One of Varo’s early major investors was TPG’s The Rise Fund (a former Bridgespan Group client), which invests in fintech companies like Varo because they offer bank accounts without checking consumers’ banking histories or assessing monthly fees and overdraft fees. They also offer low-cost advances for customers who might otherwise turn to predatory payday lenders. In making its investment in Varo, The Rise Fund cited “the support they offer people to help manage their finances and reduce financial stress really matters at a time when so many American families are struggling in a volatile economy.”
Varo’s story is an example of an impact investor playing an important role in the emergence of a financial services social enterprise. Indeed, the field of impact investing was essentially born in the financial service sector—in particular microfinance (more on that later). And financial services continues to be a popular sector among the hundreds of potential impact investments that we have evaluated at Bridgespan over the past several years.
Investments with Impact in the Financial Service SectorIndeed, activity has been high across financial services in recent years. In 2020, $42 billion of venture capital went to fintech ventures globally, for example, along with another $3 billion in private equity, according to KPMG. But only a fraction of that could reasonably be expected to have social impact.
We believe that the investments with the highest potential impact in the sector will be initiatives that operate in areas with limited current access to financial services and that bring new people into contact with banking systems. The World Bank reported in 2018 that 1.7 billion people remain unbanked globally. There are big differences among countries and regions; in the Middle East and Africa, half the population is financially excluded. Being excluded from the finance system makes it hard for people to save, borrow, invest, or run a business.
Investments in financial inclusion can help democratize access to finance. A 2020 report from the Global Impact Investing Network (GIIN) reports “noteworthy evidence of real-world impacts [including] increased spending on basic services, accelerated business expansion, and improved clients’ financial resilience.”
Mobile money—financial activities transacted by cell phone—provides tremendous potential to include more people. Mobile money continues to grow at an impressive rate. In 2020, mobile money accounts in sub-Saharan Africa accounted for nearly half of all new accounts globally. The introduction of mobile money can help lift households out of poverty, increase savings, and facilitate the movement of jobs from agriculture to nonfarm businesses. Because women in low income countries without access to bank accounts are often dependent on male relatives for access to formal financial institutions, the benefits of mobile money are often most dramatic for women.
There is also a need in developed markets where, as with Varo, companies can find new ways to serve consumers who were previously left out of the financial system. A lack of financial access is also a significant contributor to poverty and lack of economic mobility within the United States. Data from the Federal Deposit Insurance Corporation (FDIC) show that nearly half of Black families in the United States have no access to a bank account or lack vital financial services such as credit and interest-bearing savings. Being left out of the financial system can add extra fees to cash checks and borrow money. Aside from foregone interest, this can add up to nearly $40,000 over a person’s lifetime.
What’s Next for Microfinance?The impact of microfinance is hotly debated in the international development community. Some see microfinance as getting much-needed capital to hard-to-reach places; others argue that microfinance charges rates too high for low-income families to afford. Sifting through the debate, we see two areas within microfinance where there is still real potential to achieve social impact.
Agricultural micro-lending is especially promising. In one 2012 study, researchers in the United States and China found that access to credit increases average agricultural productivity by 75 percent in China. In our work, we have seen investments with high impact potential in lending to companies that support food and agriculture. One example is the Indian company Samunnati, which has attracted investments by impact investors like Elevar Equity and responsAbility. It lends money to farmers to finance the purchase of seeds, fertilizer, and other supplies. These are classified as microloans, though typically organized through farmer collectives, which today have a total of six million smallholder members. Seeking to develop the broader supply chain for these smallholder farmers, Sammunati also lends to crop processors, traders, and exporters.
Investments in other small and mid-size enterprises (SMEs) can also be effective—increasing employment and boosting wages. But investments in lending to SMEs are not always a guaranteed success. For example, in some studies, micro-loans (e.g., smaller than $500) to very small businesses do not generate higher incomes or business growth. Often these businesses face too many other headwinds to make good use of the loan. When loans are coupled with technical assistance through a grantmaking facility, the odds go up that a very small business will be able to repay the loan and go on to succeed. Pro Mujer is a social enterprise advancing gender equality by providing innovative financing services for women in Latin American countries. It supports women entrepreneurs not only through financing, but also with business training, capacity building, and mentorship.
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As in other sectors, making investments in the financial sector that have a good chance of producing impact requires looking beyond the hype and asking some tough questions. Some of the best questions to ask are about the investee’s customers: What would have happened without the financial product? Could the customer have accessed the financial services they needed without the company you are about to invest in? Are they better off, or have they just ended up with more debt, profiting the company but not themselves or society? The social bottom line is measured not by more loans or more services—but rather by democratizing access to finance and improving the prospects of individuals, families, and communities.
Kate Collins is a former manager at The Bridgespan Group. Michael Etzel is a partner in Bridgespan’s Boston office. Sebastian Gonzalez is a senior associate consultant in Bridgespan’s Boston office.