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How can platforms improve financial inclusion in Africa?



Authors: Marissa Dean, Jonathan Donner – Senior Directors at Caribou Digital

The Internet does platforms well. By the late 1990s, eBay was growing like gangbusters, partly—but famously—by hosting the exuberant exchange of beanie babies among collectors. Later, Facebook and Google leveraged network effects in social media and search to grow massive multi-sided markets in attention and advertising. More recently, innovators like Alibaba (direct to consumer sales) and hundreds of others are changing not only online experiences but also real-world livelihoods and economies impacting billions of people around the world.

Indeed, the Internet does platforms so well that it’s fair to say that the digital “platformization” of markets is one of the defining forces of change in the shift to digital economies. Moreover, platformization presents both new possibilities and new challenges for developing countries.

FiDA is exploring the impact of platformization on financial and economic inclusion in Africa through Caribou Digital’s multidisciplinary platformization lens, which combines perspectives ranging from management studies and economics to sociology and media studies. In 2018 and 2019, we are extending that lens to identify how platforms can promote financial and economic inclusion.

Platforms are mechanisms for hosting interaction and exchange between third parties in which  the host (a) facilitates value creation (financial or otherwise) and (b) takes a share of that value but (c) doesn’t completely control the scope of interactions or their outcomes. This lens helps us reveal and isolate a variety of platform functions.

Caribou Digital Platformization Lens

Sources: Platform types—Cusumano, Gawer & Yoffie (2018); Market functions in transaction platforms—Drouillard (2017), Palepu and Khanna (2010); Sectors—Caribou Digital Analysis.

Are there different kinds of platforms? The split In the lens—innovation vs. transaction— illustrates a well-documented diversity in platforms. Echoing Cusumano, Gawer & Yoffie (2018), who remind us that some platforms are infrastructures for innovation and others are hosts for transactions.

  • Innovation platforms, like operating systems or developer tools, emerge when an institution invites others to use its code or other assets  to encourage further innovation in the provision of products and services. The more one can do with the host’s infrastructure, the more apps that run on the host’s operating system, or the more records that a host’s database contains, the more value everyone (hosts and contributors alike) can create through the system. Google’s Android operating system, Amazon Web Services, and Ethereum’s blockchain computing offerings are notable examples of innovation platforms.
  • Transaction platforms create multi-sided markets by hosting interactions that match buyers and sellers. Transaction platforms are proliferating and touch every sector of the economy, from goods and shared rides to gig work and advertising impressions. eBay’s marketplace, Google’s paid search, and AirBnb’s homestays are examples of transaction platforms. In 2018 and 2019, much of FiDA’s research will focus on transaction platforms.

How does platformization work? The vertical axis of the grid brings in economics and management thinking about market functions and pivots attention from discrete institutions to the underlying concept of platformization. Drawing on earlier work by FiDA’s Marissa Dean (in turn drawing on Palepu and Khanna), this axis distinguishes four basic functions with bearing on the structure and performance of markets and transactions: 1) aggregation and distribution, 2) transaction facilitation, 3) information analysis and advice, and 4) credibility enhancement.

What are the impacts of platformization? The horizontal axis of the grid illustrates the different ways in which  transaction platforms affect markets in goods, labor, assets, attention and data. Distinct communities of practice, critique, and inquiry have coalesced to explore the social and economic impacts of platforms around each of these domains. The grid allows us to look for commonalities between these conversations while preserving key distinctions.

What happens if platforms are wildly successful? One caveat is important here: this lens does not capture the benefits or risks associated with the runaway success of a handful of the biggest platforms—what our colleagues at the FIBR project call the superplatforms. Thanks to network effects or other favorable structural factors, when superplatforms compete in a winner-take-all market, they exert outsize influence on the shape of an entire industry. If superplatforms extract a greater than merited proportion of the value created or discourage local or regional competitors, then they deserve scrutiny for potential detrimental effects. Additionally, when platforms that are successful in one industry harvest data, market to captive customers, or otherwise leverage network effects in order to enter new or adjacent industries with an inbuilt advantage, there are similar anticompetitive considerations to take into account. Neither of these important policy questions are directly reflected in our lens, but they should be included in broader conversations about platformization and development.

Applying the lens to financial inclusion

The platformization lens allows us to critically analyze digital platforms at the intersection of their marketplace functions as well as the sectors of the economy they touch. The result of this exercise is a set of tactics and partnership strategies employed by digital platform organizations and linked to specific implications for development, prosperity, and inclusion.

For example, if we examine the gig-work platform Upwork, placing it in the labor section of the grid, we see several discrete implications of its model for financial and economic inclusion:

  • Aggregation and distribution market functions: Upwork works with enterprises to disaggregate demand for tasks that can be performed with access to a computer. It also offers a flexible workforce to small businesses and enterprises. Both of these elements decrease slack and matching friction in the labor sector. Moreover, as gig workers use Upwork to expand their trade rings, their income generating opportunities grow.
  • Transaction facilitation market functions: Upwork offers escrow/milestone based payment options and a pathway for recourse if something goes wrong with a transaction. This gated process increases trust among businesses and workers transacting remotely, which in turn impacts the level of formal employment activities (via Upwork and other gig-work platforms).
  • Credibility enhancement: Upwork offers skills tests and certifications, and qualifies certain freelancers as “Upwork Pros”. Both ratings enhance the credibility of workers participating on the platform and reduce the likelihood of fraud. However, these ratings tend to lock suppliers into the platform because, while extremely valuable, they are not portable

Any one of the discrete functions offered by Upwork or its kin could be the the anchor point for an intervention designed to promote financial inclusion and broader-based economic participation in sub-Saharan Africa. But the lens underscores how important it is to unpack the details and acknowledge that these elements may not be equally beneficial to workers at the margins of the digital economy.  

The lens is applicable to a variety of development challenges in the digital era, including employment, innovation, and participation in civil society. Each application would generate a specific set of elements connecting stakeholder behavior, sector dynamics, and outcomes.

In 2018 FiDA is applying this lens to financial inclusion. We see the lens as a powerful tool for exploring literally hundreds of digital platforms operating in Africa—both domestic and international—to assess their prospects for delivering financial services and furthering the economic activity of underserved individuals, small businesses, and developing economies. Later in 2018 and in 2019, we will complement the work currently underway with interviews to better understand how platformization is affecting partnerships with bearing for financial inclusion. We will also look at how platformization is impacting the livelihoods of micro and small enterprises. Stay tuned and please tweet or contact ideas@financedigitalafrica.org to get involved or give feedback.

Tipping the Scale: Can Social Media Drive DFS Adoption and Use?



This blog was co-authored by Adaora Ogbue, Associate Programme Manager at Mastercard Foundation and Renita Nabisubi, Head of Digital Financial Services at Access to Finance Rwanda

Introduction

As we go about our daily lives we engage in basic financial transactions such as making payments or saving and borrowing money. These can hardly be separated from our social lives since they occur to facilitate our day-to-day livelihoods. Looking at how people across the globe interact socially through digital media and entertainment platforms, it is no wonder that these have become key drivers for the adoption and use of digital financial services (DFS) in China.

Social media and digital entertainment in China offer a natural consumer base for digital finance providers, to an extent which might make Facebook and other social media platforms salivate. Having cultivated digital interactions through their existing communities, Alibaba and Tencent have found innovative ways to convince users to live their digital lives within these platforms. This allows Alibaba and Tencent to study their users’ profiles and monetise their behaviour. Chinese internet finance companies have leveraged their vast user bases to drive DFS adoption and use. What can Africa learn from these Goliaths?

Tech Giants’ Large User Bases Drive DFS Growth in China

Social media and digital entertainment are increasingly important in our lives, cutting across social and economic levels based on the entry point of the cost of smartphone ownership and mobile data. This is great news for digital financial service providers in China who own the social media and digital entertainment platforms themselves. They can, therefore, analyse social behaviour in order to develop and monetise new products.

To be worthwhile, however, user bases must be large enough to prove commercially viable, since the model often followed is one of low commissions but high volumes. The large user base in China has proven beneficial to Alibaba and Tencent, who were able to identify and capitalise on trends in the usage of social media and entertainment to create a reusable source of customers for the introduction of new DFS products.

For example, Alibaba’s Alipay mobile and online payment service emerged in response to the need for users of Alibaba’s original e-commerce platform to process payments within the system. Similarly, Tencent’s social messaging service, WeChat, and mobile games such as Arena of Valor, provided natural paths to monetisation through in-app transactions.

Still, these limited use cases did little to generate customer “stickiness”, or encourage customers to make repeat purchases. Simply having a large customer base does not guarantee viability of the business model. This is where the ability to develop products around its knowledge of customer behaviour proved beneficial to Tencent.

Building on the tradition of exchanging red envelopes containing money between family and friends during special occasions (such as weddings and the Chinese New Year), the company developed a digital wallet in WeChat to digitise this age-old custom using P2P payments. Coupled with a media campaign and live interaction during the New Year’s broadcast, and with the requirement that customers link their bank account to a mobile wallet, this proved to be another simple yet effective customer acquisition strategy. Having launched the product in 2014, Tencent reported 2.3 billion transactions on January 1, 2016 alone. Despite a decrease in holiday transactions since then due to competition from new market entrants, more than 768 million WeChat Pay users sent or received red envelopes during the six-day holiday in 2018, a growth rate of 10% year-on-year.

Similarly, Alibaba introduced a competing product, giving away an equivalent of $97m of “lucky money” to users, in order to convert customers to their wallet. It further modified the product so that, when shared with WeChat users, users would be required to download and open the Alipay wallet to access the funds. Despite Alipay’s initial advantage, however, of handling payments on China’s biggest e-commerce platforms Alibaba, Taobao and Tmall, Tencent’s WeChat Pay grew its market share to 40% in Q1 2017, while Alipay’s dropped to 54%.

Tencent has further exploited the popularity of WeChat, known to have approximately 980 million active monthly users, by introducing over 10 million light-weight apps and more than 500,000 social commerce mini-programs. These provide shops with new ways of selling products to WeChat group members, without users having to install additional software on their phones. With such ease of use and various discounts offered for group purchases, WeChat and its popular app-within-an-app model have become ubiquitous in China. It is estimated that 77% of all Chinese mobile phone owners use WeChat Pay, with 30% of mobile use dedicated to WeChat and another 30% spent using other apps developed by TenCent’s subsidiaries, meaning that there is little reason for customers to engage in activity outside of the WeChat mega-app.

DFS and social media in Africa

In Africa, use of social media and consumption of entertainment are on the rise. The African social media market was estimated at 100m users in 2014 but has now grown to over 120m. Facebook and WhatsApp dominate this usage, with over 80% of access being done over mobile.

Furthermore, the number of African internet users in 2017 grew by 20% year-on-year, representing the fastest rate of growth among the four billion new users of the internet worldwide in that year.  Also encouraging is the growth of the mobile gaming market on the continent, with African developers creating African–themed games. Industry associations for developers now have presence on the continent, for example, the International Game Developers Association with seven chapters in Africa.  

Due to the nascent stage of these markets, and the prohibitive total cost of mobile ownership preventing widespread smartphone adoption, the current African user base and resulting social media and entertainment consumption are dwarfed by those of China. This is partly because the African social media user base is owned mainly by US platform holders such as Facebook and WhatsApp, which have yet to integrate DFS into their current service offerings for African markets. Furthermore, DFS providers in Africa tend to be smaller MNOs and banks that struggle to find ways to grow and profit from their small base of customers. Finally, many barriers to bank account ownership persist in Africa, making it impossible for Africa to follow China’s path to DFS growth through social media and entertainment.

With the  growth in smartphone penetration in Africa, however, there has been a reversal in trends that saw smartphone importation surpass that of feature phones for the first time in 2016. Ovum predicts year-on-year growth of 52.9% culminating in 929.9 million smartphones in Africa by 2021. Though still expensive for low-income users, Huawei and Tecno models now cost as little as US$50 to US$100.

As smartphone ownership grows, the popular use of mobile money wallets that are funded using widely-spread agent networks can create opportunities for digital payment services. According to GSMA, the total value and number of mobile money transactions in sub-Saharan Africa grew by 14.4% and 17.9% to reach US$19.9 billion and 1.2 billion, respectively in 2017. Furthermore, East Africa accounted for 56.4% of the continent’s market for mobile money that year, with Central and Western Africa’s uptake doubling over a five-year period thanks to evolving regulatory policy.

The growth of Africa’s budding social media user base can be reinforced by lowering the total cost of mobile ownership and making DFS offerings, such as payments, more affordable. As seen in China, where peer-to-peer transfers within payment services like Alipay and WeChat Pay are free, mobile money customers still pay a transaction fee that, though tiered, is often prohibitive to middle- to low-income earners. This is possibly because Alibaba and Tencent’s business models treat DFS as a value addition to their core revenue streams of social media and entertainment. They prefer to upsell customers to other income-generating services such as e-commerce, digital credit, and wealth management products.

While African financial institutions such as EcoBank have also begun to introduce mobile banking applications that enable free peer-to-peer payments, they remain constrained by low bank account penetration. To overcome this, African providers should consider partnerships with fintechs such as Norway’s Blockbonds. It launched SPENN, a mobile application payment service that offers free money transfers and does not require the users to have a bank account. Customers can fund their accounts at I&M bank branches for free or through fellow customers who opt to perform cash-in and cash-out services at a 2% fee. Having launched the platform in Rwanda as their initial market in June 2018, SPENN’s founders have targeted  Botswana, Kenya, Mauritius, Namibia, and Tanzania as potential markets for expansion.

There have also been reports of Alipay and WeChat Pay being introduced in the East African market. According to Xinhua, in June 2018 Equity Bank and Red Dot Payment, a Singapore-based online payment company, signed an MoU to link the Equity Bank payment gateway to both Alipay and WeChat Pay. Equity Bank is present in Kenya, Uganda, Tanzania Democratic Republic of Congo, South Sudan and Rwanda.

Which model will bring the long-awaited exponential growth in digital financial services in Africa?  Taking stock of the widespread adoption of DFS by Chinese social media and entertainment consumers, African markets can learn much about how to permeate the everyday lives of mobile users by creating useful products and services, which lend themselves to the addition of value-added DFS. Whether it is the introduction of existing Chinese payment services through partnerships between Chinese companies and local financial service providers or the development of completely new services, one thing is clear: scale is important. Regional market creation through policy and regulatory harmonisation will be a key driver in achieving this.

Unpacking the Impact Question in China’s Superplatforms



This blog was written by Lamia Naji, Associate Manager, Learning and Strategy at Mastercard Foundation, & Xavier Faz, Lead, Digital Finance Frontiers at CGAP

‘Impact’ can be defined in different ways. In the context of inclusive economic growth, the kind of impact we look for are meaningful changes in the lives of low-income clients, such as an increase in income or an enhanced quality of life. In context of financial inclusion, we expect these outcomes to be achieved through higher savings (financial and time), consumption smoothing, investments in income-generating pursuits, and asset-building among others.

On a recent trip to China led by Mastercard Foundation’s Partnership for Finance in a Digital Africa and hosted by the Chinese Academy of Financial Inclusion, we had the opportunity to visit a range of businesses to learn and experience first-hand how the internet and technology are driving financial inclusion, an objective central to both CGAP and the Mastercard Foundation in Africa in particular.

On our ‘learning tour’ of the so-called BAT-J companies – Baidu, Alibaba, Tencent and JingDong – and others, we quickly learned about the ubiquity of China’s superplatforms and how they offer alternative channels for financial services. In the process, we noticed a knowledge gap relevant to our work: how much do we know about the impact of ‘superplaforms’ on the lives of low-income clients?

While China is ahead of many markets in making tech-based business models a reality, the associated impact of such development seems less clear. Although an analysis of client impact evidence on digital finance showed mainly positive results for the digital finance sector overall, it also revealed null and negative changes at the client level. Furthermore, it highlighted significant knowledge gaps in our understanding of client impact of digital credit, savings and insurance products. Thus, we must be cautious of assumptions about if and how the development of these models elsewhere, including in Africa, will contribute to positive changes for individuals, institutions and the market. Put simply – what is the causal pathway through which superplatforms lead to positive “impact” for low-income clients when considering access and adoption?

In this blog we will try to unpack the individual (consumer use case) and institutional (firm business case) effects of superplatforms, focusing on three types of digital services: digital payments, social networks, and ecommerce.

Digital and mobile payments (e.g., Alipay, WeChat pay)

Throughout China, mass-market access to smartphones enables a whole suite of mobile transactions between individuals and businesses. We observed how the widespread use of QR codes for electronic payments enables simple mobile payments transactions, and large scale of adoption allows for low user fees. We could infer the following types of effects arising directly from their use:  

  • Simpler and faster purchases, as well as simpler administration of a sales point. For small vendors at Panjiayuan market in Beijing, mobile payments reduce the need to maintain a cash stock and fractional change, facilitating more efficient sales and reducing leakage from theft and fake notes.  Street sellers have a QR code sticker in a visible part of their stall, customers scan the code, enter amount to pay, show the shopkeeper the proof of payment in their screen, and walk away. Selling transactions are reduced to visually confirming payment.  The reduction in the costs associated with cash and the improved convenience and efficiency are hard to quantify. However, both have driven consumer adoption of payments: the total transaction value of e-payments in China is 77% compared to 48% in United States, as we learned at our meeting with Tencent.
  • Easier access to credit for both consumers and merchants. Payment transactions automatically create digital records of sales and purchases for both consumers and merchants. This data can be used to assess credit risk, which is particularly valuable if either are outside the traditional finance ecosystem. Providers such as Alibaba and JD Finance use this transactional data to extend credit access to both consumers and merchants which provide working capital that enable small businesses to grow.  On the consumer side, this leads to uncollateralized loans which can have different kinds of effects – which can be positive, or sometimes negative.
  • Enable participation in the emerging “sharing economy”. People participate in shared schemes by virtue of being able to pay (or be paid) instantly and remotely with electronic money. For a low-income person, the “shared economy” may mean being able to do more with limited resources. For instance, s/he may not be able to buy a bike but may have enough to pay to ride one from a bike-share company, such as Ofo, and reap the benefits that more efficient transport can bring.  Additionally, a person who owns a motorcycle can offer rides via an online ride hailing service, such as Didi, or distribute packages in his/her spare time to earn additional income.
  • In some cases (particularly larger businesses), improved inventory, merchandising and sales processes. Transaction records are used by shop-management systems to access consumer data, track purchasing patterns, and use tools to strategically manage inventory and make better business decisions. An example of such a system is Alibaba’s free retail-management platform, Ling Shou Tong (meaning ‘Retail Integrated’), which we saw in action in Weijun Grocery, Hangzhou.

Social media and networking (e.g. WeChat)

While electronic payments change the way people do business, the effect of social platforms is of a different nature.  While in their origin, social networks facilitate interactions among people, some have integrated a payment mechanism that eases access to a wide array of services. In China, the popular WeChat platform enables users to pay their bills, hail a taxi, split the restaurant bill among friends, or play games and stream videos, all in the context of social interactions across chat groups. While we were not directly able to load funds on our WeChat accounts as non-residents, we had an opportunity to experience these applications courtesy of our Chinese hosts.

We see two direct ways in which social networking can lead to financial inclusion impact:

  • Improved exchange of money in context of social relationships. During our meeting with Tencent, we learned of a fascinating example of how WeChat integrates social custom with technology to creatively produce contextually relevant products for its users. For Chinese New Year for example, families provide their loved ones with red envelopes containing cash. Given many people cannot physically come together during the holiday, WeChat facilitates the sharing of digital red envelopes, which enable even Chinese living outside of China, to also send or receive digital money in the New Year. In 2018 alone, the total amount of digital red envelopes shared on Chinese New Year exceeded CNY ¥ 768 million (USD 115 million).
  • Improved access to credit for thin-file customers. Social networking companies such as Facebook, end up knowing you better than your partner given their access to social data.  Traditional banks can access your financial history, but can’t place your financial transaction in the context of everyday life.  In China, Tencent Holdings the parent company of WeChat also owns a bank, WeBank. Data from social interactions and monetary exchanges enables WeBank to manage a loan portfolio at very low default rates even with clients traditionally classified as ‘thin file’, which is particularly relevant in the absence of credit bureaus in China.

E-commerce platforms (eg. Alibaba/ Taobao, JD.com)

E-Commerce facilitates trade among distant parties who wouldn’t conduct a sale/purchase transaction in the absence of a mechanism to connect demand with supply. Ecommerce platforms also enable a minimum trust needed to purchase something remotely without immediate and tangible validation of product quality (an escrow account).  Here are some of the impact pathways we observed in China:

  • Increased sales and firm growth for small businesses.  For SMEs, particularly those outside urban settings, eCommerce means being able to tap into a larger market, by selling beyond the immediate physical geography where businesses are located.  Businesses that manufacture and sell products (e.g., shoes, textiles, furniture) can sell nationally as opposed to just the town or city where they are based. In China, good roads and availability of different logistics services enable efficient delivery across a wide geography. Electronic records of sales enables access to digital finance (working capital).  The growth of businesses as a result of e-commerce can have a direct effect on job-creation and income-generation for local citizens: Alibaba’s rural-focused entity, Cuntao, has created more than 1.3 million new jobs nationwide through its rural eCommerce solution.  According to Cuntao, this brings RMB 180,000 benefit annually to each village. We were able to see this first hand during our visit to a ‘taobao village’ in Huidong specializing in women’s shoes. We chatted with suppliers and producers to surface their strategies on optimizing sales, learning about increasing domestic and international retail and wholesale trends resulting from selling on online marketplaces. For one factory owner, annual advertising on Alibaba coupled with the branding support provided by the platform dramatically expanded his shoe production business, which in just 4 years grew to employ 200 people and sell 1 million pairs of shoes annually.
  • Access to expanded variety of products and services, which can potentially be better suited and/or more affordable. For consumers, shopping in online marketplaces (in addition to brick-and-mortar stores), could increase access to a wider range of products and services.  These can be options that are potentially better suited for his/her needs or perhaps more affordable. Purchasing online may also bring time-savings, which may lead to having more time for productive activities. More work on the demand side is needed to better understand the benefits of ecommerce for low income consumers.

Concluding thoughts

In summary, there are indications that superplatforms can impact both consumers and businesses, bringing efficiency gains, increased digital data on transactions and social media, and access to capital. However, we think we should remain concerned around the digital divide – the extent to which the shift to digital can touch poorer and low income segments.  We should be well aware of these limitations so that the design and delivery of digital products can be improved. As of yet, there has been limited in-depth exploration of the outcomes ‘after access’ and this is where additional investment could be allocated. Perhaps the next step in the China discussion is to begin identifying the impact of superplatforms on different segments of users, including low-income women, youth and rural residents. In other words, what does this mean in terms of bringing meaningful changes and opportunities for low income people?  Is there growth and job creation in smaller and rural towns? Does self-employment improve and does it change income and expenditures? What other effects can these changes bring in access to education, upward mobility and gender equality? What are the intended and unintended consequences? How would these responses differ across different country contexts in Africa?

Emerging examples of impact stories – through qualitative anecdotal research or more rigorous experimental and non-experimental studies –  can help us understand where to marshal our efforts when advancing digital financial inclusion. In light of this, actors such as CGAP and the Mastercard Foundation can contribute to building the evidence-base on the impact of digital financial services on low-income clients in emerging markets.

Authors Xavier Faz (far left) and Lamia Naji (third from right) pictured outside a shoe factory that is leveraging Chinese e-commerce platforms to expedite growth.

You Can’t Clap with One Hand: How Collaboration Drives China’s FinTech Success



This blog was written by Lesley Denyes – Program Manager and Digital Finance Specialist at IFC and Annabel Schiff – Senior Manager, Partners at the FiDA Partnership – with input from Jessica Osborn, Senior Manager, Partners at the FiDA Partnership

Harmony has always been a highly valued virtue in the long history of China’s civilization, and it remains the cornerstone of Chinese culture today. It is no wonder then that harmony and collaboration were recurring themes during Mastercard Foundation’s FiDA Partnership fintech study tour to China, where we visited a number of leading technology and fintech organisations. Among these players there was an ethos of building the digital finance space together, rather than an atmosphere of disintermediation as we see among many banks and telcos in African markets.

To put this into context, among the technology organisations we met, both Ant Financial and JD Finance told us they each partner with over 400 financial institutions. WeBank, which started operations only three years ago, has already partnered with over 50 banks. A recent survey found 68% of financial institutions in China expect to increase fintech partnerships in the next 3-5 years. This is in stark contrast to the digital financial services space in sub-Saharan Africa in which partnerships are less common and often hampered by challenges such as power dynamics in the market, restrictive regulation and the relatively nascent stage of big data capability.

The evolution of WeBank through multiple partnerships

Here we discuss the journey to partnerships among players in China and the underlying incentives to partner. In a second blog we will reflect on if this ethos of collaboration and partnership can be replicated in sub-Saharan African markets.

Journey to Partnerships

All the companies we met with in China are using partnerships in some way to better serve their customers. In the global context, commercial partnerships are most eagerly sought by smaller companies hoping to leverage larger companies’ access to new markets or new revenue sources, with challenges often surfacing due to the imbalance of power. Rarely do we see the largest financial service companies actively seeking partnership to expand their services. We do, however, see partnerships between larger organisations (such as MNOs and Banks) for regulatory compliance reasons.

To understand how Chinese organisations partner we mapped four companies’ products by degree of partnership, and noted clear trends. There are no partnerships on payments; providers have not even integrated to enable interoperability between their wallets.

Beyond payments, as organisations offer more sophisticated financial services, partnerships play a more dominant role.

* Loans: WeChat offers loans from its sister company, WeBank. JD Finance allows customers to access credit from other financial institutions through their app. Ant Financial is the only organisation that does not leverage a partner for loans, instead packaging the lending into asset backed financing which they sell on to investors. However, with the regulatory clampdown on asset-backed securities (ABS), it is likely that they will be need to look to partner for loans in the future.

* Wealth Management: Wealth management products from banks such as China Construction Bank are offered across Ant Financial’s Yu’ebao money market fund. WeChat’s Licaitong has partnered with China Rapid Finance for investment products.

* Insurance: Collaborations enable products to leverage the expertise from specialized underwriting institutions.

Analysis of the partnerships landscape for these four organizations reveals their shared strategy to protect the payment business and share the other financial services. This demonstrates the central importance of payments for customer acquisition, as a gateway to their other financial services offerings. Payments also hold valuable customer insights that the providers are reluctant to share.

It will likely be difficult for the Chinese market to continue with two dominant payment player wallets that don’t interoperate – mobile payments are dominated by AliPay (53% market share) and WeChat (40%). Customers and merchants appear to have put up with this for now because they can move money from their bank accounts to their Alipay and WeChat pay wallets without cost, and on the same SIM card. However, with WeChat Pay starting to charge for this bank to wallet transfer we may see greater customer demand for integration of wallets in the future.

Incentives to Partner and Collaborate

Our meetings in China not only revealed journeys to partnerships, but also incentives behind collaborations and partnerships. Below we highlight some of our key findings.

Risk Management

In China the lack of a credit reference bureau (CRB) forces organisations to employ different strategies to mitigate risk. Some share data bilaterally, others leverage data shared through a quasi CRB, while others pull data from sister companies and subsidiaries to provide a comprehensive view of existing and prospective customers.  

During the study tour, we learned about a lot of data being shared among organisations for risk management and credit facilitation. Two of the largest players, Tencent and JD Finance, share customer data with each other. JD Finance combines Tencent’s social media data with their own e-commerce intelligence to help JD develop a deeper understanding of their customers for credit profiling. Data collaboration also happens through the National Internet Finance Association of China (NIFA). Many non-traditional financial service providers spoke to us about how they share data with NIFA to fill the gap left by the lack of a CRB. Similarly, Ant Financial’s Zhima (Sesame) Credit – one of eight private credit rating systems – works with various entities to develop its credit scores to combine data from Alibaba’s e-commerce platforms, the Alipay payment service, as well as other financial institutions, credit agencies and government ministries.

Scale

Strategic partnerships also permit access to new customer bases. Banks offer access to offline channels, while internet companies have immense active user bases from mass market segments that are largely missing from Chinese traditional financial institutions’ portfolios. JD Finance told us how they joined forces with Industrial and Commercial Bank of China (ICBC) to launch the ICBC Xiaobai Digital Bank, enabling them to acquire customers who are outside of JD.com – including those offline – and enabling ICBC to tap into the millions of JD.com users.

Regulatory Compliance & Government Influence

In China, the government strongly encourages partnerships with state-owned banks in order to fortify their relevance amid competition from incumbent tech players. The gradual transition of China’s internet finance companies away from finance and towards purer technology plays can be attributed to governmental pressure. For instance, Ant Financial has transformed from fintech to techfin and now to tech services.

All the technology organisations we met were very careful to demonstrate their collaboration with banks, and highlight their core competencies in technology rather than finance. For banks, teaming up with internet companies enables them to quickly catch up on the tech innovations that have created the internet finance boom.

We also heard from technology companies, such as JD Finance, that regulation mandates them to partner with financial institutions to offer certain products and obtain certain licenses. This is similar to what we see in African markets where compliance is often the main motivation for bank partnerships.

Capital Constraints

As regulators have clamped down on asset-backed securities (ABS) and financial products have reached a scale that can no longer be supported by internet giants’ own balance sheets, banks’ low fund cost have encouraged collaboration.

Two companies we met with, WeBank and JD, are syndicating their loans with other financial institutions due to capital constraints. In the case of WeBank (in which Tencent has a 30% share) we learned how they syndicate their Weilidai micro-loans due to their limited access to loanable funds, with capital split 20/80 between WeBank and partner banks. While WeBank benefits from the the banks’ capital, the banks benefit from WeBank’s access to Tencent’s large customer base, as well as the efficiency and reduced risk presented by their tech innovation, leveraging blockchain for real-time settlement and AI for risk scoring.

JD Finance similarly shares its customers and channel with banks in exchange for cheaper financing, something that is rarely heard of in Africa. Usually banks finance on-lenders at a high price, due to the risk involved in lending to customers they don’t own. However, JD Finance told us how they have been able to negotiate low cost funds due to the appeal of their large customer base and a proven credit scoring model – that is the envy of most banks – owing to their expertise in AI and their ability to test this with vast amounts of customer data from JD.com and their partner, Tencent.

Technology Infrastructure and Expertise

As financial products have increased in sophistication, there seems to be a growing recognition among Chinese tech companies of the value of bank partnerships, and vice versa. Banks offer professional financial product design and packaging while internet players have tech capability and algorithms that they have been able to test on vast amounts of user data. A recent survey highlighted that the main driver in the expected increase in partnerships between financial institutions and fintech is to strengthen innovation.

Even among leading players there is acknowledgement that you can’t be good at everything. Ant Financial described how their rural finance strategy is reliant on partnerships with banks, insurance companies and county governments to deliver credit services to rural individuals and SMEs. They rely on banks for both their data on local individuals as well as their offline infrastructure (branches) to reach, educate and acquire rural users.  

Some organisations also offer their technology infrastructure to other players. WeBank licenses its technology capabilities, enabling smaller players to benefit from a level of innovation they would struggle to develop themselves. They also license their facial recognition technology to help partners with KYC. Similarly, Yirendai – through their Yirendai Enabling Platform (YEP) –  provides solutions to business partners such as risk management and customer acquisition. While these are currently commercial partnerships, in which institutions are buying services from tech companies, it is clear that China is entering an era of collaboration with financial institutions looking to move from these expensive commercial arrangements to collaborative partnerships.

Customer Stickiness

Large platform players in China, particularly Tencent, pride themselves on their super-app status, through which they offer a vast array of services to their customers. We learned from Tencent that due to the sheer breadth of services offered through WeChat, consumers find little reason to leave the app: over one-third of WeChat’s users spend over 4 hours in the app each day, and 60% of the total time they spend on their phone is either within the WeChat app or other Tencent platforms. This stickiness creates a customer relationship built on trust, longevity, and relevance in every aspect of users’ daily life, paving the way for a multitude of lifecycle scenarios and new touchpoints for financial service providers. Therefore, partnering with large platform companies can enable financial institutions to insert products into the daily lives of their clients in a way that is optimized for relevance and convenience. For instance, on WeChat you can book flights, hotels, car hire – and purchase travel insurance – all in the same place; funds can be moved between wealth management accounts and WeChat wallets seamlessly without leaving the app. For the tech giants, integrating financial services on top of their existing offerings in this way creates the potential to more effectively monetize their consumer base and increase the stickiness of their core offerings.

This blog has highlighted how partnerships, and an ethos of collaboration, are beneficial not only to small players in China, but also the tech giants themselves. While these insights into the Chinese fintech landscape are relevant for Africa, lessons cannot be simply replicated. In part 2 of this blog we will discuss whether China’s ethos of collaboration can work for African fintech as successfully.

Barriers and Bridges to Building Africa’s Digital Silk Road



This blog written by Sieka Gatabaki, Financial Services Manager at MercyCorps Agrifin Accelerate Program in Kenya with contributions from Annabel Schiff -Senior Manager, Partners at the FiDA Partnership.

In Part 1 of this blog, Stephen Deng shared insights from our recent trip to China about how e-commerce, and a sophisticated set of last-mile products and services, has helped drive the digital finance revolution in the country. In this blog we take a look at the e-commerce landscape in Africa, and the opportunities and challenges of developing a similar stack of last-mile offerings on the continent.

The growth of e-commerce in Africa is evident. Launched in 2012 in Nigeria, e-commerce platform Jumia now has a presence in 30 African countries and reported 80% year on year growth last year. In 2017 Naspers invested $202 million in South Africa’s online shopping site Takealot, and MNO giant Safaricom recently launched their own e-commerce platform, Masoko. We are also seeing social media platforms such as Facebook, Whatsapp and Instagram being used as informal marketplaces.

Growth, however, isn’t without its challenges. A 2017 report showed that less than 30% of African e-commerce startups are profitable due to issues around funding, logistics and trust. Despite its expansion, Jumia is yet to turn a profit. Naspers’ recent sale of Nigeria’s largest online shopping mall Konga has been attributed to the platform’s lack of growth. When it comes to Africa and its various markets, there are clearly opportunities and challenges within the e-commerce landscape:  

From roads to smartphones

The continent of Africa covers 30.3 million sq kilometers, with sub-Saharan Africa comprising of 48 countries. This is a huge land mass with multiple infrastructure and political implications, compared to China’s 9.6 million sq kilometers and single governance. Although Chinese partnerships and loans are helping to finance infrastructure projects, physical transport and road infrastructure in Africa remains a challenge. This is further hindered by a lack of a formal address system in most African markets. Apps like Google Maps and solutions such as OkHi are improving the ability to locate physical addresses, but this still remains a challenge with e-commerce companies often resorting to utilizing drop off points.  

The backbone of China’s successful e-commerce landscape has been attributed to smartphone penetration and its supporting infrastructure. While Africa is experiencing increased smartphone adoption and internet penetration, it is far from widespread, with digital literacy challenges adding another layer of complexity.  

Opportunities and challenges with distribution and delivery

Leading players such as Jumia have invested heavily in their logistics network. There has also been significant interest and investment in third-party logistics, particularly in Kenya. Lori Systems utilizes returning empty truck capacity to provide opportunities for rural-urban delivery,  Twiga Foods, an agricultural e-commerce company, recently raised US$7 Million from IFC and other partners to expand its aggregation and logistics capabilities, and Sendy offers a marketplace for last-mile delivery, allowing customers to send packages using an app that connects them to motorcycle, van and pickup drivers.  Sendy now does distribution for Safaricom’s e-commerce venture, Masoko. Global ride-sharing companies, such as Uber and Taxify, are also trialling on-demand courier services in metropolitan areas to cover the gaps in current delivery systems.

Despite the increased presence of logistics services, slow, inefficient delivery systems remain a major barrier to e-commerce. This is especially the case in rural areas – home to over 60% of Africans – where populations are highly dispersed, precluding the route density required for last-mile delivery business models to work. African markets could learn important lessons from Indonesian ride-sharing companies such as Go-Jek, who have overcome some of these challenges to bring e-commerce services to non-urban low-literacy customers. It will also be interesting to see what lessons China’s Didi can provide with their recent investment in Taxify.

Developing a digital data trail

While in China there is a “stack of digital services that help suppliers adapt their previously offline businesses to the digital economy”, in Africa there is a relative “lack”. This is in part due to a dearth of data, and a lack of prioritization of data analytics for segmentation and buyer behavior analysis. While in China merchant payments drove DFS adoption, thus creating a plethora of financial and non-financial customer data, in Africa person-to-person transfers have tended to lead the way. This has resulted in a significant gap in consumer insights, hindering the digital augmentation of such businesses. Data collection, consolidation, and analytics perhaps remains one of the most challenging areas for advancing e-commerce – and indeed sophisticated digital financial services – in Africa.

Kenya is, however, showing some traction in this regard. Over 200,000 merchants are enabled to take digital money – through providers such as Masterpass QR, mVISA and Lipa Na M-PESA,  – providing a transaction footprint hitherto undigitized. Additionally the acceptance of M-PESA for payments on Google Playstore and the integration with Paypal should also accelerate the volume of transaction information gathered for behavioral predictions.  

Poor user experience across e-commerce platforms

The clunky nature of digital merchant payments is evident through e-commerce behaviour in mobile money markets where 70% of e-commerce payments are still cash-on delivery. The poor user experience also extends to delivery, refund and exchange processes, and a lack of trust. The persistence of cash-on-delivery payments within the e-commerce landscape in Africa is in part driven by this lack of trust and a desire to see goods before paying for them. Perhaps lessons can be learnt from China’s Alibaba who launched Alipay in 2004 as an online escrow service enabling shoppers to claim back refunds if unhappy with their purchases.

The role of government

At the policy level, many sub-Saharan countries are grappling with the need for policy reforms in order for the digital economy, new models of transaction, and e-commerce to thrive. Some governments in Sub Saharan Africa are creating conducive environments for the digital economy to thrive through reforms and policies on digital financial transactions, however the journey ahead is long and fraught with issues such as data privacy and ownership. We have witnessed some public-private partnerships with parastatals, such as the Kenyan Postal Services partnership with Jumia for countrywide pick up and drop off points to facilitate rural ecommerce. However, much more government support will be required if e-commerce is to overcome current last mile challenges in Sub-Saharan Africa.

In conclusion, it may be difficult to predict when African e-commerce will have the enabling last-mile services to bring about a hockey stick adoption trajectory. Many pieces are coming together, but many more need to be put in place. Studies of successful implementations in countries like China provide insights that should be closely watched.

The Digital Silk Road: Lessons from Last Mile Distribution in China



This blog is authored by Stephen Deng, co-founder at DFS Labs, an early-stage fintech accelerator for emerging markets

Recently, I had the opportunity to join a group of donors, investors, entrepreneurs, and other stakeholders and spent a week in China to understand the dramatic digital financial revolution that the country has undertaken.

We quickly realized that China’s story is not just about the meteoric rise of its tech giants, but just as importantly, the layered set of last mile products and services that was built up to enable such fast growth. As much as this is a story of ecommerce, it is a story about how traditional, physical commerce has been adapted to a mobile-first economy.

After a week visiting a set of ecosystem players from corporate executives to end users, I came away with the following set of building blocks that have played a critical role in the evolution of China’s digital financial services:

Continual improvement of physical infrastructure

It would be shortsighted to discredit the critical role that years of massive infrastructure development has played. The backbone of China’s ecommerce revolution has been the smartphone and its supporting infrastructure; 2018 estimates suggest that China has over 699 million smartphone users. During our learning trip we saw how much focus there still is from companies like Huawei who are striving to upend the price to performance equation for these technologies.

Likewise, we cannot discount the importance of building out the literal last mile – the roads, bridges, and addresses which underpin physical delivery and location. The country’s One Belt One Road initiative underlines this focus and is set to reshape international commerce in as well. In China, we also saw examples of the next generation of this effort, including JD.com’s drone delivery for the remote last mile. Technological advances like autonomous hub-and-spoke delivery will continue to push China’s last mile infrastructure forward and continue to add new customers to its digital economy.

One of JD.Com’s Drones – taken during a visit to JD.Com’s offices in Beijing

Seamless last-mile delivery as a service

China’s ecommerce engine would not run without the parallel development of a group of last mile logistics companies. Alibaba has Cainiao, it’s tech-enabled logistics platform, but its the kuaidi (delivery and logistics) companies from Tonglu: Yunda, ZTO and STO that have been the physical backbone for the country’s ecommerce demands.

We found it especially important to understand how seamlessly these logistics services are integrated into a SME’s sales process. For example, 3 hours outside of Shenzhen, we met a shoe producer who grew his business from $10,000 to $50 million RMB in four years. From a small warehouse, he sells over a million pairs a year all over China by utilizing Alibaba’s various wholesale platforms Taobao and 1688 to reach customers and uses kuaidi services to deliver them. The SME owner just has to focus on creating the best products – marketing, payment, delivery and even returns are handled on the platform.

Helping to bring offline suppliers, online

In addition to last mile delivery, there is a stack of digital services that help suppliers adapt their previously offline businesses to the digital economy. One of the biggest areas of support relates to the necessity to collect, sort through, and make decisions around the massive amount of data now available to sellers. During our Live Learning trip, we saw a very cutting-edge example in Alibaba’s TMall Weijun Grocery where traditional convenience store owners were able to participate in a franchising package that includes the hardware, software, and insights to bring them into a big data world. Store owners gained access to foot traffic heat maps, customer online purchase histories, and regional shopping trends to inform restocking and store layout decisions.

Shopping at the Weijun Grocery Store in Hangzhou

Similarly, sellers were brought into a digital payments ecosystem, not only through Alipay and Wechat Pay’s QR code infrastructure, but also in online ecommerce with access to services that reduce barriers, such as working capital loans on Taobao and a digital escrow service to bridge the trust gap between online buyers and sellers.

In another key example, smaller sellers are able to livestream directly to an audience customers on Taobao, introducing otherwise undifferentiated products to thousands of potential buyers at once with a single smartphone.

Empowering new digital economy customers everywhere

None of the above layers would matter if end customers were not empowered to participate and spend money on ecommerce platforms. The ecommerce services made available to customers are designed to digitize offline purchases and increase online purchases. Prior to this trip, many of us were familiar with Amazon and the strength of its recommendation algorithms to guide and increase their customers’ online purchases. Thanks to the prevalence of mobile payments in China, the recommendation algorithms can be built on both online and offline shopping behaviors. Buyers are advertised the right products at the right times, no matter where they are.

Additionally, newer e-commerce buyers are able to spend more and with more confidence through a group of services including: unsecured digital loans and generous return policies adopted on platform like Taobao. For users who aren’t fully digitally literate, Taobao agents can provide digital education and even take cash orders to provide an easier onramp for newer, often rural customers.

Government reducing cost of entry to the ecosystem for first movers

Finally, the trip highlighted to us the large role the government played in setting up and supporting the ecommerce ecosystem. The initial rise of “Taobao villages” included government incentives that awarded top product producers with cash bonuses. A government focus on rural bank account ownership set the backbone for the debit features that allow Wechat Pay and Alipay to function, eliminating the otherwise daunting issue of cash-in, cash-out (CICO).

Inspired by our experiences in China we scanned recent trends in Africa in order to better understand the opportunities and challenges of using e-commerce platforms, with powerful last mile capabilities, to drive access to inclusive digital financial services. In Part 2 of this blog, we delve deeper into the implications for Africa, and explore new ideas and initiatives taking place on the continent.

This blog is part of a series focused on deep dives into learnings from our trip to China. Follow us on Twitter or LinkedIn to catch each blog and learn more about these insights. If you are interested in joining a Live Learning trip, get in touch!

What LulaLend Learnt from Fintech in China



This blog was written by Neil Welman, Co-founder and CTO of LulaLend 

China is currently undergoing a digital revolution of an unprecedented scale never before seen. The rollout of digital financial services to all sectors of their vast population is nothing short of incredible. China has many similarities to the African story as well as many differences. Could some of what China is doing to achieve financial inclusion be used in the African context to bring digital financial services  to the huge unbanked and underserved population there? I was fortunate enough to be invited on a trip to China to explore this further. The trip was very generously arranged by the Mastercard Foundation Partnership for Finance in a Digital Africa  (FiDA Partnership).

In this short blog I focus on some highlights from the trip, namely:

  • How tech platforms have leveraged their user base to drive adoption of digital financial services (DFS)
  • The innovative ways that financial services are offered to SMEs
  • How Chinese tech companies are delivering financial services to rural customers
  • How data and AI is used to understand customers, deliver tailored products and reduce risk

Tech Platforms driving DFS adoption

The first thing that strikes you when you wander the markets, shops and restaurants in China is the lack of cash or even card transactions. The majority of face-to-face payment transactions you see in these places are done via mobile payments, namely using a QR code system.

The de-facto way of paying in China

Why this massive take-up of mobile payments? South Africa, where LulaLend is based, has  similar QR code based payments systems which are enjoying consistent growth but not at the rate seen in China. One key difference in China is that the mobile payment systems are generally leveraged from existing, non-financial platforms that already have huge uptake. For example, WeChat Pay is leveraged off the WeChat social messaging app (similar to WhatsApp) which has around a billion users. So iwhen WeChat Pay was released it was already accessible to a huge user base.

While this might sound impressive, WeChat Pay is not even the most popular mobile payments platform in China. That title goes to Alipay. Alipay was originally developed to facilitate transactions across Alibaba, the largest e-commerce site in China, which now has an enormous over half a billion customer base.  With such large tech players offering financial services on top of non-financial platforms, it becomes clearer why there is such a massive uptake of mobile payments.

Another benefit of leveraging financial services from an existing platform is that identity can be accurately verified which leads to much lower fraudulent rates. From our meeting with Ant Financial we learnt that less than 0.001% of transactions are fraudulent on Alipay, compared to circa 0.2% on PayPal. Lastly, the tech companies are making huge drives to grow their customer bases, and in doing so building up a bank of data on their customers. This is done by offering incentives and discounted charges on some of the services – payments commissions being one – with revenue generated from other sources such as e-commerce sales and in-app purchases. While customers benefit from really low commissions, platform providers are able to capture a lot of payment data which can be used for credit assessment and delivery purposes.

Innovative ways Chinese tech companies deliver financial services to SMEs

JD.Com is a big B2C (business to consumer) player which focuses on an Amazon-type approach thats sells directly to its 300 million customers. This means it is responsible for delivering the goods themselves and therefore has developed a vast distribution network to support this model. Its strengths lie in its customer and supplier interfaces and management systems, and its supply chain network. JD Finance is the finance segment that was spun off recently to focus on financial products.

The JD.com brand

By managing all aspects of the process, from purchase to delivery, JD.com gains access to a huge amount of data on its customers and their behaviour. The data is turned into insights and understandings, allowing JD Finance to offer unique products to the various elements of the process. For example by observing user behaviour on the platform and transaction history they are able to accurately assess the eligibility of their merchants for credit. This can be unsecured as is the case for suppliers, or secured for the merchants who use their warehousing services and have stock in them. Interests are charged at a daily rate and paydowns are generally flexible.

Alibaba is the biggest e-commerce firm in China. Their Taobao business is a B2C company that focuses on their marketplace that connects business and consumers, much like the eBay model we understand. Their finance focused arm is called Ant Financial. They too offer various merchant funding that is driven off data collected from interoperation with their site. But their main offering is Alipay, their digital payments system. The payment data from Alipay is also leveraged allowing them to segment an incredibly low risk SME base to offer funding too.

Serving the rural population

What was really fascinating and inspiring to see is how financial services are being rolled out to rural populations. This is probably the most relevant aspect to the African context. It involves extraordinary coordination and strategy between government, the banking industry, tech infrastructure companies and new internet based technology companies. The first step was a massive push to get connectivity and ICT out to the rural populations. This created the infrastructure that could essentially leverage smartphones to the majority of people.

Then, the banking industry did a massive push to get branches out as far as they could and drastically increase their number of rural customers. But what is the use of a bank account if you don’t have any money coming into it? That is where technology companies come in. Companies like Alibaba have focussed their efforts into capturing the essence of rural economy. Taobao, their eBay like site, allows any merchant, no matter how small, to sell their wares or services. This has enabled even a producer to link up to a larger supply chain and eventually deliver their goods to an international market. So the supply chains are made up of many merchants supplying goods, logistics, and brokering agents all working cohesively together using the specialist management functions of the platform. The process has become so popular that whole villages have been focussed to cater for specialities required. Rural Cuntao (Rural Taobao) is the term coined for this product. For example, we visited a Taobao village that focused on manufacturing shoes.

A typical production element for this type of supply chain

Perhaps in the African context this is not yet possible due to the still relatively low penetration of smartphones. But companies like Huawei are developing innovative ways of increasing access in rural Africa at a much lower cost than previously. This involves new communications technology to optimise usage across the frequency band and much more efficient infrastructure (e.g. much smaller tower networks needed to support this than previously).

Huawei showcasing some of their technology goods

Summing up

It was fascinating and inspiring to see how fintech in China is being used to offer digital finance, and how funding products are offered to all areas of the populations. Below are summed up keys of what we would like to pervade our thinking going forward:

Scale. The awe-inspiring size of the audience Chinese digital finance companies reach and the pace with which they are growing is staggering.

Data and AI. The use of data and AI to understand all aspects of this customer base and enable in-depth offerings at incredibly low default rates.

Innovative lending products. Drawing on the vast amount of information available to focus specific credit products to specific sectors.

Reaching rural communities. The coordination of all sectors to reach out to the underserved and provide innovative products to get them onto the platforms. Then providing the supply chain management to keep them on.

A new approach to data sharing. Customer data is seen as an asset that can be shared with competitors to improve your own offering and the value to the customer.

Understanding customer needs. Constant focus on what customers use in their everyday lives and adding platforms and products around this.

Cool, but how does this affect my business?

At Lulalend, we are looking forward to using these insights to add to and shape our strategic thinking to offer a better experience to the SME owner. A lot of the concepts we saw are already incorporated on some level in our platform so it was amazing to get insight into the most advanced platforms. Lulalend are on the forefront of championing digital lending in South Africa and a lot of what we have seen will result in direct improvements or those inspired by the strategies seen:

  • Increased refinement and accuracy of our machine learning models to assess a business.
  • Increased use of AI technology to drive down fraud and risk, so that better rates could be offered to customers.
  • Pragmatic usage of AI in the application and onboarding process, including serving customer queries. Being a data driven company, a big part of what we do is around handling and processing data, and there were some great lessons to see how truly big data is being handled.
  • Deepening the relationships we have with our partners to compliment and leverage different services.
  • Increasing the potential base of the local SME ecosystem by focussing on alternative methods of credit assessment, rather than being totally reliant on credit bureaus for this.
A golden outlook for digital finance in China (Shenzhen skyline)

WeChat, You Chat, We All Chat: the importance of social media and entertainment for digital finance



This blog was co-authored by Jessica Osborn and Annabel Schiff, both Senior Manager, Partners for the FiDA Partnership

Well over half of the world’s population is now online, with more than 3 billion people all over the world using social media each month. Social interactions that previously took place in the analogue world are increasingly happening online. The way in which social networks are deeply embedded in our lives makes them a promising foundation for digital financial services (DFS). Chinese tech companies such as Tencent – China’s social media and messaging colossus – have seized this opportunity to an extent not yet seen elsewhere. Tencent’s use of social media and entertainment for financial services’ growth offers valuable lessons for sub-Saharan Africa. The Mastercard Foundation for Finance in a Digital Africa (FiDA Partnership) recently traveled to China with financial services leaders working in Africa to learn these lessons first hand.

Socially Embedded Customer Acquisition Strategies in China

Social first, finance in the background

It serves millions of people with financial services, moving billions of Yuan per day through one of the world’s largest payments systems, yet Tencent’s core business is not finance but social networking and entertainment. Their product portfolio includes their flagship messaging services – WeChat and QQ, music streaming and social gaming, such as Arena of Valor, the highest grossing game and most downloaded app the world has ever seen.

The virality of these use cases has driven phenomenal scale. WeChat is used by 77% of all mobile phone users in China and recently hit 1bn monthly active users – approximately equivalent to the entire population of sub-Saharan Africa. Tencent’s embeddedness within the digital lives of millions of users has enabled it to integrate financial products into existing social use cases which resonate at scale.

Building use cases around people’s lives

Tencent harnessed their strengths in entertainment and their existing relevance in social relationships when they delved deep into users’ desires and impulses with the the concept of ‘social cash’. WeChat’s digital wallet enables P2P money exchanges, which Tencent based on the Chinese custom of giving cash-filled red packets (Hongbao) during Chinese New Year and special occasions.

However, WeChat not only permits sending set amounts to individuals and groups but it amplifies the social and entertainment aspects of this transaction by encouraging users to send money to groups in randomized amounts. Users can also win red envelopes by shaking their phones during live New Year’s TV shows. It is the gamification of this social behaviour which gives it the thrill that draws users in: 77% of WeChat users sent red envelopes during at the past Chinese Lunar Year. In fact, such has been the success of red envelopes that these financial transactions now drive adoption of WeChat itself – so the social media platform and financial service reinforce each other’s growth.

The stickiness of the app-within-an-app model

Tencent’s ability to layer financial services on top of products that solve everyday issues in users’ daily lives is perhaps best demonstrated by the sheer breadth and volume of services seamlessly and conveniently offered within the WeChat app, which has led it to be dubbed a ‘super app’. These services are offered through over 10 million lightweight, web-based apps and over 580,000 ‘mini programs which live inside WeChat. We experienced this all-encompassing functionality on our trip in Beijing: ordering taxis, locating friends, finding reviewed restaurants, ordering meals, navigating using a map, identifying congested areas, paying for goods offline, going dutch, sending money to friends, checking movie times, browsing for sunglasses, finding other users nearby and even ordering dog grooming services –  all offered and executed within WeChat. It’s ‘app-within-an-app model’ offers users such an array of services that WeChat is more akin to a browser or operating system than a traditional mobile app, leaving users with little need to exit the app. In fact, when FiDA met with Tencent they told us that their users spend 30% of mobile time in WeChat and 30% in other Tencent apps. By designing experiences around users’ lifestyles, Tencent moves financial transactions seamlessly into the background of services that matter more to users.

What’s important here is that Tencent did not originally provide financial services. Financial products, initially payments, were rather integrated into existing pervasive digital social lives. This is the opposite to what we see in sub-Saharan Africa where DFS providers develop and offer financial services largely in isolation from existing behaviors and hope that use cases are dynamically built around them. This approach has limited the breadth and frequency of DFS use in Africa.

Lessons for Africa

There are clear contextual differences which make reaping the benefits of social media for DFS more challenging in Africa. The continent’s countries reflect vast differences in culture, language, regulatory structures, economies and variances across many other dimensions. Being able to address the entire population of China as a single unit – unhindered by competition from the biggest social media site on the planet – Facebook – gives Tencent clear advantages over DFS providers even in Africa’s most populous countries. Nevertheless, lessons from China’s interlacing of social lives and financial services are worth consideration and reveal intriguing new approaches to financial inclusion in Africa.

Social Media already woven into the fabric of everyday life in Africa

Smartphone connections in Africa have doubled over the past two years. Greater internet access is increasing demand for digital content: there are now 191M active social media users in Africa. Companies such as Google and Facebook are striving to deliver scalable products that address the needs of these new users. This is fundamentally impacting their experience of the internet to the extent that for many emerging markets users social media is the internet, with digital practices already woven into the fabric of daily life.

But providers are not yet leveraging social routes for DFS growth

Despite the increasing prevalence of social media in Africans’ digital lives, this opportunity has not yet been leveraged for financial services growth.

Unlike in China, the social platforms widely used in Africa are not homegrown; the most-used social messaging apps are WhatsApp and Facebook messenger and Facebook and YouTube have the greatest market share for social media. These global platform players have not yet seriously invested in offering financial services to their African customers, although WhatsApp is testing out a payments feature in India and there has been talk of a future offering for Africa. Additionally, these platforms have not opened up to enable local DFS solutions to be offered over their networks (as several Chinese players have done), although Mark Zuckerberg’s interest in mobile money on his 2016 visit to Kenya may indicate this being a future possibility.

Gamification of healthy financial habits have yet to realise widespread success, despite attempts. Unfortunately, gambling is possibly the best example of how entertainment has increased DFS adoption and use in Africa, which has had very damaging effects, including over-indebtedness and poverty exacerbation.

Will social first, finance second see the same success in Africa?

In something of a plot twist, and perhaps reflecting the need for social embeddedness for financial services to succeed, Africa’s biggest mobile money provider, Safaricom in Kenya, is in fact launching a chat service to support their Mobile Money offering. The messaging service Bonga, (meaning “to chat” in Swahili) was partially launched in April and has M-Pesa deeply integrated, allowing users to review their M-Pesa balance and send money without leaving the platform – reminiscent of WeChat’s app-within-app concept. Safaricom also launched an e-commerce platform (Masoko), ride-sharing service (Little Cab) and music streaming site (Songa) to entrench M-Pesa yet further into digital social lives. The extent to which Safaricom’s social platforms can compete with global incumbents remains to be seen. Certainly Little Cab has struggled to gain traction amidst competition from global apps such as Uber and Taxify. It is also debatable as to how replicable this model is to other countries and providers who do not have the benefit of Safaricom’s large customer base and Kenya’s mature mobile money market.

Safaricom’s Bonga Platform. Photo credit: Quartz

As DFS continue to gain traction in Africa it is smart to look to lessons that can be learned from different and innovative approaches in other markets. In this blog series, FiDA explores the various lessons that China holds for DFS in Africa. To read more from our China Blog Series, follow us on Twitter and LinkedIn or sign up to receive our monthly newsletter, the FiDA digest.

Eight things we learned in China driving Fintech fortune



In May, the FiDA Partnership took 26 leaders from Africa’s digital finance industry to China to learn about their unprecedented FinTech boom. The week was immersive and intense, designed to allow participants to escape the boardroom and experience Chinese digital life firsthand on the streets of Beijing, in the mom-and-pop stores of Hangzhou, and the on factory floors of Guangdong. In this blog, we reflect on the key lessons.

1. Government played a critical role in providing an enabling environment

There is no doubt that China’s protectionist policies allowed local players to flourish, free from competition from global incumbents. The government also invested considerably in establishing the ecosystem to support digital financial services. They mandated state-owned banks to provide widespread access, resulting in 80% of adults having a bank account and rural branch and ATM penetration on par with high income countries. This eliminates the need for FinTechs to develop expensive cash-in-cash-out networks as they have been required to do in sub-Saharan Africa. This has been underpinned by prioritization of rural development, providing broadband connectivity, universal IDs, and road infrastructure which lowers the cost of servicing remote areas.

Regulators’ “wait and see” approach sparked the FinTech boom in China. They began with an incredibly open framework, allowing models to evolve before tightening regulation, reminiscent of the approach that enabled MPesa to take off in Kenya. When regulation was eventually introduced it created space for FinTechs to flourish – over 200 licenses were recently granted to non-bank institutions. Companies we spoke to said regulators encourage frequent interaction with them. This means FinTechs know about upcoming rule changes and regulators are up-to-speed with new innovations, which is also assisted by regulatory sandboxes.

2. Business model innovation is happening in a big way

Laissez-faire regulation and growing tech expertise gave rise to innovative new players entering the financial services space with fresh business models. One such model is peer-to-peer (P2P) lending. This fulfils a demand from middle income savers seeking higher returns and greater flexibility than was offered by banks, and provides credit to the mass-market which was neglected by traditional financial institutions in favor of state-owned big business. We met China’s largest P2P lender, Yirendai, which offers prime borrowers access to unsecured credit by connecting them to investors through its online marketplace.

Digital finance business models in China are increasingly data-driven. Therefore, companies with large data pools and expertise in deriving insights from them have led the way. These tend to be tech giants such as JD.com, Alibaba and Tencent, so we are seeing profits in the financial services value chain shift from financial institutions to tech companies. The fact that these companies’ core business is not finance, but social networking or e-commerce, means they are not dependent on financial services revenues for their existence. This promotes experimentation and therefore product sophistication as companies can be patient for profit. It also means companies can subsidize entry-level products – usually payments – to encourage uptake. Alibaba’s rural e-commerce entity, Cuntao, explained how diversified revenues also help increase financial services’ reach: although bank business models lack incentives to serve rural customers who are low value and expensive to acquire and service, these clients hold value for e-commerce business models, permitting the financial services which support them to reach these communities as well.

3. The power of AI

China’s FinTechs have developed enviable know-how in artificial intelligence (AI), which has a visible presence in China: we shopped at JD’s unmanned stores which use smart shelves and facial recognition. We also saw AI in action at Weijun Grocery, a mom-and-pop shop in Hangzhou which uses Alibaba’s retail management platform to digitize inventory management. Weijun receives advice from the platform on what to stock based on historical sales, a trove of data about neighbouring communities, and timely information such as weather forecasts – for example to ensure ice-creams are in stock during a heatwave. We saw how cameras track customer movements to create a heat map showing where they spend most time in-store to help the owner optimise layout and merchandising.

AI is also used extensively on the back end. JD, Yirendai and Bairong told us how they leverage AI to process large datasets for risk management. JD uses more than 30,000 variables and 100 models to credit score over 200M users. Some of the variables used are astoundingly nuanced such as how hard a customer presses the screen and at what angle when they make a purchase. Their system is over 10x more efficient than traditional models and enables them to offer differentiated pricing. AI is also used to increase efficiency and efficacy of customer acquisition: Yirendai’s robo-adviser, Yiri, has resulted in a 50% hike in assets under management. WeBank, China’s first online-only bank, showed us their impressive live dashboard – like a banking version of NASA’s mission control! By using AI and blockchain they cut annual per user IT cost to $1 – a tenth of the industry average.

4. Partnerships are key

In the world of African digital finance, commercial partnerships are most eagerly sought by smaller companies hoping to leverage assets of larger incumbents – typically banks and MNOs. When collaborations do happen they are often tense, the imbalance of power played out in battles for revenue share and responsiveness. Rarely do we see strategic partnerships between giants, except out of regulatory necessity.

Not so in China. There, even the largest tech titans acknowledge that they can’t do it all. We heard about partnerships addressing a range of needs including risk management, scale, capital constraints, technology, expertise, and regulatory compliance. Two of the biggest players, JD Finance and Tencent, told us how they partner to share user data, enabling JD Finance to develop a deeper understanding of their customers for credit profiling. JD Finance explained how they partner with banks to access low-cost loanable funds in exchange for their large de-risked customer base. Yirendai revealed how they forward prospective clients to partners if they are unsuited to their own business model. In China, partnerships abound.

5. Social media & entertainment are powerful for customer acquisition

Tencent’s core business is social networking and entertainment, channeled largely through it’s messaging app, WeChat. WeChat offers a vast array of services – in Beijing we ordered taxis, hired Ofo bikes, ordered meals, checked movie times, and shopped online – all within the app. This grants WeChat relevance in almost all aspects of millions of users’ everyday lives, enabling Tencent to integrate financial services in meaningful ways with immediately applicable use cases. By designing experiences around lifestyles, financial transactions are minimized into the background of services that matter more to users. This is in contrast to what we see even in more mature digital finance markets in Africa where financial services are often offered in isolation from existing behaviors, limiting uptake and breadth of use.

6. Trust is a big pull factor

Professor Long Chen, Alibaba’s Chief Strategy Officer who joined us for a lakeside chat in Hangzhou, noted that tech platforms’ ability to create trust has been a significant growth factor. Micro-entrepreneurs in Panjiayuan Market, Beijing told us how digital payments took off because they eliminated the risk of fake notes. A Calligraphy Brush Seller noted: “I even use Taobao to sell to customers I already know because it creates trust. Payment only happens if the customer is happy & there is a process for returning goods if they are not”.

7. Rural e-commerce is creating new opportunities for job creation

Cuntao has extended e-commerce into rural areas by setting up 30,000 service centers at village convenience stores, enabling villagers with poor internet access to access goods previously unavailable to them. Centers receive goods ordered through Alibaba’s ecommerce sites and handle last mile logistics to customers’ homes, in return for commission. They are also education centers, teaching villagers how to shop online and helping them place orders.

Cuntao also provides two-way distribution infrastructure, enabling rural producers to access new markets. Clusters of rural online entrepreneurs who have spontaneously opened shops on Taobao Marketplace to sell their produce have emerged and have been termed Taobao villages, We went to one of them – Huidong – where we visited a factory started 6 years ago by a young man who worked in shoe factories his whole life, first as a labourer then working his way up to manager, designer, partner and finally starting his own business. He started the factory with $1,600 and a single room. He now employs 200 people and sells 1 million pairs of shoes annually on Alibaba platforms. It was impressive to see the role that e-commerce has played in creating jobs. Cuntao, told us their rural ecommerce solution has created more than 1.3 million new jobs nationwide and brings brings RMB 180,000 benefit annually to each village.

Olga Morawczynski from the Mastercard Foundation commented:

Tracking the economy of jobs that have been created because of Alibaba has been fascinating. Everything from people sorting the shoes to manufacturing the shoes to sorting the post-production material. We hear the story that technology destroys jobs but I think here we’ve seen the ability for it to create jobs and increase the rate of creation of jobs.

8. The future is offline

Alibaba believes that a foothold in traditional retail is the path to growth and has developed an online-to-offline (O2O) plan called “new retail”, which redefines commerce by enabling seamless engagement between online and offline worlds. New retail melds the best of in-shop and online experiences in new and unexpected ways, Using data such as purchasing history and store visiting habits, Alibaba intends to personalize product offerings, purchasing experiences and marketing campaigns. Alibaba’s Hema supermarkets incubate these innovations; we experienced how shopping there is a smartphone powered experience. We scanned QR codes to get product information and payment is cashless and almost touchless, using facial recognition combined with Alipay embedded in the Hema app. Each store also serves as a fulfillment center for online sales, delivering customer orders within 30 minutes to anywhere within a 3km radius.

This is all part of an effort to tap into the huge offline commerce sector in the world’s largest retail market. Despite the success of e-commerce in China, 85% of purchases still happen at brick-and-mortar stores, amounting to a $3.9trn opportunity. Venturing offline also enables Alibaba to access customers who are excluded from it’s online offerings owing to lack of digital literacy or phone ownership. Using offline experiences to bring people’s transactions online presents clear learnings for Africa.

Eye in the sky, maize on the ground



Harvesting Inc. maps millions of miles of cropland across various regions. This image is from the state of Maharashtra in India.

Richard is a smallholder maize farmer in Western Kenya. He used to borrow money from his family or friends to buy essential inputs to grow maize—seed, fertilizer, and equipment—because he couldn’t access a formal loan from a bank. Most banks consider him a high risk client because of his low-income and lack of credit history. Recently though, Richard obtained a $50 loan for his farming business. By processing and analyzing satellite imagery on his farmland and cropping cycle, in combination with other alternative data, a lending organization was able to assess his creditworthiness.

Richard’s story is not unique. Remote data captured through earth observation technology (i.e., satellite imagery) could be a game changer for insurance and lending products by reducing organizational and logistical costs. High resolution remote sensing can guide ground observations and enable organizations to estimate yield at the village level. Satellite imagery—in combination with demographic, financial, agronomic, geospatial, and psychometric data—provides sufficient detail on “thin file” clients like Richard (clients without an established credit history) to make lending decisions. Innovative FinTechs like Apollo Agriculture and Harvesting Inc. are generating credit scores using algorithms that rely on mobile phone and alternative data such as earth observation imagery as well as machine learning of farmers’ needs, incentives, behaviors, and agricultural activities.

Earlier this year, FiDA spoke with Apollo and Harvesting to learn about the journeys they took to integrate satellite imagery (i.e., images captured with earth observation technology) into their business offerings and how they implemented earth observation technology. The findings highlighted in FiDA’s case study, “Launching into space: using satellite imagery in financial services,”  offer financial service providers (FSPs) interested in leveraging non-traditional, alternative data two relevant paths for using earth observation technology.

What does it take to utilize satellite imagery?

The FinTechs’ findings indicate initial predictive power from satellite imagery in terms of generating features relevant to credit scoring. However, for Apollo Agriculture and Harvesting to leverage this technology, they had to have the right expertise on board to process and analyze satellite imagery. Ideally scientists should have experience working with a combination of:

  • software engineering,
  • machine learning/data science,
  • remote sensing science, and
  • agricultural and/or environmental science

These skills, neither easily available nor inexpensive to recruit, are key to building the infrastructure necessary to process thousands of images and develop the algorithms and tools that turn raw data into meaningful insights. FiDA’s case study also delves into the other components that Apollo and Harvesting had to have in place before embarking on their journeys, such as investment capital and training data.

Cost-effective customer acquisition is a challenging aspect of the business

There are potentially half a billion farmers who are not served by financial institutions and a decent chunk of them could be if we overcame information gaps. There is a huge demand for data and increasing availability of supply. That makes sense for a business case

Harvesting

Apollo and Harvesting strongly believe there is a business case in leveraging satellite imagery, even more so when an organization is utilizing satellite data at scale. But, in its business-to-consumer (B2C) model, Apollo has had to contend with  the challenge of serving rural customers who are difficult and costly to reach. They have found that is it more difficult to recover customer acquisition costs for farmers with low-value loans.

Nevertheless, Apollo has demonstrated that with the use of satellite imagery, there is “ample room” for profitability at “imminently” achievable repayment rates. Harvesting points out that it’s a numbers game: using satellite imagery is ultimately cost-effective because the majority of the costs are fixed and, as an organization scales (with customers), those fixed costs remain, by and large, fixed.

FSPs must have a clear vision of why they want to leverage satellite imagery as well as realistic expectations of what the technology can achieve

[Satellite imagery] is sexy to put on a slide deck but if it’s not solving a problem, it’s a hammer in search of a nail. It’s hard and expensive and requires very specialized skills. Build your business without it if you can! Don’t do it because you think investors want to see it or conferences want to talk about it.

Apollo

The most fundamental question an organization must ask is: what do we actually want to do with satellite imagery? The value of earth observation data depends on the existing data an organization utilizes and the additional value satellite imagery can provide given the high human capital cost of utilizing this technology. It would be prudent for organizations to first be sure of the benefit of satellite imagery and reflect on how the technology will enable them to reach their specific objective.

FiDA is confident that the journeys presented in this case study will provide a critical perspective on both the challenges and the promises of leveraging satellite imagery in financial services.