In 2018 FiDA Partnership conducted interviews with several key platforms in Africa looking at how platform business models are evolving in terms of financial services. This blog discusses three important ways that platforms are changing the landscape for financial inclusion:
- Some platforms are advancing their core business by building physical networks and, as a result, now operate at the frontier of financial inclusion;
- Platforms are standardizing transaction data and helping the financial services ecosystem figure out how to use it; and
- Platforms are standardizing payments; worker pay, performance and incentives; and identity validation. As such, they could become important sources of non-financial information for financial service providers.
As we explore several African platform business models, we will highlight which business tactics and partnership strategies promote financial inclusion.
Building physical networks is helping some platforms reach the frontier of financial inclusion.
There are numerous examples of e-commerce platforms building their own physical networks to operate as last-mile platforms. Sokowatch started as an open procurement platform connecting distributors and shop owners. However, they had to adapt quickly as a pure platform strategy didn’t work. According to Sokowatch founder Daniel Yu, distributors were not interested in delivering $5 worth of chewing gum to the informal settlement and so they did not respond to the opportunity. Sokowatch decided to take control of distribution and inventory themselves so that the company could move forward with its platform model. As they built out their physical network operations, they layered on tools to manage the business, monitor inventory, track orders, and more. The intelligence that comes from their technology implementation combined with the delivery capability that a physical network allows makes platforms like Sokowatch an interesting potential partner for financial services providers. As Daniel Yu says,
“The value that we have is in the network—no one else has this direct connection to such a large number of stores in East Africa.”
The e-commerce players Takealot and Jumia also operate their own physical networks. In 2014, Takealot—the leading consumer goods platform in South Africa—acquired a logistics network by purchasing Mr Delivery, an established courier and on-demand food delivery service that had been operating in South Africa for over 20 years. Jumia—another growing consumer goods and services platform operating in several African countries—built its own logistics and distribution network and now operates warehouses and a fleet of delivery men and women with better efficiency than DHL.
In some cases, platforms use their physical networks to advance their own financial services ambitions. Little Cab, a Kenyan ride-hailing platform operated as a joint venture between Safaricom and Craft Silicon, has recruited and trained drivers to be registered Safaricom agents. Drivers can sell Safaricom minutes, data, or help customers pay utility bills through M-Pesa. Customers can pay using cash, credit card, or M-Pesa. They can also redeem Safaricom’s Bonga points for cab rides.
Others are bridging the gap between operating a digital business and customers with a preference for cash. Some platforms embrace face-to-face practices to decrease payments friction that would, ironically, hamper a purely digital model. For example, most e-commerce platforms seek to reduce payments friction by offering cash-on-delivery. This addresses a trust issue that consumers have with buying a product at a distance as well as any conflict in tender type between what the platform accepts and what the customer has available (e.g., card, mobile money account, cash). For example, Jumia leverages its network of sales consultants and delivery agents to convert cash-on-delivery customers to the Jumia wallet, through which the company plans for customers to be able to access an array of financial services, including consumer credit for on-platform purchases. Similarly Konga, a Nigerian online shopping website, leverages a distributed network of merchants to promote its offline/online payments technology Konga Pay to merchants and their customers. The payments platform supports the core business but also generates additional revenue streams since it can be used off-platform as well.
Jumia advertises its cash-on-delivery to reduce payments friction, but uses delivery agents to convert customers to the Jumia wallet, offering avenues for financial services.
Platforms are standardizing transactions data and helping the financial services ecosystem figure out how to use it.
The most significant benefits for financial inclusion probably arise from digital platforms making transactional data digital and standardized. Digital platforms are changing how informal merchants and workers trade. In turn, they are changing both the visibility and interpretability of informal merchants’ and workers’ activities—not just to platforms themselves, but also to formal financial institutions and FinTechs. In doing so, platforms are reinventing informality; whether workers and merchants operated in the informal sector out of necessity or choice, governments or other formal institutions can now access transactional and non-traditional financial data about their activities even if what they do (work from home or on the street) is the same.
Platforms are tackling the burden of standardizing and making visible large volumes of commercial activity because they believe in the value of this data. As previously informal income streams become standardized and accessible through worker and merchant participation on digital platforms, the business case for serving small businesses or self-employed individuals should become more straightforward. Already, historical sales data is being analyzed to offer loans to merchants in many e-commerce platform examples. Jumia uses sales volumes history, seller performance, and seller ratings to prequalify merchants for lending offers underwritten by Branch, Baobab, and Invoice Pay. Jumia has also already captured most of the KYC (know-your-customer) information, which it also shares with its FinTech Partners. And India’s Paytm, in partnership with Lendingkart, offers collateral free loans to SMEs and merchants. Paytm wants to grow the number of SMEs and sellers on its platform and sees the loans as a way to bring ease of financial assistance to SMEs and merchants in semi-urban and tier-II cities across the country.
Additionally, transactional data related to ordering is just as informative for lending decisions as sales. The procurement platform Sokowatch tracks store ordering data across all of its informal merchants. This has enabled the platform to offer revolving credit to shopkeepers whereby shops can order and receive merchandise on net-7-day payment terms. Sokowatch collects a small fee for this service, but it doesn’t need to make money from it because it also has credit with its suppliers (e.g., Unilever). In another example, Twiga Foods applies machine learning algorithms to its purchase order records, enabling the procurement platform to predict creditworthiness. Lenders have noted that this gives them the confidence they need to provide microloans to small businesses.
Instances of platforms using standardized data streams, alone or via a partner, to offer financial services are becoming more prevalent, but many Global South use cases are still early stage. The devil may be in the details around how easily an activity or transaction can be standardized and how ready financial institutions are to plug into these kinds of partnerships. Opportunities for lending may depend on how much variety there is in the type of work performed on the platform —simpler data streams may be easier to interpret. Platforms with low variety (e.g., Uber, Bolt, Sweep South, Hello Tractor) may be able to maximize standardization and predictability of income streams for lending, while platforms with more variety (e.g., Kuhustle, Upwork) may not be able to capitalize as much on this. Frequency of transactions may also matter since this has implications for how engaged a worker or merchant is on a platform and whether they are loyal to a given platform.
Services business models may offer the greatest opportunity to offer insurance in order to protect workers against on-the-job risks since the imperative exists from a business perspective. Ride-hailing platforms, like Bolt and Uber, demand that drivers have insurance. To this end, Bolt has sourced, negotiated, and facilitated an insurance scheme for its drivers (Taxify Cover). Uber has formed partnerships with insurance providers to offer affordable options—Jubilee Insurance in Kenya and VUM, OUTsurance, and MiWay in South Africa. Moreover, for domestic workers and repairmen, the law isn’t clear on who would be responsible if a platform worker breaks something while on a job. Lynk is exploring per-job insurance so that if a Pro (i.e., a worker or artisan on Lynk’s platform) breaks something while on the job, both Lynk and the Pro understand who is responsible and how the insurance plan will pay out. In both scenarios, there is an advantage for platforms to source and offer straightforward insurance plans for workers.
Platforms are standardizing payments; worker pay, performance, and incentives; and identity validation.
Financial inclusion opportunities do not arise solely from the standardization of transactions. Platform hosts collect payments from customers and, in turn, pay merchants and workers. In doing so, platform hosts are standardizing both the tender types that are commercially accepted and how workers and merchants get paid (how often, which accounts/wallets are accepted, whether deductions can be made by the host or third parties, etc.). Platforms take care to keep worker engagement high and, to the extent possible, own the transactional relationship with both workers and customers (e.g., saved banking details—consumer or worker, white-labeled digital wallets, etc.). For some financial service providers, particularly insurance providers, this can make providing insurance easier. As revealed by MicroEnsure,
“Traditional channels for insurance are tough in Africa because you have to collect payment —this works in developed markets where you can deduct from salaries, do direct debits from accounts, charge credit cards, or outsource payment collection. This infrastructure does not work in developing markets. So we look for partners who have [a] connection to [a] target market and have ability to collect payments from clients.”
Jumia is also starting to look into offering insurance as a revenue stream in its own right. They are partnered with AXA, a global insurance provider, to offer device, health, and life insurance. They offer device insurance as an add on when the customer purchases a device. Other insurance offerings—health and life—have been added to Jumia’s services catalog and leverage Jumia’s check-out and payments infrastructure.
For other platforms, like Lynk, a combination of standardizing transactions and worker pay, as well as capturing KYC info and worker credibility is enabling the platform to offer loans directly to their “Pros”. The company is trialling loans which Pros can obtain to purchase expensive power tools they need to improve output or quality. Lynk CTO and Co-Founder Johannes Degn commented it is already standard practice to collect KYC information on Pros. They have also introduced standard paycheck processing. Based on the additional information the platform collects—transactions history, ratings, timeliness of communication, and delivery of goods/services—they can rate Pros’ creditworthiness, analyze profit expectations, and calculate fair repayment deductions from Pro’s paychecks. In a new FIBR 2019 project, BFA has provided Lynk with $100k to explore this process through loans of up to $300/each to tradesmen whose transactions exceed a certain threshold (quantity and value targets exist). The project is also conducting AB testing to compare whether or not spending money on tools impacts productivity.
Concluding thoughts: financial inclusion is good for consumers, but also producers
The platforms’ entrance into African markets is changing the prospects for financial inclusion, and, as a result, new opportunities and challenges arise for workers, merchants, and others that use platforms to support their livelihoods. By unpacking platform business models and describing the mechanics that give rise to financial inclusion opportunities, we are contributing insights that can further partnerships between platforms and others across the African continent.
Taken together, these three insights illustrate the benefits of thinking about financial inclusion as a spectrum that varies depending on the needs of both the producers and the consumers. When digital platforms service very low-income producers, they tend to actively provide financial services because this offering has a tangible impact on the success of low-income producers, and as a result, the success of the platform. As we’ve discussed, the intensity of financial service offerings has, in many cases, been high in order to address the needs of one side or the other—because the platform business model depends on each side growing and maturing. Through their work standardizing and onboarding users, especially producers, platforms are not just creating transactions data, they are also doing the difficult work of bringing people into the digital economy as fast as possible. As such, platforms are important partners for the financial services industry and for anyone concerned about development. Many may be fledgling startups and volatility is to be expected as they tackle very young markets. However, by supporting platforms to diversify revenue streams and strengthen their relationships, the rewards for both platforms and financial inclusion may just come down the road.
Read about other FiDA partners working on this topic:
- BFA FIBR’s partner engagements with Sokowatch and Lynk, and research on superplatforms
- CGAP’s blog series: Platform Economy: What it Means for Financial Inclusion
- Mercy Corps’ AgriFin Accelerate (AFA) program, including e-commerce models and rural connectivity hubs
- GSMA’s work on payments as a platform
