Fintech: Where necessity is the mother of invention

There are an estimated 450 million to 500 million smallholder farmers in the world, with as many as 2 billion people living in smallholder farm households. They are one of the world’s most vulnerable groups; often at the mercy of unpredictable weather events, with limited access to infrastructure or support and little in the way of financial tools to help them mitigate risk. 

According to a report from Dalberg Global Development Advisors, credit provided by informal and formal financial channels currently only meets an estimated $50 billion of the more than $200 billion need for smallholder finance in emerging markets. 

Agricultural insurance in those markets reaches just 10% of smallholders (falling to 1% in Africa), while fewer than 15% have access to a formal savings account. One of the barriers is that agricultural loans and services are often based on ability to pay and not on the productive capacity of the land. 

But all that might be about to change, thanks to small startups harnessing the latest technology. Apollo Agriculture is one such firm. It recently launched a bundle of services to rural farmers in Kenya: a package of hybrid seed, fertilizer, farming advice and insurance, provided on credit using a mobile phone. How? Apollo makes its credit assessments by using satellite imagery. 

As Sonja Kelly, director of research for the Center for Financial Inclusion at Accion, points out: “Necessity is often the mother of invention.” Whether it is satellite imagery, using phones to provide micro-insurance, virtual reality customer service representatives, or using big data to predict health outcomes, emerging markets have become a breeding ground for innovation in financial inclusion – markets where 1.5 billion people are estimated to never have used formal financial services. 

“It’s interesting to see how in most cases we tend to think of innovation coming from developed markets first, but given financial inclusion is wide open for investment, that margins are so tight and that greater customer care is needed as it’s so new to people, in this case it is emerging markets that are driving technology,” says Katie Macc, CCO and co-founder of client engagement tech company Juntos Global.

Emerging markets are also home to what Jim Roth, co-founder of Leapfrog Investments, calls the emerging consumer. Leapfrog is a private equity firm that makes investments “that bring profit and purpose together” and it focuses entirely on this segment – those entering the middle class in developing economies and that have not been exposed to financial services. 

“That may be a factory worker in Lagos, a schoolteacher in Kenya, or a small shop owner in India,” says Roth. 

These are the dynamos for global growth. According to McKinsey, consumer spending in emerging markets is expected to grow three times faster than consumer spending in developed nations, reaching a total of $6 trillion by 2020. 

“These people are in need of loans to buy a washing machine, a car, or a motorbike. Perhaps they need life insurance, health insurance and auto insurance,” says Roth. There are hundreds of fintechs waiting to serve them – some will have an impact beyond the emerging markets. 

“Ten to 15 years ago, sophisticated processing techniques for satellite imagery basically meant squinting at data, but now algorithms have improved to the point that we are able to see detail such as what crops are being planted and how much yield is produced on the field, and generally build a detailed and insightful picture of a farmer’s life without having to travel to their farm,” says Eli Pollak who founded Apollo Agriculture along with teammates from The Climate Corporation and One Acre Fund. 

It is changing the game for farmers. In India, satellite imagery is already being used by state governments to provide insurance to farmers. In Tamil Nadu, for example, which has suffered its worst drought in 140 years, the Agricultural Insurance Company of India has used satellite imagery to assess claims. In August, 200,000 farmers had received payouts. Furthermore, now that the cost of satellite imagery has also dropped, it is possible for the private sector in emerging markets to use information generated from satellite data to provide credit or insurance at a price affordable to farmers.  

What makes Apollo unique is that it has found a way not only to identify a farmer but to also increase a farmer’s yield by supplying a package that ensures the farmer will be able to repay the loan and make more money.

“People often assume that the soil in Africa is not as good as, say, in the midwest of America, and that is why yields are low – but that is not necessarily the case,” says Pollak. Until around 1940, a Kenyan farmer and a US farmer had around the same yield of corn per acre. Now, African corn crops yield only 10% to 20% of those in the US. 

“It’s not a mystery,” says Pollak. “US farmers have benefitted from technology such as hybrid seed and increased access to fertilizer, while African farmers generally have not. We are levelling the playing field by providing them with those tools and insurance in an affordable and easy way.” 

It is too soon to tell if the imagery will give accurate loan repayment predications (Apollo began serving 1,000 farmers in April), but Pollak says its package could help farmers nearly double their crop yields. 

The insurance for Apollo’s clients is provided by Pula Partner, which also uses satellite imagery. Partnering with CGAP, a global partnership housed at the World Bank that seeks to advance financial inclusion, Pula is running a pilot for farmers in Nigeria.  

The level of detail that satellite imagery can now offer insurers is staggering. 

“We can now determine soil conditions in terms of moisture and mineral quality, and vegetation density and precipitation,” says Emilio Hernandez, senior financial sector specialist at CGAP. That data can then be correlated to historic yield records so that an algorithm can be developed to predict future yields. With the right data, the risk of crop failure can be assessed, while the high costs of frequent visits to rural areas where farmers live can be offset. 

Such an algorithm could also determine crop yields over large areas, which could help improve planning around a catastrophic weather event such as flood or drought. There are constraints, however. Hernandez says that yield data in emerging markets is not always reliable enough to make accurate correlations (Nigeria was chosen, for example, because it is does have good data), but several private-sector organizations are working on research projects to improve the quality of data. 

The importance of crop insurance and credit products like Apollo’s goes beyond providing a buffer against poor crop yields. It sets in motion a change in behaviour that leads to farmers bringing themselves out of poverty. 

“When farmers are able to manage those risks better by accessing insurance, a wide set of attitudes have been shown to change,” says Hernandez. “They have greater confidence to switch to higher-yielding but higher-risk crops. Without better risk management strategies, the farmer would not make those investments needed – if the new crop fails, the consequences for the farmer and family would be devastating, even risking starvation. No one would take that risk.” 

And with insurance and credit, farmers are not only able to look beyond low-yield crops like corn, they begin to form a credit history and move along their journey to full financial inclusion.   

Satellite imagery is widely used in industrial agriculture in developed markets, but its use for small farmers has so far been unnecessary, as most have insurance. More than 92% of farmers in the US receive federal crop insurance, for example, and in western Europe there are many smallholder insurers. 

But there are uses of satellite imagery that could prove useful for small farmers in developed markets. Professor David Lobell at Stanford University who is researching how well satellite imagery can measure soil composition and predict crop yields, says: “Data from satellite imagery on productivity of [these] fields would certainly help when it comes to buying and selling land, and there are startups beginning to pop up that are looking at this area.” 

Drones are also being used in developed markets for agriculture. Hernandez points out that drones allow for “more precise detail of land conditions on a metre-by-metre basis” than satellite imagery, but they are currently cost-prohibitive for emerging markets. Insurer Allianz has incubated Fairfleet, a marketplace to book drone pilots, and now uses drones to make assessments, such as during Bavaria’s floods. 

“The technology still needs to be developed but we see drones as having a large role to play in insurance, and also more broadly,” says Solmaz Altin, chief digital officer at Allianz. “Assessing the magnitude of any natural catastrophe would be one use in emerging markets.” 

At present drones are considered too expensive, however – costing several hundred euros a flight.

Insurance seems to be where much of the innovation is taking place, especially in health insurance. It is a sector Leapfrog is focusing on. 

“Insurance provides a critical safety net to people coming out of poverty,” says Roth. “If you lose your job in a developed country, you are likely to have a network that will help you get by for a while. But in developing countries, you may be the sole person in your family who isn’t in poverty, and if you lose your job or have a health event, the whole family will suffer.” 

The barrier to reaching this segment of the population in emerging markets has been infrastructure.

“It’s not like in the UK or the US where there are tens of thousands of insurance agents, for example. You essentially have to leapfrog the infrastructure and find new ways of reaching them,” adds Roth. Technology has opened that up. “If you start an insurance company in Ghana, you will start digital – you may even bypass a PC offering and go straight to smartphone because that is where people are. Agents become irrelevant.” 

This is precisely how Bima got into micro-insurance. In 2010, the firm began to notice that mobile penetration was rocketing in Ghana, so started to explore if it could make insurance more accessible. 

“There were two major barriers to insurance,” says Marie Kyle, head of product development and innovation at Bima. “The documentation process to register was laborious and required specific identification, and the second was that there was no affordable product.”

Bima developed a paperless application process for life insurance, personal accident and hospital insurance, where users can sign up in two minutes on their mobile phone. Instead of reams of paper and identification, Kyle says, “we realized the only information we needed was age, phone number and the name of a beneficiary.” In part, that is because pay-outs are relatively small – on average about $2,000. 

Users can pay using their phone credit – just 4 cents a day. Some 93% of its users live on less than $10 a day and 60% on less than $2.50 a day. They are considered the ‘lower income mass market’; 90% of them are first-time buyers of insurance, so the products are kept very simple, as is the claims process. 

Bima now serves 14 markets across Latin America, Asia and Africa, has 24 million registered users, with 765,000 added each month. Its impact in bringing those formerly excluded from the financial sector has been big. 

In 2014, for example, Bima partnered with mobile phone network provider Digicel to increase insurance penetration rates among the underserved in Papua New Guinea (PNG) and Fiji. Of Bima’s customers, 80% were accessing insurance products for the first time, 52% had never had a bank account, while 44% were educated about insurance for the first time by Bima’s agents. 

Before Bima’s entry, insurance penetration was as low as 3% in PNG and just 12% in Fiji. After two years, however, Bima had increased the number of people with insurance in PNG by 266% (more than 380,000 people) and had driven insurance penetration up to 25% in urban areas. Within three years, Bima became the largest provider of insurance in the country. 

Thanks to the ability to scale up rapidly, Bima is also now the biggest provider of life insurance in Cambodia, for example. 

Kyle says it has been approached by regulators in developed markets to see if micro-insurance would be an option there too. “Given the current regulations, that’s probably not something we want to look at right now, but it shows there is a broader appetite here.”

Metlife has also partnered with Bima to work on a product that couples tele-medical advice and insurance. The global insurer has been working on several products from its LumenLab innovation centre in Singapore, such as micro-insurance for pregnant women. 

“Typically retail banking as an industry has always been more innovative than insurance, but the latter may have edged ahead of late,” says Zia Zaman, chief innovation officer at MetLife Asia. 

One of Metlife’s most ambitious projects has involved customer service. Lack of infrastructure in emerging markets often means it can take over half a day to complete a simple task at either a bank branch or at the office of an insurance agent – even just to ask a question or change an address on file. So LumenLab partnered with PNB MetLife in India to build a virtual reality service where customers in India can have a fully immersive interaction with an insurance “agent” by putting on a smartphone powered virtual-reality headset at one of the 15 pilot branches. 

The platform is called conVRse and was designed in partnership with a small Indian tech company, Imaginate. Clients put on a virtual reality headset and meet their avatar agent who then shows them around their account, helps them make changes such as adding a beneficiary and who also points them to answers about claims. 

“We’re not using it to sell anything but rather as a means to encourage our clients to interact with us – to find answers to questions they may not want to ask in a branch, or certainly don’t want to travel to a branch to ask,” says Zaman. He says 5,000 customers use the service and MetLife plans to add on artificial intelligence to make the service more interactive and distribute conVRse to customers directly through their phones. 

Often forgotten when digitizing financial services is the relationship: the need for interaction and customer service. What has become apparent in the attempts to bring financial services to the estimated 1.5 billion to 2 billion people currently without it is that more innovation is needed. Only an estimated 2.73% of India’s population have life insurance, for example, yet there are products available. 

“A lack of a personal relationship has a huge impact on engagement levels,” says Juntos’ Macc. “Here we are – thanks to technology – having witnessed the greatest democratization of financial services that ever has happened, yet usage rates are disappointing,” she says.

In banking some estimates put usage rates as low as 10% to 25%. That is troubling for both users and providers, says Macc. 

“Some companies have invested millions of dollars in reaching the underserved, while users have put their trust in the hands of institutions,” she says. “Yet the accounts are not profitable and end users are not getting the value they could be – and if that persists, it could create retrenchment, and it’s hard to come back from that.”

She points out that people often do not trust themselves to use an account correctly when they first enter the financial system, and therefore need customer support and engagement from their provider. “They worry about sending money to the wrong place,” says Macc. “Some fear if they reset their PIN their balance will go to zero. When people are transferring such significant portions of their income, it can feel like a very high-risk engagement, and not being able to ask a branch person means they simply stop using the service.” 

Juntos sought to find a solution by developing an automated engagement service via SMS in a way that feels personal. Rather than only reacting, Juntos will send a text (white-labelled as the financial service provider) asking if the user knows how to change their PIN, or offering a suggestion on how to save, or if they would like a list of the closest deposit points, or how to use an ATM. That opens up an SMS conversation that allows Juntos to solve problems, offer advice, ask about their education needs, or be clear about fees in case that is preventing usage.

If that sounds like just another standard chatbot ‘How can I help you today?’ line, it’s not. To create a personal touch, Juntos conducts extensive on-the-ground research to get a cultural understanding of the deterrents to using mobile banking and how best to phrase texts in a way that would welcome engagement. 

“You think it’s going to be common sense, but actually our research shows it is not at all,” says Macc. “So we do a lot of testing, and once it’s rolled out we continue to gather data from our partner institutions and see what is working to change behaviour and what isn’t and adapt from there.” 

It is working. Some 36% of its Juntos’ users texted back “Merry Christmas” one year. 

“We really try to make sure people feel like they are talking to a real person,” says Macc. “I think most people know they are engaging with a computer, but sometimes users will share will us very personal stories by text about their financial journey as they might do with a branch manager, which lets us know that it’s working.”   

The statistics speak for themselves on client engagement. In Juntos’ pilot with Paraguay mobile financial services company Tigo Money, average monthly transactions increased 21%. In its project with Philippines micro-lender Fuse and mobile financial services provider Mynt, loan applications quadrupled. Now Juntos, through its bank and mobile network operator partners, reaches 800,000 people a month in eight countries in Latin America, Africa and Asia. 

Macc says it is just the beginning for this type of technology. 

“In the automated customer engagement space a lot of people are looking at the engineering power that could allow for a correct response to anything a human says. It may be 10 to 15 years before we see a natural conversation with a computer, but that is going to be a big change for financial services firms, and indeed all organizations that have customer service.”

She says that Juntos is being approached by banks in developed markets that see an opportunity in better engaging some of their own clients. It seems an obvious partnership. Indeed, partnerships seem to be key to the innovation that is happening in developing markets. 

MetLife’s Zaman, for example, points to the potential of working with partners on embedding insurance: such as customers buying motorbike helmets receiving rider’s insurance, or mothers buying baby formula receiving health insurance. 

“Because financial institutions haven’t worked out how to reach the unbanked or uninsured well at scale, they are more willing to use partnerships for financial inclusion, even in some cases to help manage the customer relationship,” says Accion’s Kelly. “Compare that to, say, a mainstream bank in London which already has core relationships with customers at scale. The bank might be more careful about bringing a third party into their customer relationships.”

Clearly financial institutions in the developed markets could learn a lot from these partnerships in the developing world. 

“It is certainly possible that technologies developed in Africa and Asia could be used in Europe or the US,” says Xavier Faz de los Santos, a senior financial sector specialist at CGAP. “But it would have to be something that changes the equation in a big way. Institutions in developed markets are well-entrenched in their models and won’t change easily.” 

They may not change easily, but with the potential for greater customer engagement, lower costs and higher margins, there is good reason for financial services firms in developed markets to stay abreast of the innovations beyond their shores. 

Some 17% of the adult population in South Africa is HIV positive; life insurance can seem an impossible dream for many of them. That was until Ross Beerman co-founded AllLife. He had been working in the financial industry and saw an opportunity to use data to disrupt the insurance industry. 

“Insurance companies were using big data to price clients, and that priced people with HIV out,” says Beerman. “But we said: ‘Why don’t we instead use data to empower people to be the clients we need?’”

The first thing AllLife looked at was the data needed in the application process. It could take up to six weeks of tests and doctor visits just to get a quote – during which time many people gave up with the application process. 

“We started asking what data was really needed and it turned out it was far less than what was being required,” says Beerman. “If we ask you for your weight and height, for example, – which you will likely know – we can gauge what your blood pressure is. Similarly we can also ask whether you have been given blood pressure medication, for example.” 

AllLife worked with medical practitioners and underwriters to create ‘decision trees’ of questions so that potential clients are only asked those relevant to their condition and in a way that moved people quickly through the application process – particularly if they answer ‘no’ to everything.

What AllLife also took advantage of was research that shows that those who are HIV-positive and take their anti-viral medication regularly live much longer than those who do not. So it asks clients to commit to medication and drives active engagement through automated reminders about CD4 count check-ups. It also does not use brokers and engages directly with clients. 

AllLife has insured more than 100,000 people in South Africa. But could it be a model replicated elsewhere using brokers? 

Mutual insurance company Royal London in the UK believes so and it is currently piloting a product by AllLife that targets diabetics. As with South Africa’s HIV-positive population, people with diabetes in the UK (4.5 million people) can spend as long as six weeks in applying for life insurance. Using the ‘decision trees’ process and AllLife’s technology, Royal London’s first pilot customer, a 78-year-old diabetic, was able to apply for insurance in just 14 minutes. 

Clients are encouraged to adopt healthy habits – although this is usually fairly minimal. Says Beerman: “We remind people to go for their HbA1c tests, and it seems to encourage people to act in a healthier way.”

That interaction not only builds a relationship between the insurance company and the insured, but also provides something of a feedback loop. In South Africa, AllLife has 14 years of data on its HIV-positive clients to see what drives healthy outcomes, for example.

“ Essentially, we take a really good guess at your health, then try to help you manage, and then we get to see how good our guess was so we can improve our algorithm,” says Beerman.

It is game changing for diabetics and opens up an enormous market to AllLife. Over 100 million people in China are diagnosed as diabetic and 31 million in the US – where only about 2% of insurance products are sold to diabetics.

Daniel Waldron, a specialist at CGAP, a global partnership housed at the World Bank that seeks to advance financial inclusion, points to pre-pay solar as an example of how innovation in developing countries in financial inclusion is changing the way we think about credit. 

CGAP partners with pre-pay solar firm PEG in Ghana, which has followed in the footsteps of Kenya’s M-Kopa in providing solar electricity paid for with credit deducted from a mobile phone. 

A client pays a deposit of $35 and receives a solar electricity system to power lights, a radio and charge phones. Users then make loan repayments, typically over the next 12 to 14 months (at about 50 cents day), after which they then own the unit, which should last them another five years. 

What is unique about pre-pay solar is that if a payment is missed, PEG can shut off the panel so the user would be without electricity. 

“The model increases the willingness of users to pay, and the micro-payments also mean that people can now afford electricity,” says Waldron. 

It is a big benefit to communities. Traditionally kerosene has been used to power homes, often resulting in health problems from indoor pollution. Kerosene is also not a long-term investment. And, having affordable light in the home, people are able to work longer hours and children are able to do schoolwork in the evenings.

What the pre-pay loans also do is enable users to start to build a credit record. Both PEG and M-Kopa offer follow-on loans for items such as washing machines, mobile phones, bicycles and TVs to customers that have met their loan repayments for solar power.

Waldron says it is not hard to see the model catching on in other sectors helping people on low incomes to access credit and improve their standard of living with collateral that can be turned on and off. He suggests as an example that a vehicle could be developed that will not start if a repayment is missed.