As discussed in our Khosla Impact blogpost last fall, “Digital Financial Services: Changes to Bank On
,” banking is changing across emerging markets. Electronic means of accepting, aggregating and processing payments are replacing paper and unlocking a range of more affordable, accessible or flexible services. In India, new banking reforms and licenses
, a unified payments interface
, and substantial government incentives
are driving adoption of bank accounts, payment cards and mobile wallets. In Africa, mobile money transaction volumes and use cases are expanding, with merchant & utility payments as well as credit and savings adding to the base of top-ups and remittances. And across the world, the accelerating rate of Internet penetration
is bringing more transactions and more services online. At the Khosla Impact Fund
, we have tracked these changes as a window of opportunity and have substantially expanded our portfolio in financial services, all with companies leveraging or enabling these trends. Last week our fund led the third round of investment
for NeoGrowth, India’s leading business cash advance service. NeoGrowth offers small and medium businesses a new type of loan that replaces fixed EMIs with flexible repayments based on a percentage of daily card or online sales. The product also reduces the hassle and risk of physical cash or check collection by integrating repayment directly into a merchants’ point-of-sale (POS) system or online store, retrieving funds automatically. These “cash advance” loans are widely available in the US but are still rare in emerging markets. In 2014, our portfolio company, Kopo Kopo
, pioneered this service in Kenya with their “Grow
” product, which uses phones as the POS and M-PESA transactions as the primary data source and repayment tool. In India, where there are now over 1 million card POS terminals and nearly 500 million consumer payment cards, NeoGrowth is able to use card transactions — primarily debit cards — to underwrite and collect its loans, both online and in-store, as Square does in the US. The market opportunity for NeoGrowth is just getting started, and we are excited for the possibilities that lay ahead as more and more of India’s retail spend moves into the formal economy and NeoGrowth uses those card payments to pioneer data-enabled credit services. This week, I am pleased to announce our investment in Milaap,
India’s largest crowdfunding platform. Milaap raises lower-cost philanthropic capital for organizations working on development at the grassroots in India — microfinance organizations, skill-training groups and even sanitation installation teams — while also being a fundraising platform for all kinds of important causes that people care deeply about. As a testament to Milaap’s leadership, Kiva, the world’s largest microfinance crowdfunding platform, has decided to partner with Milaap in India, since they have developed critical regulatory payment infrastructure that enables foreign micro-lenders to enter the country. As a result, Milaap has deployed over $4M in India raised from users across 100 countries. More recently, within India, the increasing availability of payment cards, the tremendous growth in smart phone adoption and the improvement in online payment gateways have begun to enable the creation of a crowdfunding market among Indians in India, not just overseas, for local causes that they feel passionate about. In only six months, the new Milaap Open
platform has hosted over 600 campaigns for community projects like schools, personal healthcare emergencies, and artistic projects like movies. This would not have been possible without the recent growth in mobile Internet and consumer trust in online payment gateways and payment cards. This year, Milaap will continue its focus on mobile growth in India through a recently launched app with one of the largest digital payments solutions, Ctirus Pay, as it brings crowdfunding into the daily life of the Indian consumer. Across the Arabian Sea in Africa, we are seeing a similar shift towards mobile-first Internet and the unique combination of Internet usage data and personal financial data that trend creates, since so many people already have mobile money accounts. Accordingly, we recently invested more capital in Kopo Kopo
and have made a new investment in a stealth company working on consumer financial products. While all of these companies serve very different markets, they are leveraging technology as a means of moving money better, faster and cheaper. Specifically, all are leveraging the expansion of different forms of digital payment. Each product starts and ends with a payment and each company’s market grows with the number of digital payments that can be captured and catalogued. So where is this all going? We believe that in the end transaction fees have an expiry date.
The newest generation of fintech companies are building business models, especially lending models, based on transaction data while relying less on transaction fees as a means to generate income. These companies seek to make money not just on the transaction, but also after it. Transactions then become datasets that companies wish to expand by incentivizing them, rather than imposing high fees on them. And the fastest growing companies find ways of enabling and acquiring as many digital transactions as possible that feed into higher margin, more advanced secondary products. This trend will be especially impactful for emerging markets consumers and small entrepreneurs, as many of them, just now entering their prime earning and saving years
, will be able to take advantage of these “payment-enabled services” to access lower cost, more convenient banking products than their legacy banking systems could ever offer.