Pioneering Inclusive Finance through Technology

India jewelry stand

The microfinance movement started in the 1970s with a long journey ahead. Mohammad Yunus, a social entrepreneur from Bangladesh, developed the concept to empower the “unbanked”—or the millions of people around the world without access to banking services—by providing them with financial services. The movement garnered momentum from the start, predicting 100 million borrowers by 2005 and continued growth. In 2006 Yunus won the Nobel Peace Prize.  

However, despite all the advances, by 2019 microfinance was still serving a small portion of the world’s unbanked. Of course, 140 million borrowers globally is a major achievement, but it pales in comparison to the 1.7 billion still unbanked.

Despite the relative successes, Yunus’ microfinance movement alone could not be enough to solve the financial inclusion challenge. One of the reasons is scale, but there are others, such as different cultures, regulations, and personal habits in different regions around the world that do not fit the Yunus model well. 

Tala evolving inclusive finance

Now, fintech company Tala has been rethinking the idea of inclusive finance—successfully marrying technology, economic inclusivity, and social impact within a profitable business model.  

Technology allows Tala to gain insights from customer listening and data and shows that extending loans to individuals in emerging economies is not just possible; it can also be profitable. 

Outthinker Networks President, Claudio Garcia, interviewed Tala’s Chief Risk and Strategy Officer, Kunal Kaul, to learn valuable lessons for companies seeking to make an impact in today’s interconnected business world.

Confronting the challenges of the microfinance model 

Tala Founder and CEO, Shivani Siroya’s background in investment banking and public health prepared her for a stint at the United Nations Population Fund, researching microfinance. Her goal was to explore how microfinance fit into the daily lives of the women and men around the world who benefit from its services. She wanted to figure out where the money was going, how people were using it, and how she might improve the system.  

What she found was contradictory. The lessons she learned would not show up in typical financial reports—and the communities she studied would likely not report them anyway. 

Consider the story of a woman running a small jewelry stand in India. She was saving up to send her son to school to study technology, and meanwhile helping to plan a wedding for another female friend in the community. She may not have a credit report, but Siroya could see that she was a trustworthy member of the community. 

Through focused customer research, Siroya found there were three challenges to the microfinance movement:

  1. Understanding social norms: The original microfinance model is based on group lending. Group funds pool money as collateral; each person receives one loan at a time. They rely on social pressure to get people to pay the loan back. For many cultures, the challenge is that these models lack privacy. In some cultures, customers might not want other community members to know how much they receive.  
  2. Recognizing customer needs: In talking to prospective unbanked customers, it was clear their needs were the same as any other customer. They wanted to be treated with dignity and agency. They were not looking for charity; they simply wanted the same opportunities as everyone else. It’s also common that microfinance approaches require loan recipients to spend the money on productive business expenses. However, Tala realized that their customers do not draw a hard line between personal and business expenses, and therefore, the company allows the customer the dignity of using credit however they want—including consumptive use cases like household bills or groceries. If one customer uses the money for their home electricity bill today, it might allow their business to operate next month. 
  3. Striving for scalability: Microfinance faced a scalability challenge because there’s only so much money you can raise through charity and non-profits. There were still many people left out of the system. Siroya saw that the only way to economically and sustainably make an impact was through a for-profit model.

Tala took a strategic approach to targeting underbanked customers that offers an example to other companies who want to have a positive impact on social change. 

Below are some of the lessons in strategy for impact: 

Kunal Kaul Outthinker Networks

Embrace the challenge of infrastructure

One of Tala’s most distinctive strategies is their targeted approach to markets lacking ‘technology rails,’ the digital infrastructure necessary for financial services. By taking into account country-specific factors such as regulatory environments, smartphone penetration, and country size, Tala has managed to carve out a space for themselves in countries from Kenya to the Philippines and Mexico. 

Understanding the nuances of local markets, as Tala has done, is crucial for any business looking to expand. Navigating and capitalizing on the unique challenges of different regions, whether fragmented digital infrastructure or remote delivery locations, is key to success in new markets. 

“If these people need access to capital, we need to find different ways to understand their needs and trustworthiness.”

Value the power of logistics

In its operations, Tala found that the physical aspect of banking, such as delivering debit cards, can pose a substantial challenge. In Mexico, they learned that 40% of cards could not be delivered due to the remoteness of certain areas. This has implications for companies in all sectors, highlighting the importance of having flexible solutions and a willingness to adapt to local conditions. Businesses need to be prepared for unexpected hurdles and develop agile solutions to overcome them. 

Prioritize profitable unit economics

Financially, Tala has robust unit economics. The focus now is on scaling the customer base to cover fixed costs. This shows the importance of having sound unit economics before scaling – a lesson that can be valuable for any business. While profitability is important, ensuring that the per-unit economics are solid before looking at overall profitability can lead to a much more sustainable business model in the long run. 

Deepen relationships and expand Slowly

Tala is present in four countries currently – Kenya, Philippines, Mexico, and India. While there are plans for expansion, Tala has made it clear that they also prioritize deepening relationships with existing customers. They have even diversified their services to include bill payments, savings, and money transfers through the Tala Wallet, opening more than 1 million wallets in the Philippines within a year and a half. 

This balanced strategy of growth and deepening relationships is a valuable lesson for businesses. It emphasizes the importance of nurturing existing relationships while strategically pursuing new markets. 

Determine KPIs for social impact

Tala conducted a study over the past year with third-party impact measurement company, 60 Decibels. They found that Tala’s services provide a safety net for customers. Three-quarters of borrowers interviewed reported an improvement in their quality of life. 80 percent reported an improved ability to face a financial emergency. 80 percent of women borrowers reported increased self-confidence.

According to Kaul, although Tala does not require productive use of loans, they found 70 percent of funding goes toward productive business growth expenses. And 100 percent of borrowers trust Tala with their data and understand the terms and conditions of loans. 

Final Thoughts

Tala’s model offers a fresh approach to inclusive finance and a wealth of lessons for companies across sectors. Their strategic approach to new markets, their logistical flexibility, their emphasis on unit economics, and their commitment to serving customers all contribute to a model that is both profitable and impactful. As businesses look to the future, Tala’s approach may well serve as a model for how to navigate the complexities of our interconnected world while making a meaningful impact.

About Outthinker Networks

Outthinker Networks brings together two executive peer networks – the Outthinker Strategy Network and the Outthinker Innovators Network – to help senior strategy and innovation leaders solve their most pressing challenges and keep their organizations ahead of the pace of disruption. 

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Authors

Claudio Garcia
Claudio GarciaPresident - Outthinker Networks
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Cori Dombroski
Cori DombroskiContent Director - Outthinker Networks
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