Danai Pathomvanich
Oct 21, 2014
With the ubiquitous arrival of low-cost smart-phones, Asian investors are suddenly realizing that businesses targeting millions of lower-income consumers can be very profitable.
Up until now, vast numbers of lower-incoming citizens have been massively underserved by conventional banking and insurance sectors.
Today, in parts of Africa and Asia, mobile-based financial tools are dramatically lowering the costs of delivering these services. Many Asian entrepreneurs are getting on the band-wagon by developing innovative new financial-services products for a large and potentially profitable underserved market.
Huge market potential
Global insurance and financial-services companies have traditionally avoided emerging markets such as Africa and Asia.
In a recent McKinsey and Co article, Profit for purpose: Alternative investing for emerging markets, Dr Andrew Kuper, founder of LeapFrog Investments said that for a long-time everyone had a deep misperception of emerging-market consumers.
“People thought of them as aid recipients, or individuals who weren’t acquirers of financial services or, for that matter, affordable health care or housing or education.”
Kuper said that many studies show that 85 percent of low-income and emerging consumers are not destitute and are not pure recipients.
“They are working, striving people who are managing money and who are typically engaged in 16 financial transactions at any one time—borrowing from here, promising to pay there, protecting themselves here and there.”
The key is finding a viable platform to deliver these much needed services efficiently and profitably.
Past problem – unprofitable legacy distribution channels
Digital smart-phone financing platforms are helping entrepreneurs access lower-income savings effectively and efficiently.
Conventional financial services organizations in the past avoided providing high-volume, low-value financial services, even though many studies have shown that lower-income are always saving for emergencies and special purchases.
Their legacy infrastructure costs prevented them from delivering these services profitably.
Smart phone digital financing – competitive advantages
Smart phone digital financing offers distinct competitive advantages to new financial-products market participants.
The majority of conventional financial institution expenses center around in-person services and cash transaction costs.
Digital smart-phone financial transaction costs are essentially free because mobile finance clients keep most of their money digitally. They send and receive money, even from distant counterparties without creating significant transaction costs.
Typical product types
In Africa, Kuper’s LeapFrog has developed profitable $US4 (Bt128) a month insurance policies to more than one million people.
These innovative new products that are efficiently and cost-effectively delivered by smart phone digital-finance platforms allow the poor to “insure against some of the worst things in life, to accumulate pensions, to help people save, to enable them to make payments with far fewer transaction costs, far less in clarity.”
Conventional insurance sales and transaction costs are massively reduced because the services are delivered digitally.
Before LeapFrog sold its investment last year, it had expanded Ghana’s Express Life Insurance customer base from 12,000 people to 350,000 in less than two years.
Asia’s opportunity
In Thailand, an estimated 50 per cent of its labor force is self-employed and has difficulty accessing conventional formal financing,
Numerous entrepreneurs throughout the region are currently developing products that will be effectively sold through this new low-transaction cost distribution channel.
In addition to targeting low-income consumers, these entrepreneurs are also developing mass-market products that can be competitively delivered at very-low transaction costs.
