in financial inclusion for MFIs and banks is twofold: 1) Operational efficiency to drive down costs in MFIs; 2) Convergence, leveraging from what we know and apply them to more established MFIs and banks. Shroff believes, although it has not yet been seen, that the technology behind FinTech companies will drive the penetration of the credit spectrum, reaching the unreachable in rural areas. Noteboom agreed and added that she sees a big role for investors when it comes to B2B opportunities to help the financial traditional sector going through their digital transformation journey. Allaert shared the belief that FinTech will increase the accessibility to finance for those that were initially left out.

    The next question from Vankalas was where technology can play the biggest role. Higenbottam stated that financial inclusion is all about changing the operating model of institutions so that it becomes commercially viable to deal with smaller transactions sizes. After all, the process and lifecycle of any transaction is the same, regardless of the client. Vankalas then stated that although it is showed that FinTech can bring down OPEX, this is often not reflected in the service offer or prices for clients. Higenbottam argued that he sees it as an argument for more capital into the FinTech sector, because pricing is a functional competition. Interest rates should come down if competition comes in. Shroff added that she would like to see a more data-driven dynamic approach to pricing, especially in the more mature markets, to be able to reach more clients with financial products and services.

    An audience member noticed that the discussion had been focused on the credit side so far and wondered if there are FinTech companies that go beyond credit based models. Higenbottam pointed out that FinTechs could change the way how money is aggregated, in order to quickly generate deposits. MFIs could benefit from FinTech by creating sustainable predictable liabilities in their own currencies, which has been a major challenge in the microfinance sector up to this point. Shroff added that technology facilitates the creation of extensive client databases which enable sophisticated algorithms to help MFIs to become more solutions-oriented for clients, instead of just pushing credit.

    The discussion then moved on to discussing the challenges when it comes to FinTech solutions. Noteboom stated that it is very challenging for MFIs to incorporate technology in their operations because it goes beyond the technical only. In order to truly become a sustainable and profitable business you need to look at internal aspects, such as data management, change management and capacity building at investor level. Allaert mentioned that she noticed that finding the right partners to scale up your business is a main challenge. Mapping which responsible actors are out there, knowing who to approach and language difficulties are all constraints for upscaling. Shroff mentioned that a main challenge for investors is how to evaluate FinTech companies. The main criteria used for evaluating more mature companies are not useful for start-up FinTech companies given that their operating models are different and that they do not have long histories of performance results.

    The difficulty about getting funding or finding a first client was then mentioned by an audience member. Allaert agreed and mentioned that it is a common problem for any FinTech company that banks tend to work with more established companies. Noteboom advised other companies willing to invest in FinTech to first look at the products at their disposal and to see whether those can be tweaked a little as a start in the FinTech (investment) world. Shroff said that for investors the business case of a FinTech company must be viable, meaning that they look at how long it is going to take to build scale with a proposed sales cycle.

    Then an audience member mentioned that in his experience it is key to help ensure start-up FinTech entrepreneurs navigate their regulatory environment effectively. Noteboom clarified that it is both about understanding the regulatory environment into which you are stepping as well as involving regulators in the solutions you propose. Waiting for them to come along cannot be an option as that will likely take too long. Hence, peer learning is important, engaging regulators even more so. Higenbottam shared two practical tips for cross-border opportunities: 1) Vote with your feet - if your business model works and you want to expand, go to similar environments suitable to your strategy and technology. 2) Don’t go Uber - financial services are more regulated than transport, the penalties for crossing the line are much higher so be well informed.

    The panellists were then asked by the moderator whether they think that technological influences have moved the financial inclusion sector away from its social nature, the human touch to microfinance loans. Higenbottam stated that he believes that with new technologies, it is inevitable that human interaction will decrease with the end-customer and/or reduce the amount of human involvement in backend. He added that the two key issues with traditional MFIs are around credit management and social performance, which are closely related to the quality of the management information system. Hence, if you can digitalise this system, you can reduce your OPEX per loan and you can ultimately improve your social performance. Noteboom argued that FinTech does allow MFIs to get closer to their clients. Tablets enable loan officers to spend more time in the field and the availability of data helps MFIs to serve its clients better.

    This session ended by asking the panellists what type of FinTech innovation they see or want to see, which may help the industry tackle some of the aforementioned challenges. Higenbottam said that a software tool for a tablet which can deal with all aspects of the value chain would be very interesting. Shroff shared that she believes more partnerships between FinTechs and financial institution platforms can help to reach the underserved in remote areas. Noteboom and Allaert added they see a lot of potential in blockchain technology. Allaert explained how blockchain allows for safer and faster processes of cross-border transactions. She also stated how funding through cryptocurrencies might help projects finding funding – especially projects that have encountered difficulties finding financing through the traditional channel. Noteboom added that blockchain can be used to build digital identities for refugees, which would include them in the financial sector.