Accion, a global nonprofit organization, announced on Tuesday the launch of the Accion Digital Transformation Fund, a $152.5 million fund for large financial institutions, including microfinance institutions serving small businesses currently excluded from the global financial system.
The company said in a statement that it would offer these firms with growth capital and strategic support for “digital transformation.”
For over sixty years, this non-profit organization has been working in the financial services sector: first, developing and scaling solutions tailored to the procurement of small businesses, small farmers and women; second, by providing investment and advisory services to traditional financial institutions and microfinance firms, which in turn create accessible products. Over the years, Accion has helped build 230 financial services providers serving low-income consumers and businesses in 75 countries.
In 2019, Accion took a daring step into early-stage fintech investing by launching Accion Venture Lab, a $23 million fintech startup fund. This enterprise arm has supported over 65 seed and Series A firms operating in over 30 countries in Latin America, Southeast Asia and Africa. Notable investments include Konfio, Lulalend, Fairbanc and Khazna.
These startups, some of which have grow to be large fintechs in their markets, are not only using technology to expand the reach and accessibility of their products to the underserved at scale, but are also using technology to extend customer engagement, which is an area in which where Accion believes traditional finance institutions are catching up.
“Over the years of working on financial inclusion, we realized that in rural parts of the world, people left behind by traditional financial institutions were not becoming more digitally inclusive,” he said Abhishek Agrawalmanaging partner at Accion Digital Transformation Fund, during a telephone interview with TechCrunch.
“And the challenge was twofold. One is that rural or digitally delayed customers do not have enough confidence in digital technology. The second part was institutions (traditional banks and financial services institutions that do not have enough knowledge or internal support to speculate in true digital customer engagement).
Agrawal said the pandemic has highlighted the severity of the digital inclusion gap. While Accion has advised banks and microfinance institutions on learn how to digitally engage customers, the nonprofit organization knew it needed to put its money where its mouth is, and that is exactly what it did by launching this fund. Accion Digital Transformation Fund’s investments will focus on firms serving micro, small and medium-sized enterprises (MSMEs) in South and Southeast Asia, Latin America and Africa.
Accion Impact Management manages the Accion Digital Transformation Fund and the Accion Venture Laboratory.
While the Venture Lab focuses on early-stage fintech firms and newer models, the Digital Transformation Fund focuses on larger financial services firms that have not yet pivoted or significantly invested in digital customer engagement.
Its approach involves deploying $12 million to $15 million in capital investments, along with limited partner contributions, to support these firms on their digital transformation journey and greater customer engagement. In this fashion, fintechs and traditional financial services firms in the nonprofit portfolios of each funds can digitally help underserved customer segments.
“In this case, we would prefer traditional microfinance, affordable housing companies and microfinance institutions transforming into banks. For us, it is not about digitizing processes or helping to implement basic banking systems. This is not where we will step in,” Agrawal said.
“We want these banks or traditional financial services institutions to think about how to engage with the customer more digitally, so that the customer will have more choice in the future. This strategy also helps traditional financial services companies prepare for future events as they are lagging behind and relying on competitiveness, as well as collaboration, to be bold in the world of fintech.”
The Accion Digital Transformation Fund will not proceed investing in fintechs from Venture Lab. Instead, the fund will focus exclusively on new investments in traditional financial firms. The company expects to perform 10 to 12 investments while maintaining flexibility in capital allocation between interesting regions.
“There is no hard limit allocated to each region as it will depend on the specific needs and potential of each company in different regions,” Agrawal said. However, the company intends to make three to 4 investments in Asia, two to three investments in Africa and two to three investments in Latin America, thus building a balanced portfolio in all features, the managing partner added.
With this in mind, the fund will also construct its portfolio taking into account various models. For example, in India, where two investments have already been made, this is the case Annapurna Financeswhich makes small, unsecured loans to distressed women, averaging about $400 unsecured, and IKF fundswhich operates primarily as an asset finance company and offers senior secured loans ranging from $3,000 to $5,000.
What will the digital transformation and engagement seem like for a company offering very small unsecured tickets in comparison with one other company offering barely larger secured tickets in India? Accion hopes to reply these sorts of questions with its digital transformation fund by providing examples of economic returns from these models that will be available to other markets, Agrawal said.
The fund’s limited partners are British International Investment (BII), a UK development finance institution and impact investor; Dutch entrepreneurial development bank FMO; IDB investment; International Finance Corporation (IFC); MasterCard; OeEB, Austrian Development Bank; and Swedfund, the Swedish development finance institution.
Accion’s other investment strategies over the years, in addition to the Digital Transformation Fund and Venture Lab, include Accion Emerge, which supports growth-stage firms innovating in embedded finance, agtech and the way forward for work, and its relationship with the spin-off Quona Capital, a enterprise firm focused on financial inclusion in emerging markets.