1. THE CHALLENGE | 2. THE OPPORTUNITY | 3. THE IMPACT | 4. WHAT WE INVEST IN
Financial services are essential for enabling people to withstand disruption and build for a more equitable, resilient future.
However, the current financial system is not designed to serve the needs of 1.4 billion people who are completely “unbanked” and excluded from actively participating in the rapidly evolving global economy. Within this, women are disproportionately excluded, with approximately 770 million left out of the formal financial system.
Mercy Corps Ventures invests in founders building inclusive frontier fintech startups that enable people to be more productive and resilient.
The Challenge
Global and local shocks expose the existing inequity and exclusion in our current financial system across a number of underserved populations. Unbanked households are more likely to suffer losses in the case of climate shocks or disasters and lack access to digital payments from friends and family who can help during a crisis. Shocks to small merchants and producers (often uninsured) may lead to business interruption, reduced income, and food insecurity. Migrants and refugees, displaced due to climate change or conflict, pay extremely high fees to send and receive money from their home communities. These groups lack access to the most basic building blocks of prosperity and resilience—bank accounts, savings, insurance products, and other financial services.
“I have witnessed the transformational power that access to and usage of quality financial services can have for vulnerable groups. Inclusive finance helps them better manage disasters and recover from crises. Part of the solution is tapping into the power of tech-enabled innovations that are customer-centric. There is enormous potential in inclusive financial technology.”
H.M. Queen Máxima of the Netherlands, the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development (UNSGSA)
Most of the 1 billion people living in low-income, urban settlements work in the informal or gig sector. Informal workers are often paid in cash and lack reliable income. They have no formal employment or income history and don’t receive benefits from employers, such as sick leave, health insurance, or a pension. This often leaves informal workers exposed to shocks, such as illness and economic recessions, barred from traditional financial services, and without a path to financial stability.
There are upwards of 162 million micro-, small-, and medium-sized enterprises (MSMEs) in frontier markets globally. MSMEs (which include smallholder farmers, micro-merchants, and informal workers) contribute substantially to employment and GDP in these markets. They are critical for providing goods and services to communities at the last mile. However, MSMEs lack access to lines of credit or short-term working capital, which constrains their growth and decreases their resilience to shocks. An estimated 41% of MSMEs in frontier markets have financing needs that are unmet, leading to a financing gap of $5 trillion. This is because they lack collateral, formalization, and credit history typically required by traditional financial institutions. These barriers are more significant for women-owned MSMEs, who often face additional social and non-financial barriers to launching and growing businesses.
The number of migrants and refugees globally is increasing as extreme weather, droughts, and natural disasters lead to conflict, loss of livelihood, and macroeconomic instability. Traditional financial services make it difficult or expensive for migrants to access cash and assets or open new accounts. Remittances and domestic payments are critical sources of income for many rural families to fund basic services, education, and productive uses, such as investing in a small business. Remittances have the potential to be a gateway to a wider range of financial services such as savings or credit; however, they remain extremely expensive due to multiple intermediaries, with 6% as the average transfer cost. Remittances also lack transparency for senders and receivers and can take many days to complete a transaction.
The Opportunity
In the last decade we witnessed the first technological leapfrog in how underserved users in frontier markets access finance: mobile-based financial services. Mobile network operators (MNOs), fintechs, and e-commerce platforms emerged during this period, and are bundling a complementary range of digital financial and information services delivered directly to users via mobile phones. These solutions not only provided access to financial services for millions of people for the first time but also started taking market share from legacy financial institutions.
Despite mobile money and fintechs, and the transformation it is propelling, the lack of interoperability between digital financial services platforms is impeding the full potential for inclusivity. These platforms are owned by MNOs and financial services providers that control pricing and products offered. Their “walled gardens” often exclude other companies and developers from building software applications on top of their platforms. This lack of interoperability stifles innovation, affordability, distribution, and uptake while forcing users to “cash out” rather than keeping their money digital.
However, we are now seeing a new generation of startups addressing these constraints through the creation of mobile fintech solutions that are modular, embedded, and interoperable between platforms. These solutions allow underserved users to access financial services in a more seamless and inclusive way. These solutions are also going one step further: earlier models of financial inclusion (such as mobile money) assumed the base layers of banking and finance would remain constant. However, this is not proving to be the case as new technologies are transforming core infrastructure and delivery of a wide range of customer-facing financial products and services. Startups using this new wave of inclusive financial technologies are proving to be an improvement over mobile money and our current financial systems.
This new wave of inclusive frontier fintech solutions is transforming our global financial system while creating revolutionary new pathways for people to spend, save, send, and secure money.
These innovations are powering this transformation:
WEB3
Web3 technologies provide a powerful new set of tools for evolving our financial services landscape. Startups are developing unique value propositions for emerging market users across a variety of sectors. The open-source, decentralized nature of public blockchains enables software developers, fintech startups, and other innovators to create applications tailored to the specific needs of underserved populations. Mobile wallets, including non-custodial wallets, offer users the opportunity to transact, save, and access financial services using digital currencies including stablecoins (digital currencies pegged to more stable currencies such as the US dollar). Peer-to-peer payments cut out layers of intermediaries and dramatically reduce the cost of sending money domestically and across borders. Blockchain provides safe, trustworthy storage for critical pieces of data, such as digital identities, and can give users ownership of their personal data and agency for allowing access. Smart contracts have the potential to automate and improve the efficiency of financial services, such as reducing transaction times and costs of insurance payouts.
These solutions have promising applications for migrants and refugees, MSMEs, and consumers in frontier markets. We expect new waves of startups to build on decentralized Web3 architecture for thriving, interoperable, and inclusive financial ecosystems accessible to all.
INNOVATIONS IN USER EXPERIENCE, EDUCATION, AND DISTRIBUTION
At the most basic level, as demonstrated by mobile money, mobile access to financial services via digital wallets reduces cost and distribution barriers to reaching the last mile. However, in addition to mobile access, a number of innovative new models for the distribution of digital financial services are emerging through digital platforms, channel partnerships, and agent networks. These innovative models for distribution are also experimenting with new approaches to bundling and embedding financial services alongside other products. For example, neobanks and other fintechs are bundling complementary financial and information services to drive usage of a wider range of products while growing the lifetime value of their customers.
In addition, fintechs are increasingly designing digital products that incorporate superior user experiences (UX) and education tools—recognizing the value in robustly supporting underserved users in adoption of their technology for the long term.
EMBEDDED AND MODULAR FINTECH
Thanks to their modular designs, many fintech tools and products can be embedded into digital networks, platforms and products across industry verticals. Software developers can compose applications seamlessly, mixing and matching financial tools like Lego bricks into various digital platforms. This is creating a new stack of fintech infrastructure, middleware and end-user solutions. For instance, fintechs are integrating payment solutions into messaging apps; layering e-commerce purchasing into social media apps; offering buy-now-pay-later options for internet purchases or at point-of-sale for merchants; embedding pay-as-you-go (PAYG) credit into a range of products; bundling insurance alongside credit and airtime; and providing working capital financing across supply chains.
As mobile wallets become more intuitive and financial services become embedded in digital platforms, low-income consumers will use them for managing savings, payments, cash flow, and risk.
NEW DATA SOURCES
Many frontier fintechs are utilizing advances in data availability as input into algorithms for financial products, such as credit screening or insurance payouts. In the microinsurance industry, emerging fintechs have developed new distribution approaches and products based on predictive models, incorporated geospatial and remote sensing, and are leveraging smart contracts to reduce the cost and time to payouts for users.
Many fintechs are at the forefront of developing these new data sources. Digital identities, for instance, are becoming more common across frontier markets. These digital IDs can enable the 1 billion people without official identification to access financial services and own their personal data. Not only do they gain agency over who can access it, they also have the ability to port their data across networks, and generate value through their engagement.
The Impact
When people are able to access, use, and afford a range of financial services, they better manage economic assets that help them to cope with shocks and disruptions. In the context of a changing climate and more volatile world, financial services delivered via mobile devices improve financial wellbeing and resilience even when bank branches are closed or inaccessible. Microinsurance products support climate-vulnerable customer segments transfer risk; mobile wallets, savings products, and affordable cross-border transfers provide migrants with tools to adapt; asset financing for climate smart agriculture inputs and productive assets like PAYG solar irrigation enable small farmers to take climate-adapted approaches; financial products tailored to the large market of unbanked women enable them to invest for income and nutritional stability, which is also planning and preparation for shocks.
Additionally, reaching the 770 million women currently unbanked would generate $330 billion in banking revenue and $500 billion in insurance premiums, as well as significant social returns that correlate with women’s access to finance.
We invest in fintech, decentralized finance (DeFi), and Web3 startups that are designing inclusive and responsible financial solutions that strengthen the resilience of underserved users.
Groups Impacted
What We Invest In
Consumer & MSME Finance
We invest in consumer and MSME solutions that are radically restructuring ways in which underserved and low-income consumers, households, workers, smallholder farmers, and MSMEs access financial services, including:
- Digital wallets: mobile wallets, non-custodial and custodial
- Modular fintech solutions: microinsurance, savings, payments, credit, and remittances products integrated into digital platforms, networks and products
- Embedded credit for productive use: asset financing such as manufacturing equipment, mobility, energy, manufacturing, and processing equipment
- MSME finance: supply chain and working capital financing, point-of-sale, and cash flow management solutions
- Bundled products: neobanks, fintech, and e-commerce companies bundling financial and information services
- Financial literacy tools: User education solutions integrated into financial products to drive uptake and healthy usage
Examples include Pivo, Wasoko, Pula, Turaco, and PayHippo.
Distribution & Infrastructure
We invest in infrastructure and distribution solutions that are foundational for increasing access to digital financial services, including:
- ID for a migratory and digital world: emerging apps that give people identification proof, control over their data, ability to limit access, and generate value through their engagement
- Systems interoperability: interoperability solutions among digital currencies, mobile wallets, service providers, and cash on- and off-ramps to further improve usability of digital payments
- Digital on/off-ramps and distribution channels: the user experience of the digital economy can be clunky, as the bridges between offline and online worlds are still being built. We will support innovative solutions setting up the rails so that users can seamlessly get in and out of the digital economy. This encompasses merchant and sales agent networks, along with other B2B/B2B2C channels serving important last-mile distribution functions such as customer touchpoints, marketing, customer service, and cash-in-cash-out (CICO)
- APIs for integrating financial services into e-commerce platforms and marketplaces
- Regtech solutions: Know Your Customer (KYC), Anti-Money Laundering and other solutions for fintechs and their users to maintain regulatory compliance, including traditional and “on-chain”
Examples include Kuunda, Warbler Labs, and Umoja Labs.
Decentralized Finance
We invest in decentralized and crypto-enabled Web3 solutions that are democratizing access to financial services and establishing a new fintech stack of digital currencies, wallets, and blockchain-enabled application, including:
- Inclusive payments and remittances: reducing the cost and complexity of sending money, including peer-to-peer transactions without need for intermediaries
- DeFi savings products: fintechs responsibly providing access to stablecoin-based savings and investment products for users in countries where currencies are volatile and/or users who are low-income
- Decentralized risk-sharing and smart contracts transforming access to insurance products across a spectrum of indicators, including health, life, crop, weather-index, and vehicle
- DeFi market access: models providing affordable access to the global financial system and capital markets for emerging market players. Emerging fintechs are leading the way in these innovations, offering access to global liquidity pools, decentralized credit markets, exchanges, and money market funds
Examples include Ejara, Goldfinch, and Umoja Labs.
Our Resilient Future Thesis
Mercy Corps Ventures Resilient Future Thesis focuses on identifying solutions that strengthen the resilience of people and communities in frontier markets. We see investable opportunities in multiple areas, where disruptions are creating the opportunity for impact and positive market conditions for necessary systemic changes.
Explore other thesis areas
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