The Rise of Alternative Finance: Why does the world need them?

Photo by Christine Roy on Unsplash

Today, there are over two (2) billion search results about the word “innovation” in google. To simplify it there are only three (3) main things to consider when you’re innovating. It should be cheaper, faster and better! One great thing about the alternative finance companies is that value innovation is at the core of their operations which enables them to deliver cheaper, faster and better financial services compare to their traditional banks’ counterpart.

What is alternative finance?

Alternative finance refers to financial channels, processes, and instruments that have emerged outside of the traditional finance system such as regulated banks and capital markets.[1]

One of my favorite alternative finance founders’ stories is TransferWise. TransferWise is a UK-based money transfer service launched in January 2011 by Kristo Käärmann and Taavet Hinrikus. If you have experienced cross-border payment or remittance, you may have noticed the difference in the exchange rates between Google/Reuters and your traditional bank.

Figure 1–1 The mid-market rate versus the banks’ buy & sell rate

What is the mid-market rate?

The mid-market rate is the midpoint between the buy and sell prices of two currencies.[2] The mid-market rate is an exchange rate unlike any other. It’s the real one.[3] The mid-market rate also knows as the interbank rate is the rate that banks use when they’re trading large amounts of foreign currencies with one another. Unfortunately, this rate is pretty much always reserved for big banks.[4]

TransferWise founders’ story[5]

Taavet worked for Skype, so he was paid in euros, but lived in London. Kristo worked for Deloitte in London, he was paid in pounds but had a mortgage in Estonia. The two friends realized that they were losing their hard-earned cash on banks’ exchange rate markups. So instead, each month they looked up the interbank exchange rate and used that to pay each other — Taavet put his euros into Kristo’s account, and Kristo used his pounds to pay into Taavet’s account. In doing this, they saved a ton of money and also started to wonder if there were others like them who needed a way to move money in our increasingly global world without getting ripped off. That’s why they founded TransferWise.

Interestingly, they provide better money transfer services compare to traditional banks without using blockchain technology. The concept was to match transfers with other people and then have a small commission while using the interbank or mid-market rate. Today, the company supports more than 750 currency routes across the world and provides multi-currency accounts. In 2018 TransferWise’s net profit reached US$ 8 million, and its customer base reached 4 million, who collectively transfer around US$ 4 billion per month.[6]

M-PESA (M for mobile, PESA is Swahili for money)

Kenya often presented as the “poster child that digital payments can make the world a better place.”[7] M-PESA is one of the most successful examples of mobile money that has seen remarkable growth in terms of user base and agent network since the launch in 2007 in Kenya. The number of accounts had reached about 14 million in 2011, implying around 70 percent of the adult population gaining access in four years after the launch. The agent network has seen a parallel increase with around 28,000 agents in 2011 where it outnumbered the 850 bank branches in total. Instead of the costly process of delivery prior M-PESA, via hand or through friends or bus drivers, all households need to do is exchange cash for e-money with the help of an M-PESA agent who will transfer the e-money via SMS to the cell phone of the recipient. The dominant use of the service is to receive money and send money (91 percent and 90 percent), followed by buying airtime (68 percent) and checking M-PESA balance (65 percent).[8] According to Suri and Jack, access to M-PESA lifted at least 194,000 Kenyan households, or 2 percent of the total, out of poverty.[9]

Perhaps, the next challenge for M-PESA is to increase the number of users on saving money because according to a study only 7.6% of the Kenyans in the 2013 Financial Inclusion Insights dataset have ever used an M-PESA account to save for a future purchase.[10] Nevertheless, the impact of M-PESA is undoubtedly positive. Today, the company has expanded to Afghanistan, South Africa, India, Romania, and Albania.[11]

Digital Bank

Consider the story of Nubank, a Digital Bank founded in 2013 based in São Paulo, Brazil.[12] Nubank itself now has 5 million customers for its no-fee credit card, making it one of the top five credit card issuers in the country. Some 2.5 million people have signed up for the company’s digital bank account, launched in 2017. What I love about Nubank aside from its great product and technology is how it successfully hurdle the people’s trust obstacles. According to its Founder, David Velez, starting the company by offering credit cards first was a key differentiating factor. That is because customers tend to struggle to trust a new company to hold their hard-earned cash, so acquisition costs are higher: “While customers wonder whether it’s safe to deposit money for a challenger to look after, we are the trusting party when it comes to credit.”[13] The credit card product served as a beachhead from which Nubank could expand to other banking services such as savings account, debit card, and rewards. Better product and technology plus the people trust, Nubank is poised for unprecedented growth with the nation’s underbanked population, estimated at around 60 million.

Lending for SMEs

Two weeks ago, I catch-up with my good friend Jonathan Rosario, the Founder of LGUSuite. LGUSuite is a Philippine startup company that helps LGU (Local Government Unit) with their digital transformation. DILG (Department of the Interior and Local Government) mandates every LGU in the Philippines to gather household profile data (400+ datasets) in their respective localities. Today, much of the LGUs in the countryside still use paper-based questionnaires for its local census where it takes around 1–2 years before the household data become usable. LGUSuite, provide an affordable SaaS (Software as a Service) where it replaces the paper-based questionnaires with cloud-based questionnaires, making the household information available in real-time.

It was Sunday lunchtime (Apr 8, 2019), both of us were still grinding. He has a schedule at 3 PM in Divisoria (commercial center in Tondo, Manila, Philippines which is known for its shops that sell low-priced goods) to pick-up his order for t-shirts and will head back to their office for silk-screen printing which will serve as their team uniform for their Calumpit, Bulacan, Philippines project. I have a schedule at 2 PM as a panelist for the event “Inclusive Prosperity Fintech Summit 2019” held at Acceler8 Finman. We talked about life in general and each other startup challenges, primarily raising capital and bootstrapping. He shared that he’s getting much of his capital requirement through credit (purchase order and invoice) financing from First Circle. First Circle is a Philippine-based financial technology lender. Since its public launch in 2016, they have loaned millions of dollars and served thousands of SMEs from various industries.[14]

Figure 1–2 My friend, Jonathan Rosario, Founder of LGUSuite wrote a review on First Circle FB Page.

“The best advertising is done by satisfied customers.” ~Philip Kotler

Figure 1–3 LGUSuite, Calumpit, Bulacan, Philippines Project

I guessed they were wearing the t-shirts bought in Divisoria and self-silk-screen printed served as the team uniform (hustling and bootstrapping at its best — SALUTE).

Countryside Development

Figure 1–4 Prof. Yunus Opening Keynote at YY Future Cities Lab 2019, Manila

Of all the hackathons I’ve attended, this one is my favorite. YY Future Cities Lab 2019 took place in Manila, Philippines last March 19–21, 2019. Opening keynote by no other than Nobel Peace Laureate, Prof. Muhammad Yunus, Founder of Grameen Bank and author of the best selling book “Banker to the Poor.”

Figure 1–5 Pearl Pay’s CTO Mr. Pio Ryan Lumongsod, having his book “A World of Three Zeros” signed by Prof. Yunus followed by Pearl Pay team “Sky, Jerwin and Spark”

Aside from we’ve got a firsthand interaction with Prof. Yunus and got our books signed, the champion of this hackathon (SocBus Design Jam or Social Business Design Jam) has a lot of potentials. BlockFarm, an online platform for democratizing agricultural land ownership. One may reasonably ask, what it has to do with alternative finance? According to the BSP (Bangko Sentral ng Pilipinas) report, as of June 2018, there are a total of around 54 million savings accounts maintain by 43 million depositors (Some depositors maintain multiple savings account). 66% of the savings accounts are less than Php 5,000 (Approx. US$100). BlockFarm will democratize agricultural land ownership using blockchain technology where people who want to invest in real estate can do so for as low as the price of a single sqm, making it affordable to the vast majority of the savings account depositors with less than Php 5,000.[15] BlockFarm provides liquidity to the agricultural land development activities which support countryside development as well as an alternative investment for savings account depositors who want to have a better yield.

Figure 1–6 BlockFarm team, Champion of the SocBus Design Jam, YY Future Cities Lab 2019, Manila

(Photo 3 ladies from left to right: Chiara Marquez, Dominique Sy, and Stephanie Lumongsod)

Venture Capital Firms

Figure 1–7 Most Valuable Companies in the World — 2019[16]

What Amazon, Microsoft, Google (Alphabet Inc.), Apple and Facebook have in common? Aside from they’re all tech companies, their growth funding were all financed mostly by Venture Capital Firms (Note: Arguably, we can exclude Microsoft that it needs a VC Firm. Please click here to go to quora discussion “How much venture capital did Microsoft raise?”)[17]. The best home runs happen when you invest in the pre-IPO (Initial Public Offering) stage. Most if not all of the Venture Capital Firms treat IPO as its exit strategy. One may reasonably argue that VC Firms is now the mainstream when it comes to startups funding. Despite being a healthy sector of the private capital market, venture capital is still considered a form of alternative finance in the Philippines. Of the US$3.16 billion VC investments for the first eight (8) months of 2018 in Southeast Asian startups, the Philippine startups have only managed to secure less than US$50 million.[18] That is less than 1.4% in total.

Why does the world need them?

Albert Einstein sums it up “We cannot solve our problems with the same thinking we used when we created them.”

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P.S.

1. If you’re a software engineer, we’re hiring, click here for more information.
2. Anyone from the business development team of TransferWise, we at Pearl Pay are open for partnership. Just comment to this article, if you want to increase your disbursement network in the Philippines through the Pearl Pay coalition of rural banks.
3. I encourage the top 1,000 corporations in the Philippines to have active participation in the Philippines startup economy by setting up their own CVC (Corporate Venture Capital) or ideally partner with a local startup accelerator such as the Launch Garage. As a startup practitioner, I’ve got four words for you. Don’t miss this chance:)

Endnotes

1. “Alternative Finance.” Wikipedia. March 07, 2019. https://en.wikipedia.org/wiki/Alternative_finance.
2. “Mid Market Rate.” Kantox. Accessed April 19, 2019. https://www.kantox.com/en/glossary/mid-market-rate/.
3. “The Mid-Market Exchange Rate.” TransferWise. Accessed April 19, 2019. https://transferwise.com/us/mid-market-rate.
4. TransferWise. “What Is the Interbank Exchange Rate? And Why Is It Such a Big Deal?” TransferWise. May 25, 2018. Accessed April 19, 2019. https://transferwise.com/us/blog/interbank-exchange-rate-definition.
5. “The Story of TransferWise.” TransferWise. Accessed April 19, 2019. https://transferwise.com/gb/about/our-story.
6. “TransferWise.” Wikipedia. April 02, 2019. Accessed April 19, 2019. https://en.wikipedia.org/wiki/TransferWise.
7. Hove, Leo, and Antoine Dubus. “M-PESA and Financial Inclusion in Kenya: Of Paying Comes Saving?” Sustainability11, no. 3 (January 22, 2019): 2. doi:10.3390/su11030568.
8. Zapanta, Arianna Ma. Francesca S. “Risk Sharing Impact of Reciprocity in Mobile Money: Evidence from Kenya’s M-PESA.” August 30, 2018, 4–5.
9. Suri, T., and W. Jack. “The Long-run Poverty and Gender Impacts of Mobile Money.” Science354, no. 6317 (December 09, 2016): 1288–292. doi:10.1126/science.aah5309.
10. Hove, Leo, and Antoine Dubus. “M-PESA and Financial Inclusion in Kenya: Of Paying Comes Saving?” Sustainability11, no. 3 (January 22, 2019): 1. doi:10.3390/su11030568.
11. “M-Pesa.” Wikipedia. April 07, 2019. Accessed April 21, 2019. https://en.wikipedia.org/wiki/M-Pesa.
12. “Nubank.” Wikipedia. March 28, 2019. Accessed April 21, 2019. https://en.wikipedia.org/wiki/Nubank.
13. Mari, Angelica. “Nubank: Driving Financial Services Competition In Brazil.” Forbes. September 29, 2018. Accessed April 21, 2019. https://www.forbes.com/sites/angelicamarideoliveira/2018/09/29/nubank-driving-financial-services-competition-in-brazil/#40eea7701174.
14. “Our Story.” About Us | First Circle. Accessed April 21, 2019. https://www.firstcircle.ph/our_story.
15. Welcome to the Bangko Sentral Ng Pilipinas Website! Accessed April 22, 2019. http://www.bsp.gov.ph/banking/pbs_new/72.htm.
16. Board, FXSSI — Forex Sentiment. “Most Valuable Companies in the World — 2019.” FXSSI. April 12, 2018. Accessed April 22, 2019. https://fxssi.com/top-10-most-valuable-companies-in-the-world.
17. Quora. “How much venture capital did Microsoft raise?” November 16, 2015. Accessed April 22, 2019. https://www.quora.com/How-much-venture-capital-did-Microsoft-raise.
18. “Philippine Startups Lag behind Southeast Asian Counterparts in 2018 Funding, but 2019 Looks Rosy — KrASIA.” Kr. Accessed April 22, 2019. https://kr-asia.com/philippine-startups-lag-behind-southeast-asian-counterparts-in-2018-funding-but-2019-looks-rosy.