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Dec 24, 2019 | 5 min read

The Rise and Rise of Microfinance Startups

Pavel Kaplunou , Marketing Communications

Venture capital may not be the only source of funding for sprouting startups, but investment trends do a solid job in revealing which industries are on the rise and which are going lukewarm. Small businesses and ambitious startups covet angel investors and the opportunities they provide to bring their ideas to life. At the same time, such stakeholders make a targeted gamble on businesses with high growth potential under terms of future equity in the business, should it succeed.

A recent Crunchbase post details the verticals to which investors are turning a cold shoulder. These mostly include startups that operate in the offline world, yet heavily rely on tech to fulfill their objectives. However, the opposite trend is taking route in the financial services industry with investors eyeing the burgeoning microfinance vertical.

Availability of Traditional Banking Services

Banking services are thought to be ubiquitous from country to country, however the shifting political landscape in many governments leaves development at stages that cannot compare to the western world. In the absence of such traditional services businesses and entrepreneurs adapt to function in completely different circumstances.

The Latin American microfinance scene has exploded in recent years with the introduction of Swiss based KiWi, which helps small scale entrepreneurs receive micro loans to cover their business needs. While Brazil seems to be the country with the most dollars sent in venture capital funds, Mexico enjoys a springing culture of microfinance as 90% of all companies are in fact with small and local businesses.

In a different post, Crunchbase also explores the appearance of companies such as Konfío, Chime and Klar, which have conquered a significant share of the market in their respective areas that are intertwined with loans funding the individual entrepreneur.

Technological Catalysts

The reasoning behind the success of such lending companies attributes heavily to technology and the way it empowers the individual to act independently on their initiatives. The consolidation of mobile network providers and the proliferation of mobile devices across the entirety of the social stratum has given companies another channel to reach out to the population. This has manifested itself differently in many countries.

In much of the African continent, for example, mobile network service providers reign supreme. Not only are they responsible for the standard telecommunications services, but they have also seeped into areas such as money transfers, financing and microfinancing. Essentially, cultivated in an environment where the population holds significant distrust towards banks, and is reluctant to use bank-issued cards, the likes of MTN or Vodafone-owned M-Pesa have proven to be viable alternatives.

Technology has also been a weighty factor behind the growth of mobile and digital payments in Latin America as well. The spur of mobile powered-payments and the waning reputation of banking institutions only goes to show why persons turn to technology and why microfinancing has grown in popularity, when it comes to finding financing.

The Bigger Picture

Why the number of startups targeting small business, entrepreneurs and individuals trying to make a fair living is on the rise is consistent with trends in agile software development. Unfortunately for large banking establishments, younger and leaner companies are able to jump start their business by starting off with cloud-computing, while banks fail to handle change management effectively and struggle to move away from on-premise based systems and define their IT strategy.

FinTech startups can heavily rely on the release of MVPs that garner traction for their product, before fully committing to a regular development cycle. Once up and running, the main hurdles such companies face have to do with keeping up with compliance and support, which can, in most cases, be outsourced to cut costs and ensure it is delivered more effectively by dedicated teams, while the main branch of the business focuses on marketing, growth strategies and stakeholder management, and overall development. On the same note, for example, Smart IT handles an on-going maintenance and support mission for a renowned microfinancing company with operations across the globe. While the details cannot be revealed due to disclosure agreements, it is safe to say that it is not the only company relying on business process outsourcing to run its business.

Verdant and springy companies are bound to release market-specific products and services that are an ideal fit for their target demographic. VC trends go to show that the financial services popularity curve will experience a steady rise yet. In order to ensure stable growth and development in the future, such startups can differentiate their IT strategy from conservative financing institutions by establishing clout with IT professionals, who can relieve the burdens of technical skill gap and streamline maintenance and support.

On a side note, Smart IT would like to wish everyone happy holidays and a great start to the new decade in 2020!

24 December 2019


Pavel Kaplunou, Marketing Communications

Pavel is Smart IT's Marketing Communication Manager. He oversees content creation and is in charge of the official Smart IT blog. Contact Pavel to learn about potential media and content collaborations. [email protected]