Could customers in emerging economies bypass banks altogether?

How Branch international and other Fintech startups are capitalizing on an overlooked market.

Mobile phone proliferation is drastically changing the banking landscape for emerging economies. Now, with mobile phone data, machine learning techniques are opening doors to thousands of traditionally unbankable populations. Mobile phones have not only blown up the global remittance market (more on that in my previous article here) but they are also enabling access and providing a huge gateway to enable economic growth in regions that traditional banks cannot and will not serve.

So how does it work? essentially, the data on your mobile phone is enough for a machine learning algorithm to assign you a credit score. This is huge, because the absence of credit history in most emerging economies is the barrier to gaining access to capital. If you don’t have a bank account, you can’t build credit. If you can’t build credit, banks won’t give you a loan. If you can’t get a loan, it’s really hard to buy a house, build a business, or go to school.

By lifting the credit barrier, these new mobile banking startups are opening the floodgates to economic growth in these regions.

How big is this market?

A report from Accenture states that more than a third of the world’s adult population is making little or no use of financial services. The report estimates that targeting the unbanked population could generate around $380 billion in new revenue for banks. The majority of the population they are talking about are in low-and middle income emerging markets. The problem is that traditional banks are ill-equipped to penetrate these markets. They do not currently have the structures or risk tolerance to assess credit in non-traditional ways. Additionally, it takes sizable investment to establish brick and mortar branch networks in these locations.

Fintech startups, however, have a massive edge. Most of these populations either already have mobile phones or will get them soon. Mobile-phone-based money transfer services such as M-Pesa have enabled people to deposit, withdraw, transfer money and pay for goods and services easily with a mobile device. No bank account required.

Services like M-Pesa are important because they allow other Fintech companies to piggy back and offer other financial services, like access to credit. With a mobile payment infrastructure growing rapidly, emerging economies are poised to bypass the traditional banking system completely and jump straight into mobile banking.

So how are they doing it? let’s take a look at Branch International, as an example.

Branch is a for-profit, socially conscious company based in San Francisco and Nairobi. We use technology to reduce the cost of delivering financial services in emerging markets. Our first product is credit. Branch is like a bank in your pocket, there for you at all times.”

Branch International was founded in 2015 by Matt Flannery. 10-years ago, Flannery co-founded Kiva, a peer-to-peer lending model that revolutionized lending in emerging economies by allowing customers to support women and micro-entrepreneurs with loans as small as $25. He is taking his knowledge of the emerging economies space, and creating a powerful tool to put a profit motive behind enabling economic development in these areas.

Branch uses mobile payment technologies like M-Pesa to turn that cellphone in your pocket in to your own personalized bank. By using data science, Branch is making commercial lending more accurate and more accessible.

Branch uses data from your phone to create a credit score. Machine learning algorithms then predict credit worthiness, enabling access to traditionally unbanked populations.

Branch creates a strong incentive for repeat business — the more you use it, the lower your APR.

So how much money could they actually make?

While Accenture estimates the global unbanked market opportunity to be around $380 billion, let’s break that down using very rough estimates just for Branch’s credit offering. I’ll use the midpoints of ranges on their website as a starting point:

Size of loan: $250 (range: $2.5 — $500)

APR: 83% (range: 15% — 180%)

Loan term: 6 months (range: 2 weeks — 1 year)

Average payment frequency: biweekly

Estimate of interest earned per average loan: $58

Estimate of global unbanked population: 2.5 billion

Estimate of unbanked population who would actually take advantage of a loan service: 20% (my number)

Average loan write-off: 3.1%

2.5 billion people x 20% adoption rate = 500 million customers

500 million customers x $58 average interest earned on loan = $29 billion

Subtract the 3.1% of loan write-offs = $28.1 billion market opportunity

That’s a sizable market for one product. Granted, this is a very back-of-the-envelope approach, but there is clearly a very attractive opportunity here.



So far Branch has raised $10.4 million in funding backed by Formation 8, Khosla Impact, and Andreessen Horowitz. The team is continuing to build out its base in Nairobi. The opportunity is there, but the test will be building the trust of the communities they serve and ensuring they can accurately predict the risk they are taking on.



The loan amounts may be small, but there is still an attractive business opportunity here. Technology is allowing Branch and other companies to better understand the risks associated with investing in emerging economies. Branch has created an attractive business model that opens doors for underserved populations and may render traditional banks irrelevant in the consumer lending space.