Last year, Mondato Insight lamented the state of global savings - especially as it relates to pensions. If policy interventions in emerging markets are barely moving the needle on pension penetration, what hope is there for the private sector in selling (and, simplifying) individual-oriented wealth generating investment solutions to low or middle income segments? While the democratization of investing has culminated in robo-advising platforms like Wealthfront and micro-investing levers like Acorns across mature economies, with user bases filled out by not-yet-rich Millennials, much of the technology's potential still seems unfulfilled. What is the true depth of this democratization avowed by fintech, especially in the global context?

Trickling Down?

Inherently, investment is a messier, more convoluted product to digitize for mass consumption than payments, savings and even insurance. In terms of financial literacy, the barrier to entry is high, and enterprising start-ups must often bake concepts like portfolio management, risk tolerance and time horizon into the product offering in order to move down the clientele income chain.

The market opportunity for those willing to streamline the complexities of investment into a digestible parcel for this new sub-section is enormous. In Latin America alone, there are 346 million savings accounts with a minimum balance of at least USD$100. Those balances reap little, with most deposit account interest rates in the region fetching a 0 percent return - or nearly that, anyway. Ualet, a robo-advising platform in Colombia, is first to market with its nano-investing solution (contributions can be as small as USD$3) that supports a fully digital on-boarding process.

A prospective user merely downloads the smart phone-enabled mobile application and then completes a questionnaire that gauges appetite for risk, of which there are five possible profiles. Funds - which are either directly debited from an integrated bank account or moved on a one time basis through the secure online payments interface operated by Colombia's main private clearing house - are automatically allocated among a possible mix of money market funds, regional corporate debt funds, local stock market funds and dollar denominated funds according to the risk profile.

This locked-in approach has a noise-cancelling effect on its users, who no longer need to preoccupy themselves with the ins and outs of portfolio building. And while these sorts of small-value robo-advising schemes have a clear value add for low and middle income populations (since Ualet's official launch in quarter 1 of 2018, it has on-boarded 11,300 users representing USD$2 million assets under management, the majority of whom have a monthly income between USD$276 and USD$830), they are excessively rare in emerging markets given the sheer intricacy of the digital product's technical specifications coupled with regulatory grayness.

"The most pressing challenge has been transforming a 100 percent offline model to a 100 percent online business model. This encompasses challenges such as the design of transactional platforms for additions and withdrawals, as well as migrating the whole business infrastructure to the cloud. In order to overcome these issues, we have a proprietary business analytics model for asset allocation, a fully digital on-boarding platform, a payments system for cash-in and cash-out, API connections to asset managers and a digital front proprietary banking core for portfolio valuation, all in a multi-cloud infrastructure." Leopoldo Forero, Chief Executive Officer at Ualet

Despite the growing pains incurred in committing to a pure digital model, the trade-off is that reaching, and servicing, shallow pocket investors becomes commercially viable. Customer acquisition costs for traditional asset managers range between USD$50 to 100 per head, compared to Ualet's USD$8. Ultimately, profit margin will be the final decider in whether fintechs take the plunge in democratizing investing.

It Takes A Tribe

In India, the roll-out of a similar product is underway, but this time costs are also capped through creative collaboration. NiYo, a fintech that digitizes employee benefits and payroll, has partnered with Upwardly, an online investment platform. The structured investment solution, which is integrated into NiYo's Bharat mobile application, is designed for blue collar workers from the services and manufacturing sectors who average an annual income between USD$2,000 to 4,000. Similar to Ualet, Upwardly has had to manage the 'cognitive load' of this very investor-green segment. Upwardly has stripped some of the features of its more open-ended platform for the sake of simplicity, and with a minimum investment of INR₹100 (or USD$1.44) on-boarded NiYo patrons can select straightforward investment plans through their mobile.

Although Upwardly has introduced e-KYC functionality that cross references video feed with KYC Registration Agencies' databases (these agencies maintain KYC records of investors centrally, on behalf of capital market intermediaries registered with the Securities and Exchange Board of India) through open APIs, regulatory standards still render the prospect of serving unbanked constituents unattractive.

"Dealing in cash creates a large burden in terms of compliance cost. There is a lot of regulatory, legal and manufacturing support required for creating an offering for the unbanked. Given the current level of penetration in a country where less than 2 percent of the country invests, we are some distance from a purely unbanked customer. I believe that we will see innovation around this over the next 3 to 5 years. In the product's current form, a bank account is required." - Prateek Mehta, Chief Executive Officer at Upwardly

National identity initiatives, like Aadhaar in India for example, could be the innovation that adds a layer of visibility to the unbanked. As noted by Mr. Mehta, however, until a regulatory consensus emerges around leveraging Aadhaar for e-KYC purposes, Indian fintechs will continue to hedge around it. Ualet, too, sticks to banked pockets, citing anti-money laundering (AML) policy.

Mobile Money Investment?

Relying on banking infrastructure as the jump-off point for product deployment in some emerging markets is just good sense. According to the 2017 World Bank Findex, as far as bank account ownership goes, both India and Colombia are in good shape at 80 and 46 percent respectively.

So, are bank accounts and banking architecture the proverbial chicken (or, egg) to democratizing investment for the low and middle class? Unfortunately, if the products currently live in market are any indication, then the bank account is almost universally the foundational layer for investment solutions in regard to payment integration and KYC / AML requirements. But, what latitude does that leave for countries who have little to no legacy infrastructure to act as kindling? Of little surprise, the few examples to be found are concentrated in mobile-money saturated sub-Saharan Africa.

On June 30th, 2017, the government of Kenya released the first round of the M-Akiba bond to finance infrastructural development projects. The bond guarantees an interest rate of 10 percent per annum - payable semi-annually after every 6 months - with a minimum investment of KES 3,000 (in contrast to the obligatory up-front KES 50,000 expected for other treasury bonds active in Kenya's market). While the floor price of M-Akiba is exceptional - and clearly reflective of a desire to attract a diversified set of investors - so, too, is the mechanism for purchase and payout. All activities relating to registration, trading and settlement are via Safaricom and Airtel's mobile platform (just dial *889#) or Pesalink's interbank real-time push payment platform.

The private sector in Kenya is also experimenting with nano-investing sans a requisite bank account. Through its online portal or mobile application, Abacus empowers individual investors to trade in bonds, stocks and unit trusts with as little as KES 200. KYC is tiered, and speculators equipped only with a national ID number can dump up to KES 100,000 onto Abacus's system. Although the platform is more free-rein than some of other alternatives already listed (in fact, many of its premium features unlock data analytics to better optimize portfolios), which might intimidate low to middle income investors, its push and pull integration with M-Pesa speaks to localizing currents that are slowly chipping away at the inaccessibility of investing.

At the heart of it, a confluence of localization, financial literacy, regulation, technical capacities and UX will determine how quickly investing permeates into all of society's ranks. Localization and regulation may be forces that can stop a product's traction dead in its tracks, but even in the least restrictive environments, a lack of financial literacy or intuitive usability can halt adoption. (A walk-through of the button-smashing, or more than 20 text commands, and numbing of fingers involved in investing through C-Trade's USSD channel in Zimbabwe is a perfect representation). If technical innovation and device penetration slows investment products, perhaps hybrid online-offline models are the next step to including the low and middle income consumers. If agents can wheel and deal cryptocurrency, could they not also be investment brokers? Or, could microfinance institutions become a dynamite intermediary powered by tech partnerships? When it comes to investing, the sky is the limit.

© Mondato 2019

Image courtesy of Marco Verch

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