Strive Community
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Strive Community

Innovation to support digitalization of vulnerable small businesses in Brazilian favelas

Strive Community recently announced a program to support the digitalization of 500,000 small businesses across up to 5,000 favelas in Brazil. Favelas are informal urban settlements whose populations live under precarious conditions and with an almost total lack of access to public services. For example, favelas seldom have access to basic public services such as sanitation or roads. Their inhabitants can struggle to even receive mail, due to the informality of their dwellings.

In Brazil, 17.1 million people live in favelas, and 62% of them are Black. These settlements are a living, material testament to Brazil’s structural inequalities. It is unsurprising, then, that favelas were hit particularly hard by the COVID-19 pandemic. Seventy percent of favela inhabitants reported not having money for food on a daily basis throughout the pandemic. Small businesses within favelas also suffered, with only 23% of these managing to transition to online work.

And yet, as Celso Athayde, the founder of Strive Community’s grantee Central Única das Favelas (CUFA), an entity that represents favelas across the country, likes to say “favelas are power.” These communities can negotiate adversity like no other and view entrepreneurship as a pathway to improving their livelihoods on their own terms. Forty-one percent of people living in favelas own a business; and, when polled, people in favelas put owning a business ahead of any other professional ambition (35%). They are also active players in the digital economy: 86% of residents are online regularly, and 75% of them shop online. Favelas circulate US$25 billion a year and represent a substantial consumer market.

Much like micro- and small enterprises (MSEs) around the world, small businesses in favelas cite access to capital for investment as their main challenge (40%). Brazil’s credit market has historically been plagued by some of the highest interest rates in the world, and bureaucratic hurdles make access to capital particularly difficult for MSEs. In communities where people struggle to even have a formal address, overcoming the hurdles to access credit for their business can seem impossible.

Research shows that most small businesses in Brazil work around these challenges by using a personal credit card to finance their business, rather than taking out a business loan to meet their needs — leading to higher interest rates which can effectively strangle their business. Eighty-two percent of Brazilian SMEs report seeking funding from banks, with 44% of these applications being denied.

Fintechs, a growing — and important — presence in Latin America, are increasingly working to serve the unmet needs of underserved segments. Research published this year shows that 75% of SMEs accessed credit through digital banks and fintechs, resulting in 43% of SMEs reporting productivity gains, and 56% reporting higher turnover. Among Brazilian lower-income populations, 71% of people have a credit card from a digital bank. New open banking regulation and the inclusion of 16 million Brazilians into the formal financial system during the pandemic, create an opportunity to promote sustainable, responsible financial inclusion for favela-based small businesses.

To address this opportunity, Strive Community is bringing together the experience and unique perspectives of three expert partners to support the digital and financial inclusion of small businesses located in favelas. The first, CUFA, has solid community roots and deep understanding of the residents it serves. Similarly, Aliança Empreendedora has worked for 17 years to empower vulnerable MSEs in Brazil, providing upskilling and mentoring across the country. Finally, Flourish FI is a startup that uses behavioral nudges to encourage the adoption of healthy financial habits. These organizations will also work to actively engage the ecosystem of fintechs and digital tool providers in Brazil, as well as other strategic partners, to bring them into the project, iterate, and learn, as well as offer new products and services to MSEs.

The program will help build the resilience and financial health of small businesses by: leveraging gamification, virtual reality, and other tools to support adoption of digital technology and incentivize behavior change; establishing a mentoring program to prepare MSEs for responsible credit access; and mobilizing MSEs across favelas to access the program’s upskilling content and package of solutions by tapping into media, digital channels, and in-person outreach.

While the program will rely on Flourish FI’s unique expertise in behavioral nudges to encourage MSEs to progress from one offering to another (for example, from upskilling to tool adoption, or from tool adoption to mentoring), the approach remains decidedly experimental. There is no single prescribed track for MSEs to follow. By tracking their self-prescribed journeys, we hope to gain a better understanding of how MSEs choose to progress between offerings, and with what effects. Such understanding will allow us to optimize the design and delivery of digital inclusion programs in ways that are efficient and relevant for MSEs.

The program will also count on CUFA’s incredible ground presence to train local community facilitators to become human touchpoints, to support onboarding and troubleshooting as MSEs experiment with new digital content and tools. While the Strive Community approach is primarily digital, offering local touchpoints for MSEs is particularly important with vulnerable populations. Training these community leaders is likely to be an important lever for enabling digital inclusion not only for this program, but also for these communities in the long term as well.

This iterative approach, and unique partnership, represents a novel way of supporting digitalization. These three organizations — CUFA, Aliança Empreendedora, and Flourish FI — have very different skill sets and working cultures. They are building a common language to work together through the foundations of human-centric design. Partners are working with new tools, building personas, and thinking of users rather than beneficiaries. These learnings — on how MSEs digitize and on how different entities like our grantees find common ground — are likely to be the program’s biggest legacy. Grantees are retaining a scientific, curious eye to gather as many learnings as possible throughout the program.

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