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Wider, deeper VC investment needed for Indian and African mobile money firms, says Gates Foundation report

The Paytm mobile digital payment app displayed here helps financial inclusion in India, as does M-Pesa in Kenya but more such initiatives are needed says a new report from Village Capital and the Bill and Melinda Gates Foundation.
Dhiraj Singh | Bloomberg | Getty Images
The Paytm mobile digital payment app displayed here helps financial inclusion in India, as does M-Pesa in Kenya but more such initiatives are needed says a new report from Village Capital and the Bill and Melinda Gates Foundation.

A new financial inclusion report from the Bill and Melinda Gates Foundation, carried out by venture capitalist (VC) firm Village Capital, with the participation of 55 entrepreneurs and 23 investors has found that wider and deeper support is needed to encourage more mobile money firms to launch in India and East Africa.

In excess of 233 million and 60 million people in India and East Africa respectively still lack formal bank accounts and 50% of small businesses don't have access to formal credit.

Financial technology (fintech) enabled firms such as M-Pesa in Kenya, which provides mobile payment, saving and credit facilities to 30 million people in East Africa, and the Paytm giant mobile m-commerce operation in India that claims 200 million users, are still the exception in terms of providing access to financial services for poor people.

Mobile phone cash credits, withdrawals and bill payment capabilities are all possible on such services, as are online shopping, loan and other such functionality. Fintech firms can effectively provide a bank account to the so-called "unbanked" in the developing world who are not reached by branch banking networks, or necessarily wanted by traditional banks as they have no credit history.

Not enough other digital financial services (DFS) firms outside of the big names like M-Pesa are getting early seed investment money or, crucially, scale up investment to allow their fintech-enabled financial inclusion projects to achieve wide scale adoption.

"The objective of our report was to find out why DFS firms and other fintechs aren't proliferating or scaling up as we'd like and to suggest solutions from the perspective of the entrepreneurs themselves," said Heather Strachan Matranga, manager of emerging markets and the report author at Village Capital, in a phone interview with CNBC. "We're leaving money on the table by not tailoring the finance process to the needs of entrepreneurs in these markets."

According to the Breaking the Pattern report, funded by the Gates Foundation, 72% of venture capital in East Africa for the last two years went to only three start-ups.

"The market hasn't reached any kind of meaningful scale," said Ross Baird, CEO of Village Capital, in a statement. "We need hundreds of companies to truly improve the financial health of communities in India and East Africa."

According to Baird in his report introduction the problems are two-fold. "Investors are hesitant to invest because they see DFS companies as riskier than alternative sectors or geographies," he says, while pointing out that the traditional "one size fits all" Silicon Valley VC approach to investment is inappropriate in this context. "Investment tends to flow to entrepreneurs with strong preexisting networks, and those without are left on the sidelines."

This "pattern recognition" problem is exacerbated says Baird because the high cost of early stage due diligence means investors fall back on prestigious universities or technology accelerator programs to identify opportunities according to a set template, further limiting the pool of investable firms.

"This is bad for companies, which miss out on capital," says Baird, "and for investors who miss out on high-potential companies that need more time, cash and support to grow."

"To increase financial inclusion and access to opportunity for millions of people around the world, it is essential that we break this pattern and help more DFS startups reach their potential," concluded Baird.

The report makes a number of recommendations to improve the situation:

  • Strengthen the human/capital infrastructure so that it isn't automated and always using the same networks. This will improve outreach and the ability of more fintechs and DFS firms to get to market.
  • Facilitate partnerships between entrepreneurs and major financial institutions to improve scale up capabilities.
  • Provide alternatives to "pattern recognition" fallbacks so that it is not always the same universities and technology accelerators receiving money. New pitching opportunities and forums for smaller, less well known firms to meet investors, governments and so forth are needed.
  • Develop alternative financing mechanisms to provide DFS companies with the right funding at the right time. The above recommendations are inter-linked.

The findings from the Breaking the Pattern report, which spoke to entrepreneurs and organizations such as Atikus Investments Inc in Rwanda and FTcash and Loans4SME in India among many others, will be used to shape Village Capital's future development work. The VC firm wants to apply its above recommendations across a number of different sectors from food, to healthcare to financial services and inclusion.

Later this year and in 2018 Village Capital, and its partner PayPal, plan to operate four global investment-readiness programs, supporting more than 40 emerging fintech innovators across the U.S., Latin America, India and sub-Saharan Africa. The latter two regions in particular will use this report to try to improve the diversity of the participating companies.

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