Why would a tractor company need to be in the insurance business? Why would a ride-hailing company start offering credit? It’s actually an old story. From store credit cards in the US and carnês de loja in Brazil, to Ally Financial—the bank started by General Motors—the line between financial services and consumer goods and services has always been blurry. We’re seeing this again: in the recent wave of platformization, platforms are getting into the finance game to support their core business. We’ve seen platforms leveraging financial services to:
- Increase their user base by reducing barriers to platform adoption for workers and merchants,
- Boost transaction volumes by increasing worker/seller productivity,
- Increase the lifetime value of workers on the platform by soliciting their loyalty, and
- Diversify their revenue streams.
We’ve been looking at how platform business models are evolving in terms of financial services. This blog discusses why adding financial services to their offerings is good for African platforms’ bottom line.
Reducing barriers = user acquisition
African workers face several barriers to joining digital platforms: internet connectivity, financial account ownership, identity documents, ownership of assets required to perform the work, the necessary skills and literacies to successfully complete onboarding steps, and more.
Offering financial services is one way that African platforms can address some of these barriers and increase their user base. For instance, the ride-hailing platform Bolt (formerly Taxify) has partnered with Autogenius and AIICO to launch “Drivers Shield” car insurance in Nigeria. This is an important initiative because insurance is a prerequisite for ride-hailing drivers, and high-cost insurance requiring upfront premium payments can be prohibitive. The cost of smartphone ownership also bars some would-be drivers and merchants from platform use. Accordingly, some companies, like Sokowatch and Uber, offer small, affordable loans that can be used to purchase smartphones.
Another barrier is bank account ownership. Lynk and Jumia have been using M-Pesa to pay their workers in Kenya because, while most lack bank accounts, they do have M-Pesa accounts. However, restrictive transaction size limitations have led both companies to explore how they might facilitate bank account access for their workers.
Boost transaction volume and revenue
Many platforms’ monetization strategies are transaction based. Offering financial services is one way to increase users’ platform activity and thus transaction volumes. Interestingly, because platform transactions—and not financial services—drive revenue, there is less pressure for the financial services to generate revenue in and of themselves. Accordingly, platforms may be able to offer more competitive lines of credit, and so on, than banks or other traditional finance providers. These efforts have the added benefit of helping participants to earn more on the platform.
One example of this is Lynk, which is exploring a partnership with Bosch to provide loans for tools to qualified artisans under the assumption that access to power tools will improve productivity. This project is being piloted with support from BFA’s FIBR project.
Similarly, both Jumia and Sokowatch provide merchant credit to increase platform transactions. Sokowatch offers shopkeepers net-7-day terms on consumer goods ordered to sell in their shops; the revolving credit helps shopkeepers avoid stockouts and the resulting missed sales. Jumia offers credit to sellers to increase their ability to purchase and manufacture stock, therefore increasing their sales through the platform. An initial pilot was conducted with Branch and they have scaled solutions through other partnerships—with Baobab, InvoicePay, Umati—in every country in which they operate.
Increase lifetime value
We also found examples of platforms offering or exploring financial services benefits as a way to reduce worker churn. Ride-hailing platforms, such as Bolt in Kenya, have offered vehicle finance schemes with low deposits in an effort to keep more people behind the wheel. The deal is available to drivers with good ratings, helping them access significantly greater net profits—loan payments are smaller than vehicle lease installments—and work towards vehicle ownership.
Bolt, the first ride-hailing company to do so, also offers health insurance in Nigeria, and Lynk is looking into health insurance and savings accounts for their Kenyan Pros but is facing several challenges. These soft benefits help motivate and engage workers. Sokowatch mentioned that they plan to offer capital loans (e.g., to make improvements to physical stores, etc.) as a way to increase stickiness. Additionally, Lynk is exploring how to offer “per job” insurance for its workers in an effort to retain worker and customer loyalty by mitigating the financial risk to both in the case that damage is done on the job.
Offering worker benefits makes sense both because of statutory obligations—although whether digital platforms must comply with laws around worker benefits is not always clear—and from a business perspective. Because platforms rely on network effects, the greater the number of workers and merchants active on the platform, the greater its value for customers. Drivers waiting to match with passengers, artisans on standby ready to make furniture, or domestic workers that can be scheduled instantly. Moreover, the longer a worker or merchant remains active on the platform, the more lifetime revenue they generate. Consequently, we at FiDA Partnership hypothesizes that adding worker benefits has the potential to increase loyalty to the platform and the lifetime value of a worker or merchant.
Diversify revenue streams
Many platforms view financial services as a potential key revenue driver in their own right, or, in some cases, even the main revenue driver. Such companies believe the predominant platform model from the Global North (i.e., charging a transaction fee) isn’t viable in Africa where many customers are extremely low income. Although transaction volumes and values are low and customer acquisition costs are high for now, these platforms believe in the long-term value of the data they gather—particularly for financial services providers.
One example of such a partnership is Hello Tractor, a platform that connects tractor owners with booking agents and farmers that need them. Hello Tractor does not charge transaction fees to any actors on their platform. Instead, they aim to monetize through commissions by providing financial services to farmers, tractor owners, and booking agents in the future, and they see the data they are collecting as enabling financial services providers to make better decisions about risk. According to Jehiel Oliver, Founder and CEO of Hello Tractor,
“Once you establish the marketplace there is [a] tremendous amount of de-risking that can be done with the data that you have, reducing customer acquisition costs for financial services providers. This is the unique value that we can deliver to banks on the pre-loan decision and portfolio management side.”
Lynk, an online platform partnering with Kenyan artisans to showcase and promote their products and services, also alluded to making money by offering financial services, rather than charging transaction fees. They are actively exploring how their data may unlock opportunities for Pros (i.e., workers or artisans on Lynk’s platform) to obtain loans.
These new opportunities for platform merchants and workers that were previously excluded from mainstream financial services are truly exciting. However, bringing these benefits online is not without challenges as we explored in our blog “Three pain points of African platforms adding financial services to their business models.”
Finally, we note that further research into the user and business impact of financial services to reduce barriers, increase earnings, and foster loyalty would be an interesting follow-up to this high-level briefing. It would be particularly relevant to look at whether such offerings interfere with workers’ and merchants’ ability to choose with which platforms they engage and their de facto mobility between platforms.