Smita Aggarwal Talks Embedded Finance in Frontier Markets
When Flourish Global Investments Advisor Smita Aggarwal began her career, building the first rural lending business and digital channels for a major Indian bank, “the concept of using technology for inclusion was ahead of its time,” she said on a Nov. 9 episode of the Asia Tech Podcast with Michael Waitze.
At the time, access to technology in emerging markets was limited. “Today, that scenario has completely changed,” Smita explained, especially in Southeast Asia, where 70% of people are still unbanked or underbanked, but most have a smartphone.
That gap is a huge opportunity for fintech in frontier markets. Traditional financial services have not reached most customers, especially MSMEs, low-income households, and gig workers. And yet, because the financial sector is underdeveloped in these markets, not only is the opportunity huge, so is the task facing fintech entrepreneurs.
Embedded Finance Is About Contextualization
It’s not just ticket size or cost that has kept underserved customers out of reach for traditional FSPs. It’s also the challenge of underwriting thin-file and no-file customers, and the burden on consumers of going to a branch, filling out the paperwork, and applying for a financial product that may not fit their needs.
“The world of banking and finance were distinct from the day-to-day transactions that we do in life, and that’s a big reason why financial services were only able to reach a limited number of people,” said Smita.
Embedded finance, on the other hand, has the potential to become so seamlessly integrated into customers’ daily lives, and so intuitive, that adoption is also seamless.
“You don’t wake up and say, ‘Hey, I want to take out a loan today,’ or ‘I want to buy insurance.’ No, these are tools to help us manage our economic lives,” said Smita. “And therefore contextualization, I think, is the most important piece of the whole concept of embedded finance.”
That makes understanding the customer the first job of any embedded finance startup. But there are also market ecosystem and back-end challenges.
Learn the Playbook for Building the Fintech Stack
In frontier markets, fintechs may need to solve for many adjacent problems beyond the customer front end, due to the lack of market infrastructure. For example, Smita explained that the ecommerce market took off in Indonesia, and as a result, there were enough players providing logistics and digital payments.
But when Flourish first invested in Bangladesh, “there were just no logistics players of the scale you’d need,” she said. “And so, if you want to be successful in ecommerce, maybe you need to also solve for logistics. And then the next thing you realize, maybe you also need to solve for payments, because there’s nobody doing that.”
Because frontier markets have many structural aspects in common (high mobile adoption, fast-growing economies, a large unbanked population), Smita told Michael she’s “seen the playbook” for rolling out the building blocks of the fintech stack: digital identity, payments, interoperability, e-wallets, and other technologies.
“If I know the things that need to get built [by learning from the innovation in other countries], then I feel like I can see the future,” Michael said, “particularly the adjacencies, because without that, it’s not going to work.”
Michael asked Smita one final question, at the end of the episode: what she looks for in a fintech entrepreneur. In addition to domain expertise and conviction, Smita said adaptability.
“A lot of times, what you decided as your plan will not be what you end up doing, because guess what? By the time you got started, the regulation changed, or the competition did something different,” Smita advised, “While you’re focused on what you’re implementing, you need to keep your eyes and ears open to what’s going on around you – and adapt to that.”