Financial Inclusion: Profiting in Unexpected Markets
By including technology and new business models, startups are able to turn financial services with low revenues into good businesses. This is seen both in East Africa and in Denmark.
Whereas in Denmark it’s almost unheard of to not have a bank account, in many other countries it is quite uncommon. Consider Ethiopia, which is home to the Danish startup Jamii.one. There, banks target wealthy clients and citizens because the country’s nascent financial sector and lack of fintechs make broader demographics not as profitable or worthy of pursuing. Against this backdrop, the majority of Ethiopians lack access to financial services.
According to Charlotte Rønje, the CEO and co-founder of Jamii.one:
In Ethiopia, 72% of the population doesn’t see themselves as potential bank customers. But I have yet to meet so-called ‘unbanked people’ who do not save for the future.”
Despite the fact that many women living in rural East Africa do not have bank accounts or official identification papers, they are often members of savings groups. Community-minded, they save up as a collective to expand their stores or to afford larger purchases, such as a bed or an electric stove. Knowing this, Jamii.one is working with these communities to scale financial services to low-income areas.
As of 2017, the World Bank estimated that 1.7 billion adults lacked access to banks or mobile payment solutions. This is down from 2014, when 2 billion people lacked a bank account. The reason? Technology. Looking ahead, Jamii.one sees it as an inevitability that technology will give more unbanked people access to financial services, including loans.
As Rønje points out:
If you’re going to do this in a scalable way, you need data. And this is where the savings groups come in. They register what people in their group own, so the data is already there and has been for years. It’s just not being used. We developed a system to digitalise the groups’ recordkeeping, and, through non-governmental organisations, we now have an effective channel to reach the users.”
While establishing micro-financing in Uganda, she saw not only the advantages of the concept but also how difficult it was to scale. Before Ugandans could access micro-loans, they needed to have a credit rating. Because it was difficult to know exactly how much an individual owned and ratings were based largely on self-disclosure, this process resulted in fraud and imprecise ratings – leading to low repayment rates, inflated operational costs, and high-interest loans.
Offering an insider perspective, Rønje is quick to point out that:
“Since savings groups trust each other and are responsible for each other, their data is reliable. By using technology, we’ve given unbanked people a credit score and digital identity so that they can access financial services and loans for a decent cost through banks and micro-lenders.”
Since their launch in 2019, Jamii.one has partnered with 53 non-governmental organisations in Ethiopia and has reached over 4,000 users. Based on their latest data, the savings groups operate with a repayment rate of 98%, which is quite similar to the repayment rates of Danish banks.
Opportunities for Denmark
Jamii.one has shown how a low-margin market can serve as a viable business opportunity by effectively using technology. While this approach has great potential in low-income areas, the startup Grandhood sees an opportunity to leverage it in Denmark for pensioners.
As the founder and co-CEO of Grandhood, Jon Lieberkind offers a window into Denmark’s landscape:
“There’s a residual group of over 300,000 Danes who do not have a pension plan. That is due, in part, to the fact that the pension solutions delivered by established companies often contain minimum requirements for the number of employees and the contributed amounts. Generally, it is expensive, or the solutions are inflexible.”
In response, the startup developed a digital solution targeted at freelancers, entrepreneurs, and employees who work in small- and mid-size enterprises. After all, they make up a large segment of that residual group.
Through Grandhood, users can choose their own contribution rate and have a say in the solution they contribute to. Going forward, Grandhood will enable users to deposit different amounts each month to offer freelancers the flexibility to make adjustments according to their current income levels.
Departing from the tradition of charging more for flexibility, Grandhood aims to stay profitable in the lower segment of the market by removing overhead costs and streamlining administration through digital solutions.
“By doing so, we democratise access to flexible and inexpensive pension plans to a forgotten group in our society,” Lieberkind explains.
Startups are moving the needle
Whether the goal is to provide savings and loans to those who are unbanked in East Africa or meet the needs of an historically underserved group in Denmark, the solution calls for technology and an innovative business model. For Rønje, there’s an obvious explanation as to why startups are making these markets profitable:
Financial inclusion requires innovative fintechs with a niche focus. Customer-oriented design processes are not for banks to come up with. They are very good at infrastructure, and they should keep doing that. But they need fintechs to help bridge the gap and make new, profitable business areas
From a purely technological starting point, each user becomes increasingly cheaper to serve as the user base grows. Even small margins can seed a profitable business if the volume is big enough.
Echoing this, Lieberkind remarks:
“It’s easy to scale. Basically, we can replicate our own business model and scale the platform to other countries. The key is volume. Because we operate in a low-margin area, the only way to build a good and marketable business is by increasing the volume.”