So why the boom?
Financial technology seems to be leading the startup charge, representing 40 percent of the largest 10 deals of the year so far, collectively worth $100 million. The two biggest players in the FinTech startup have been Cellulant — a digital payments operation currently up and online in 11 African countries — and the online micro-lending startup Branch. Cellulant raised $47.5 million in Series C funding earlier this year, and Branch knocked in $20 million.
“The banking infrastructure in the U.S. is so robust and complete,” said Schwark Satyavolu, general partner at Trinity Ventures, one of Branch’s investors, earlier this year. Branch, he said, “seems like an application of Silicon Valley tech to create financial services. But it’s substantially more interesting because Branch is doing it in emerging markets where you don’t have a robust stack or credit bureaus, or information that’s nearly as rich or as deep as in the Western world.”
What Branch does have, however, is some direct experience in the world of micro-lending. This is not Branch Founder and CEO Matt Flannery’s first rodeo in this arena. Previously he co-led Kiva, a micro-lending platform that enables families to make small loans to entrepreneurs in developing countries, which is coming up on its 15th birthday. Kiva, according to Flannery, has done a tremendous amount of good but, as a nonprofit, it faces huge limitations when it comes to fundraising. Flannery said that with smartphones exploding throughout Sub-Saharan Africa, the opportunities to offer more expansive financial services beckoned — but only if he could first raise the kind of “serious capital” necessary to build a more robust and muscular platform to hit the needs of a greater number of consumers.
The Branch app is that more muscular service, built from the ground up to analyze all kinds of information on users’ phones. When users tap into the ATM, the app can read the text message that sent their balance. Pay a bill, get an electronic alert? That also feeds into the phone. All that information , plus lots more, is then taken holistically and used to score a potential customer’s credit.
Branch, despite its name and the fact that it calls itself a branchless bank, is not a bank at all. It is, instead, a non-bank lender that charges 15 percent interest on a loan as low as $2 at the end of one month and a 15 percent APR on its largest loans, which are $1,000 and can be paid over the course of a year. The $2 loans are a loss leader, but losses that bring repeat business in their wake, according to Flannery — and that repeat business is where the money comes from. Flannery also said the strategy of bringing them in with the lower loans is working. New customers borrow from Branch 20 times on average in their first year.
In addition, Branch does not charge overdraft fees. Flannery said, “I’ve worked in micro-finance long enough to know that fees create a cycle of debt.”
Today, Branch has attracted about $80 million in investment, and much to those investors’ pleasure, they are profitable and growing 20 percent month over month. As for their next step? Savings accounts.
“People typically don’t have them, or the yield is super low to non-existent,” he said. That will be a “big regulatory issue for us,” and could take the better part of a year to get up and running.
Challenges aside, Flannery noted, Branch will keep, well, branching out because there is an evident need in the market. He said, “[There is] big opportunity in these places.”
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