At the end of 2016, there were about 3.2B people in the global middle class, growing at a pace of 160M per year — about the same number that is currently in the US middle class. But there is an important multiplier effect, which is that the income and economic activity for these new middle class families will grow faster than their developed world counterparts. As the New York Times put it, the American Dream is alive and well — in China. And finally, there is the mobile multiplier. These middle class families are being born into the mobile age, and will look at their mobile devices first for key products and services. They likely have more familiarity with Whatsapp, Transsion, Samsung, and Oppo than their banks, leaving an opening for new mobile first companies to serve them in new ways. But in the face of this potential, we have a few material differences which makes us realize that current tech titans may not be well positioned to serve this market:
- Bias to cash: A small percentage of consumers in these economies have credit cards. In fact, the majority of them will fall into the World Bank’s definition of underbanked so may not even have a bank account.
- Smaller balances & transactions: While credit card penetration in markets like Brazil seems high (>60%), ultimately the balance available means many emerging middle class families are not able to use those cards, and often look for other solutions like Boletos. Also, in many of these markets consumers prefer to buy in small payments. This means products and services need to be designed differently.
- Mobile (money) first: The end consumers are getting introduced to the internet through mobile devices, many of which are data enabled feature phones, and shared devices are common. This means looking at mobile behavior is key. Also more and more companies and countries are following Kenya/MPesa’s lead and entering the mobile money space (e.g., AliPay, PayTM, GoJek) driving consumer adoption. Antifraud pressures and lower costs are pushing merchant adoption.
- Enhanced fraud risk: A combination of low GDP per capita, the lack of prevalent credit bureau or identity systems, and low labor costs means merchant and user fraud risks are higher and costs of fraud are much lower. Any fintech company or consumer service needs to take this into account when designing their product.
- Limited talent and venture pools: In my experience, many think these issues will be resolved by local companies in emerging markets — after all, look at Ola, Flipkart, Gojek, and Grab! From all our travels into emerging markets with PayJoy and Juvo, we have observed almost an order of magnitude difference in the talent and capital available to early stage companies vs our experience in California and New York. In fact, in some countries we were told the preference was to wait to see what comes out of the US before starting something new. It also seems US seed and Series A investors generally do not have the capacity to raise or evaluate companies in other markets, with key exceptions like Next Billion Ventures.
There are some concrete examples of companies who seized the next billion opportunity well: