’m currently reading Smart Money: How High-Stakes Financial Innovation is Reshaping Our World for the Better, by Andrew Palmer, Head of Data Journalism for The Economist. Palmer does a fine job of illustrating the fact that financial innovation is not a recent phenomenon: there has, in fact, been a continuing history of financial innovation, one that spans centuries. Take, for example, the invention of interest, or profit sharing. Palmer postulates that the use of livestock as currency, in combination with the propensity of that livestock to breed, may have led to the creation of the concept of a “return on investment” – which, over time, no doubt led to many innovations with respect to the “splitting of the upside” among the lender and borrower. Peer to peer lending? P2P lending pre-dates banking by centuries. Unified currency and coinage? Emperor Qin Shi Huang unified the Chinese currency system in 210 BC. Trade finance? Banking? Stock exchanges? Derivatives? Foreign exchange? Centuries old innovations. Even the humble credit card — the archetypal consumer finance product — has been around for decades. So what’s left to do? In the face of such awesome past inventions, is there really any genuine innovation happening in financial services today? The good news for investors is “yes” — there are still massive problems still to be solved, and as Michael Lewis showed us in
Flash Boys, innovation (and millions of dollars in upside) doesn’t have to involve inventing a new form of exchange: it can sometimes come down to figuring out the best location for a server in a server room. At Hatcher, we invest in ICT (Information and Communications Technology) companies, the bulk of which have a financial services or technology component. And the success and rapid growth of these companies provides strong proof that there are still massive problems yet to be solved in finance — and massive gains to be made by venture investors. ApexPeak, a Singaporebased company founded by Gakim Solomons and Nick Gan barely two years ago, is an online trade finance platform that enables suppliers to receive early payment of their outstanding bills. The problem that ex-bankers Solomons and Gan are solving is how to supply working capital to small businesses based in markets that have yet to develop sophisticated credit scoring systems. That effort was recently given a boost by the acquisition of Dubai-based Cashnomix, founded by Sujith Kurup. Kurup and his technology team studied data on over 300,000 businesses, primarily within MENA, and developed a new approach to credit-scoring for emerging markets that is a good match with the innovative approaches to capital sourcing and insuring receivables pioneered by ApexPeak. Is this a worthy use of venture capital? You bet.
According to the International Trade Center, the Top 10 categories of physical goods traded annually amounts to over $9 trillion dollars, worldwide. That number does not include services, which in some countries such as the UK, account for more than 70% of GDP. Supplying capital to these markets may not be easy, but with help from the Internet, smart data systems based on emerging markets data, and innovative insurance products, there is potentially billions of dollars to be made from supplying working capital to emerging or under-served markets. Another of our startups working to improve access to funding and payment systems in emerging markets is Telr, last year’s recipient of the Arabian Business
“Startup of the Year” award in Dubai. Telr has developed a payment processing technology platform that is being further developed to support merchant cash advance (MCA) capabilities, based on an alternative system for determining credit-worthiness that leverages realtime data obtained directly through the platform. The upside? E-Commerce is just getting started in many of Telr’s key markets, and merchant cash advance — a business that is already able to target more than $1.4 trillion in annual B2C transactions (eMarketer) — is a nascent business in the fastest-growing e-commerce markets in the world. As investors, we like that combination: underserved and fast-growing. We have several other
Jul - Sep 2015 International Finance Magazine
Special Focus: Payment Systems