Costa: Why Financial Inclusion is Not Enough Anymore


Flourish is a $500 million venture firm investing in entrepreneurs whose innovations help people achieve financial health and prosperity. Recently, the firm organised a financial inclusion event in Lagos where its Managing Partner, Arjuna Costa, spoke to select journalists on what the firm is bringing to Nigeria and Africa and the new trends in fintech. Solomon Elusoji provides the excerpts:

Why did you organise your recent event?
We are a sector specific Fund and our ambitions, at Flourish, is to drive change at a sector level. So, how do we think about the financial services sector and how do we change it for the better? When you are operating in a regulated environment, you can’t just be an investor. You have to engage with the regulators, with the policy makers, with influencers, thought leaders, researchers, and bring it all together. So that’s our mode of operating. And we have a very flexible pool of capital; we can both invest in entrepreneurs and innovators, but we can also provide grant funding to researchers, policy makers, to help them do their jobs better. So if you think about what needs to happen at the ecosystem level, you’ve got to engage at all these different points. So an event like this is a chance to both build networks, build our own thought leadership in the space, highlight the work of entrepreneurs and highlight our portfolio.

How much have you tried to engage with the regulators?
We are very respectful of the regulators. We’ve found that the most effective way for regulators to adopt new ways of doing things is to learn from their peers, not from an outside investor saying this is the right or the wrong way to do it. And we are one of the big founders and sponsors of an organisation called the Alliance for Financial Inclusion. This is basically a peer network of regulators from the global south. There are no US, Europe or OECD member countries.

So, these are peers who share best practices and learn from each other. What we do is to fund that organisation with grant money, so they can be effective. And it is mechanisms like that that allow us to be most effective. If you are a regulator and you are thinking about the stability of your system, thinking about inclusion and big policy issues, who better to learn from than a peer regulator who has solved similar challenges before. One of the most exciting that comes out of this organisation, AFI, is that they met in Mexico, a few years back and they came up with something they called the Maya declaration.

And the Maya declaration is the central bankers each committing, in front of their peers, to an inclusion target, and they hold themselves accountable. And they have an annual meeting called the Global Policy Forum, where they update each other on their own progress. That’s a very powerful mechanism – regulators engaging with each other, holding each other accountable.

Flourish is big on ‘financial health’ as a concept. What does this entail and what is the role of technology?
When the industry was in evolution, we started with the challenge of financial inclusion. But inclusion is a very narrow view of the world. It’s either binary, you are included or excluded. Really, the challenge is, how do we engage with the household or small business, bring them all the products and services they need, so they can thrive and take advantage of economic opportunity and prosper. So this idea of financial health/wellness is trying to broaden this notion from just inclusion to really that level of holistic engagement.

What does that mean? It means if you talk to the average family in Nigeria and ask them what their dreams are: their dreams are probably for a better house, for an education for their children, for the ability to buy a farm to retire to. They don’t say my dream is to get a student loan or a mortgage and to be able to buy an asset. But those are actually two different ways of looking at the same point. It is a student loan, it’s a mortgage, a savings account, an investment account that grows overtime, that allows you to retire and live on the farm.

So how do you take those dreams and aspirations and translate that into financial products that allow families to thrive? That’s the notion at the high level of financial health, how you make it operational; and the role of technology is critical. One of the things technology has solved is the high cost of giving people individualised services. If you look at a bank, it cannot reach the bottom 70 percent of a population because it is very expensive to build a beautiful bank branch and serve people who might be saving a little bit of money.

But if you can put that bank branch in somebody’s pocket, in a smartphone – what you can do today – and give them a highly personalised experience, in digital format that’s localised to their context, then you have the ability to engage holistically with this family or the household or small business, and start to think about their needs, collecting data about them, interacting with them. I think one of the challenges we have to solve is, in a digital era, how do you still keep things personal? A hundred years ago, banking was a community.

You went to a corner and your corner banker knew your life, knew your children, what you aspired to and he designed products for it. Banking became institutional and it lost that connection. How do you still bring that trust back, that personalisation? That will be one of our challenges of the digital era.

Flourish is a $500 million venture firm. How much of this have you invested in Nigeria?
We are a global firm. We invest across the US, Latin America, Asia and sub-Saharan Africa. We have a portfolio that’s deployed $200 million so far; $300 million is committed to us, to continue to invest, both in our existing companies, as they need capital, and new companies, as we find them. We don’t take a view of saying we are going to do X amount in Africa versus Latin America. We want to back the most innovative, mission driven entrepreneurs who are solving the problems we care about. We invest, as I said, for sector impact, so the demonstration of a successful company in Nigeria on a company in Indonesia or Mexico is very powerful, so we find the best entrepreneurs and take that idea and make it successful.

So far we have made three direct investments in Nigeria. Going back to 2012, our first investment was in a company called PAGA. Subsequently, we made an investment in a company called Flutterwave, and most recently, we invested in a company called Lidya. These are all tackling different parts of the overall puzzle around financial inclusion. We hope to close another deal this year. We are constantly on the lookout for new companies. We need companies at a certain level of maturity before we can engage, so we do things to help the ecosystem grow.

How do you think your intervention will help reduce poverty in Nigeria and Africa?
We believe that with the level of technology innovation that is happening today, plus the creativity of the entrepreneurs and really interestingly, beyond being creative entrepreneurs, they are driven by a mission and a purpose. And this idea of making a difference in their own society is something that is motivating a lot of entrepreneurs. And they are able to attract talent and build teams because of that purpose. So when you put together inspiring ideas, talented people, the right kind of capital, the right kind of support, I think there is a lot of impact to be had.

There are various funds tackling issues in education or health; we are very focused on this idea of economic opportunity and financial health. And in that space, we think there’s a lot of progress to be had. One more point, it’s not just the technology. For a long time, we’ve thought inclusion was getting somebody a bank account. So you go to the mass market and say open a bank account; those bank accounts, after six months are dormant. I’ll tell you why. It’s because people have a very complex relationship with money. They have this mental model in their head of what money means and how to use money.

A bank account often doesn’t match that. I’ll give you an example. If you go to a household and ask them how they save, nine times out of ten, they will go into the back of the house and bring three different tin boxes. One tin is for a rainy day, one thing is for a cousin or nephew who is getting married and has to be given a present; one tin is for school fees and new school uniforms. So, if you go to them and the proposition you give to them is, open a bank account, it’s a savings account, one account, the bank is open from eight o’clock to four o’clock, if you want to take the money out, you have to leave work, spend 20 minutes in traffic, spend 20 minutes on a line.

So why are they not doing it? Because it doesn’t match what their real life is. Researchers are starting to go deep into understanding what that real life is like. And with the power of technology, we can customise a savings account into five different mini-accounts. Imagine if we had an app that had five little icons on it. One icon has a ‘kid in school’, one icon has an umbrella for ‘a rainy day’, one icon has ‘wedding present’, and two other icons; you can move money between funds by swiping; if we can design with the user in mind, understand their needs, and build a technology that matches that, test it, go and see if it works, 999 out of a 1,000, your customer is going to say, ‘no, that’s not it, that’s now how I think about it.’ So entrepreneurs today are using technology, this idea of really going deep into the customer experience, and when you connect those two, that’s when magic happens.