Reimagining informality leads to opportunities for lending and insurance
In 2018 FiDA conducted interviews with several key platforms in Africa looking at how platform business models are evolving in terms of financial services.
One of the most significant potential benefits digital platforms offer for financial inclusion is in redefining what it means to be an informal merchant or worker. Most Africans participate in the informal economy, sometimes beyond the purview of the state and tax authorities and often without secure contracts, benefits, or social protections.
Digital platforms are changing how informal merchants and workers trade. In turn, they are changing how visible and additionally interpretable informal merchants’ and workers’ activities are not just to the platforms themselves, but also, potentially, to formal financial institutions. Indeed, in tackling the burden of standardization, platforms are unlocking new opportunities for financial services. As more commercial activity and income streams become standardized and accessible through worker and merchant participation on digital platforms, the business case for serving small businesses or self-employed individuals should become more straightforward.
Instances of platforms using standardized data streams, alone or via a partner, to offer financial services are becoming more prevalent, but many Global South use cases are still early stage.
So far, India has provided leading use cases linked to e-commerce platform models. Flipkart aims to explore insurance and lending for sellers and consumers. And Paytm, in partnership with Lendingkart, offers collateral free loans to SMEs and merchants. In Africa, Jumia uses sales history and projections to confirm seller ability to pay for merchant lending underwritten by Branch and others. For African micro-merchants that transact or begin to transact digitally, standardization may bring about tremendous new potential, especially since, as BFA has noted, micro-merchants have been unlikely to do bookkeeping even with incentives. For micro-merchants on Sokowatch’s platform, for example, the data the platform has obtained from store ordering has made it possible for the platform to offer financial services to its micro-merchants.
“We are aggregating data on informal merchants via a digital tool for the first time in Africa. Today we are doing predictive ordering and a suggested ordering window based on historical orders, instead of kiosk data entry. No one else [in Africa] has been able to crack this.” -Sokowatch
Local services platforms may offer even greater opportunities for financial inclusion than e-commerce models. For some platforms, transactions can be highly standardized with few customizations and, more importantly, the imperative for financial services from a business perspective exists. Ride-hailing platforms, like Bolt (formerly Taxify) and Uber, require that drivers have insurance. For domestic and craft workers, the law is unclear regarding who is responsible if a platform worker breaks something while on a job, increasing the likelihood that platforms need to make sure their workers are covered by insurance.
Additionally, we are already seeing instances of ride-hailing platforms in Africa offering financial services through partnerships. Uber, in some markets, has partnered to offer insurance or facilitate car leasing arrangements. And JUMO has announced a recent partnership, JUMO Drive, that enables digital vehicle finance for existing Uber driver-partners. Bolt has sourced, negotiated and facilitated an insurance scheme for its drivers (Drivers Shield).
Platforms in the domestic and home improvement sub-sector are still exploring possibilities. Lynk, building on the standardized data they have on artisans’ incomes, is trialing loans for power tools for their Pros.
“We have KYC information on Pros (i.e., workers or artisans on Lynk’s platform) already; we know their transaction histories, how much profit they make, and we can deduct repayments from their pay.” —Lynk
Lynk also has other data that can be used for credit scoring including ratings and timeliness of communications and deliveries. They are testing this right now with BFA who has given them $100k to disperse as loans of up to $200 each to tradesmen who meet certain criteria. They are also exploring per-job insurance so that, if a Pro breaks something while on the job, both Lynk and the Pro understand who is responsible and how the insurance plan will pay out. With all the work they are doing to standardize data streams, digital platforms could be good business partners for African financial services providers, particularly banks, as they grow. To capitalize on this opportunity, banks and other financial services providers will need to think creatively about how to develop new products or modify existing ones for the digital platform era.
Originally published at https://www.financedigitalafrica.org on June 13, 2019.