Emerging and Growth Markets | November 8, 2022

Inclusive fintechs build on gains to help emerging market businesses weather the economic storm

Jessica Pothering
ImpactAlpha Editor

Jessica Pothering

ImpactAlpha, November 8 – First it was Covid lockdowns. Then global supply-chain disruptions. Now, the rising cost of goods and interest rates is tightening the squeeze on the micro-merchants that provide the majority of basic products and services to emerging market consumers. 

Helping essential businesses meet compounding and intensifying economic challenges was a recurring theme at Accion Venture Lab’s Fintech for Inclusion Global Summit, which drew dozens of fintech providers to The Hague last week. 

Inclusive fintech providers are drawing on troves of data that didn’t exist on these mostly-informal, offline businesses just a few years ago to manage inventories, access capital and unlock growth potential. 

“Demand for our services is only going up,” Vahid Monadjem of Nomanini, a credit facilitator for Africa’s informal shopkeepers, told ImpactAlpha. On the sidelines of the summit, Monadjem whipped open a chart on his phone depicting a 45-degree trendline in the company’s sales growth.

“The need for financial services in this market environment is greater than ever,” said Accion Venture Lab’s Amee Parbhoo. 

Models, like Nomanini, which embed financial services with other digital services are “particularly relevant as we try to get better data and customers look for more seamless solutions,” she added. “We think these are the future models in fintech that can drive scale and sustainable growth.”

A host of tech providers have emerged in recent years with solutions designed for long-underserved merchants, who serve as last-mile distributors of the majority of essential foods and consumer goods in most emerging markets. 

Data gathered from these tech companies is illuminating how the needs of micro-businesses are shifting in light of new economic realities. For example, shopkeepers are “stocking fewer premium products and more generic products” for customers feeling the squeeze from rising prices, Monadjem said. 

“Prices are going up, but retailers aren’t able to adjust their margins,” shared Dan Cohen of Tienda Pago, a lender to informal retailers in Mexico and Peru. “They need more capital now to buy the same amount of goods.” 

Data show that this trend is playing out differently in different markets. “In Peru, we have seen a decrease in demand [for loans]. Because the price of food is higher, people are selling less, and because they’re selling less, they’re borrowing less,” Cohen observed. “In Mexico, that’s not the case.”

The inflationary environment threatens to reverse progress on financial inclusion – which fintechs are well positioned to address, says Jacob Haar of Community Investment Management, which finances fintechs offering responsible small business credit. “Companies are tightening their credit standards, [so there is a] massive opportunity to move upmarket to customers you would not have been competitive with before but now have fallen out of having financial access.”

Strategic shifts

Companies like Nomanini, Tienda Pago, as well as Cashinvoice in India, TradeDepot in Nigeria, and MaxAB in Egypt have proliferated in recent years, bringing to the market tech platforms that provide a trifecta of inventory services, embedded financing and digitalization for emerging markets’ frontline consumer businesses. Their goal: to give retailers’ incomes and livelihoods a boost while building an on-ramp to formal financial services.  

“Fintechs have a clear ability to leverage partnerships, transaction data and technology to serve these businesses at scale,” said Parbhoo. “We are seeing real impact here in the ability of fintech startups to offer financing in a way that drives resilience and growth of these small businesses.”

Many raised significant sums from venture investors waking up to the market opportunity during the pandemic and subsequent tech boom. 

Not all have smoothly navigated this year’s downturn. Nigeria’s Alerzo and Kenya’s MarketForce, which both offer embedded inventory finance to informal retailers, resorted to layoffs less than a year after raising equity rounds. Peer company Capiter in Egypt, which raised $33 million in a Series A funding round last year, has also been rocked by turbulence and layoffs, at least partially due to 2022’s difficult fundraising environment. The board recently ousted the CEO and COO.

“Not all are going to work – we’ve seen a number of all-digital models fail or have to rethink their use of human touch,” said Parbhoo. (She declined to comment on Capiter, an Accion Venture Lab portfolio company.) “We’re also seeing adjustments around the real cost to acquire and retain both customers and retailers.”

“What companies and investors are figuring out now is which models can sustainably grow and best serve these customers,” she added.

More urgently, they’re devising solutions to the shifting needs of customers amid new economic realities. 

Tienda Pago, which charges a flat fee for its financing rather than interest-based loans, has decided not to increase fees for its reliable, paying customers. 

It’s also leaning on its partnerships with fast-moving consumer goods companies to share some of the cost burden of rising consumer goods prices. “We’re saying, hey, you may have to eat part of these costs if you want to keep the supply chain healthy,” said Cohen. “And they’re willing to listen.” 

Nomanini, which is backed by African banking giant Standard Bank, is doubling down on Africa’s most financially underserved by finding partners to enter new markets. It announced in July a partnership with financial services provider Baobab Group to provide supply-chain financing to 180,000 micro and small merchants in the Democratic Republic of the Congo. The two companies’ vision is to launch next in Senegal, Mali, Tunisia, Burkina Faso, Côte d’Ivoire, Nigeria and Madagascar. 

Another company, Field, which provides inventory management, forecasting and credit to registered, independently-owned pharmacies in Kenya and Nigeria, says its financing is as much as 90% cheaper than the next-best alternative: market-rate unsecured inventory loans. This year, Field has had to increase the cost of its services, but it offsets those by providing value in other ways, like helping customers trim costs by curbing stock wastage. Pharmacies lose as much as 15% of their inventory through expiration each year. Field’s customers lose less than 0.5%. 

“We’re putting a lot more money back on the table,” said Field’s Michael Moreland.

Aligned incentives

Moreland stressed the growth—and impact—opportunity for fintechs, even in a difficult market. The key to unlocking it, he says, is for fintechs to recognize that they’re in the service of their customers, rather than the other way around. 

“The growth strategy has to be positive—it has to be about changing, at a very fundamental level, the way the value chain works,” said Moreland. “We’re on the same side of the table as the businesses we serve. We’re their service provider. We are structurally incentivized to think about their success. By aligning with them and investing in their growth, we only win when they win.” 

Investors looking for fintech opportunities, particularly in a slowing market, should focus on models taking this approach, said Parbhoo. “Accion has always been mindful of sustainable growth over growth-at-all-costs—and the reality is that this is now something all investors are talking about.”