Connect with us

Entrepreneurs

The Price Of Puff

It is still one of the biggest businesses in Africa despite all the efforts from the government trying to stamp it out. The tobacco industry makes over $700 billion a year and seems to survive advertising bans and restrictions. Part of this business is African children who work for a dollar a day.

mm

Published

on

It’s 5AM in the northern hills of Malawi where its tobacco is grown. Chifundo Ndilowe is awake and ready for the day. Dressed in grey shorts and a blue NBA vest, still filthy from yesterday’s long day on the farm, Ndilowe has hours of hard labor ahead. He is just 15 years old and has been planting and picking tobacco since he was 10.

“I came here in 2011 because rural life is hard. We were battling at home and I had to start contributing for us to survive. I stopped going to school to work. It is very tough working under these conditions because it is hot and we easily get tired and I am often sick,” he says.

Ndilowe moved 567 kilometers from Mulanje to Mpherembe, 300 kilometers north of Malawi’s capital, Lilongwe, to work in a tobacco farm five years ago. It means long hours, missing school and breaking the law for little pay. He earns a little more than $140 and $280 a year depending on the harvest.  That’s less than $1 a day.

“We work for the year and only get paid after harvest. During the year, we get 20 kilograms of maize for 12 days because we don’t grow crops for consumption. They also give us salt and then we have to figure out the rest ourselves. I get to eat once a day and I take whatever is there,” he says.

Ndilowe is just one of an estimated 800,000 youngsters in the tobacco fields; voices that are seldom heard. One of an army of children who sweat for millions of cigarettes lit all over Africa.

A study on child labor in the tobacco industry in two areas of Malawi, Suza in the Kasungu district and Katalima in the Dowa district, found 57% of all children were being used as child labour in the tobacco fields.

George Kube, an adult tobacco worker, works with Ndilowe and two other children.

“There is no money for the children to go to school and if they don’t work to help we wouldn’t survive. We farm on two acres of land and the produce is auctioned to tobacco companies. You have to be very strong if you are going to do this job because sometimes we have to cut down trees and look for water,” says Kube.

 

A study, published by the British Medical Association, says contract farmers, like Kube and Ndilowe, cultivating tobacco in Malawi, live below national poverty lines, while independent farmers operate at a loss.

“Even when labor is excluded from the calculation of income less costs, farmers’ gross margins place most households in the bottom income [groups] of the overall population. Tobacco farmers appear to contract principally as a means to obtain credit, which is consistently reported to be difficult to obtain,” says the study.

Tobacco farmers may struggle to make a living but tobacco manufacturers thrive. The world tobacco industry is worth billions of dollars. Cigarette retail values in 2014 were worth $744 billion and over 5.6 trillion cigarettes were sold to more than one billion smokers according to the Campaign for Tobacco-Free Kids. But, very few farmers make money from it.

The market is controlled by a few international companies; China National Tobacco Corporation, Philip Morris International, British American Tobacco, Japan Tobacco International and Imperial Brands. They buy tobacco from cheap emerging markets, like Malawi, for profit.

For years, governments around the world have been trying to clamp down on smoking because of its health implications, through stringent laws and higher taxes, yet tobacco use is increasing in some countries, says Zambian economist Grieve Chelwa.

“African incomes have been rising over the last couple of years and we know that tobacco consumption responds to rising incomes. Further, tobacco companies have put in place strategies (subtle advertising) to take advantage of rising incomes.”

And they flourish.

This year, British American Tobacco (BAT) announced its revenue went up 8.1% at constant rates of exchange, cigarette volume from subsidiaries was 497 billion, up by 2.2%, cigarette market share in key markets increased by 40 basis points and its brands performed exceptionally well with cigarette volume up 9.8% year ending September 30.

BAT plans to merge with its US partner R.J. Reynolds Tobacco Company, the company behind the famous camel cigarette brand, in a deal valued at $47 billion. It hopes to create a stronger global presence and move into new ventures like e-cigarettes.

Grieve Chelwa

In its third quarter, Philip Morris International reported net revenues of $19.9 billion, up by 2.6%, net revenues, excluding excise taxes, of $7 billion, up by 0.8%, operating income of $3 billion, up by 0.6%, and operating company’s income of $3.1 billion, up by 1.2%. In Africa, companies thrive because of weak regulation.

The World Health Organization (WHO) has a 75% benchmark of tax on the retail price, yet the African average is way below. Nigeria taxes cigarettes at only 20% of the retail price. Chelwa says ideally increasing taxes to reduce tobacco use should work anywhere because of the law of demand, increasing price reduces demand.

“But, the important point is the increases have to be real-inflation adjusted increments,” he says.

In Africa, high tobacco taxes are rare. WHO says only 33 countries, with 10% of the world’s population, have introduced taxes on tobacco products of more than 75%. Tobacco tax revenues are on average 269 times higher than spending on tobacco control.

Tobacco companies are also good at finding new markets, with new smokers and weak regulations. According to an article published by The Lancet, a UK medical journal, tobacco use is declining in higher income countries, but nearly 80% of the world’s smokers live in low and middle income countries.

“Tobacco control regulations are not strong across most of the continent. Countries have ratified the Framework Convention on Tobacco Control (FCTC) but that’s all they have done. And sadly the tobacco industry is an important player in the setting of tobacco control policy in most African countries,” says Chelwa.

For years, tobacco companies argue they market merely to convince smokers to switch brands, but evidence published by the National Center for Biotechnology Information shows advertising drives smoking.

Christo Van Staden

According to a WHO study, smoking has increased in 27 countries over the past 15 years. Seventeen of these are in Africa. In Cameroon, smokers more than doubled from 7% in 2000 to 22% last year. Congo-Brazzaville has seen the biggest spike. Nearly half of Congolese men smoke. Last year, 22% of its people admitted to smoking regularly, up from 6% in 2000.

“Only 42 countries, representing 19% of the world’s population, meet the best practice for pictorial warnings, which includes the warnings in the local language and cover an average of at least half of the front and back of cigarette packs,” says WHO.

In South Africa, cigarette advertising is banned. There are also restrictions on point of sale product display, vending machines and sponsorship of events, activities, individuals, organizations or governments. Now, Health Minister Aaron Motsoaledi has pledged to take it further by strengthening the Tobacco Products Control Act.

Motsoaledi says there should be no branding, no logos and no colors on cigarettes to discourage smoking. If the law is introduced, all cigarettes will be in a brown package with graphics that show the damage they can cause.

This is worrying for the tobacco industry. Christo van Staden heads the only primary tobacco processing factory in South Africa, Limpopo Tobacco Processors, that processes 12 million kilograms of tobacco. He says the effects could be catastrophic.

“The biggest impact [of tougher regulations] is the increase in illicit cigarettes which is a huge dent in the business of BAT and in the whole market. About 20 to 30 percent of cigarettes in Gauteng are illicit and they are paid way below the price,” he says.

As we meet, in Rustenburg, a two-hour drive from Johannesburg, Van Staden’s farmers have lost 30 hectors of tobacco to a passing storm. On this day, the sun blazes down from a cloudless azure sky. A sprinkler keeps the glossy lawns and flowers alive. Inside the factory, it is dark and you can hear a pin drop. The silence is almost tangible. There is no bustle and machines that usually crackle stand still. It is not tobacco season. All employees are upstairs in the offices working. Dressed in khaki shorts and shirt, Van Staden says tobacco farming is hard.

“For every hector, you need two people to work there and pick it by hand, it is very expensive. One hector costs about R130,000 ($9,500) to plant and the farmer needs to make at least 20 to 25 percent profit. Last year was a very tough year. There were very tough conditions and an average farmer did not make any profit at all.”

“Now they are supporting the local market but if they don’t get any benefit out of that, they have to compete with everyone else in plain packaging, then there is no reason for them to buy South African tobacco, they will literally walk out of here overnight and source their product from Brazil, India and China where they can buy a lot cheaper. We are not ready for that. We would close these doors,” he says.

For Van Staden, closing doors means 10,000 farmers lose their income. He thinks there should be more education about the dangers of tobacco and efforts to keep youngsters away from smoking.

“I am a non-smoker and will not advise anyone to smoke. Most of my staff members don’t smoke. Unfortunately, people smoke everyday but see the warning on the packets and turn a blind eye.  Because it’s such an unhealthy product, the governments around the world will try and eradicate it but I don’t think it will happen in the next 20 years. There are laws in this country that allow people to smoke and to close down the primary sector is not going to stop smoking overnight,” adds Van Staden.

South Africa will follow the UK, Ireland, Australia and France in banning branded packaging.

 

In Uganda, 4,800 kilometers from South Africa, it’s even tougher. If you light up in bars, restaurants or hotels, you will be fined $60 or jailed for up to two months. Smokers must be at least 50 meters away from public spaces, such as schools, hospitals and taxi ranks.

Uganda’s new laws also ban the sale of electronic cigarettes, flavored tobacco for water pipes, the sale of single cigarettes and tightened rules on labeling, advertising and selling tobacco to under-21s.

“We are strongly opposed to plain packing as we feel that there hasn’t been enough consultation and research on it. Our concern is the serious adverse consequences that it will have on the economy, jobs and investment; as well as potentially making counterfeit easier. It trounces fundamental intellectual property rights and freedoms guaranteed by the constitution,” says Joe Heshu, Acting Head of External Affairs at BAT.

According to Heshu, counterfeit cigarettes are a bigger issue. In 2015, South Africa’s Treasury lost R5.1 billion ($373 million) due to illicit trade. The trade accounts for about 24% of the market.

South Africa has been increasing tobacco taxes since 1994 and the big impact has been the reduction in consumption and prevalence, but Chelwa agrees there has been a minimal impact of the taxes on illicit trade.

“Illicit trade often has to do with tax administration and not taxes. Even if taxes were a cent, you’d still have illicit trade showing that it is not a tax level or tax rate issue but a tax administration issue,” he says.

On jobs, Chelwa argues “there are very few tobacco manufacturing jobs, very few given how mechanized manufacturing of cigarettes is.”

The big worry he says is in the field.

“Governments have to consciously find ways of transitioning tobacco farmers into growing other types of crops. This will require a lot of work,” says Chelwa.

Asked if he thinks cigarettes are killers, Heshu argues his company has launched e-cigarettes, which are supposedly less harmful products, in the UK, France, Germany, Italy and Poland.

“We are committed to the research and development of Next Generation Products (NGPs) and globally have invested over half a billion pounds during the past five years. There is a growing body of evidence that NGPs do pose significantly fewer risks than cigarettes.”

For now, tobacco companies continue to thrive. Only 29 countries, representing 12% of the world’s population, have completely banned all forms of tobacco advertising, promotion and sponsorship, according to WHO.

Some of Malawi’s tobacco, grown by the likes of Ndilowe and Kube, is shipped 2,000 kilometers south of Mpherembe. In South Africa, 19% of the population, over the age of 15, smokes according to the World Bank. That’s almost one in five people and it is dangerous.

Tobacco is responsible for six million deaths each year. Of those, 600,000 die from the effects of second-hand smoke. This number is expected to increase to eight million by 2030 if current trends continue, says WHO.

Alexandra chain smoker, Mpho Ndlovu, knows this, yet he goes through three packs of cigarettes a day.

“I have been smoking since I was 15. It started as just playing with friends at school because we knew we weren’t allowed to. It was a way of being cool. I got hooked and have been smoking for 40 years,” says Ndlovu.

What started as a game became a habit and then an addiction.

“Smoking helps me when I’m nervous and I just enjoy it. I have tried to stop many times but have failed. I know this might one day kill me but, at this point, there is nothing I can do.”

Ndlovu spends R110.50 ($8) per day on cigarettes. That’s R766.50 ($56) per week and R3,066 ($225) per month and R36,792 ($2,700) per year and R183,960 ($13,500) in five years. If he continues smoking the same number of cigarettes per day for another 40 years, at this current price, he will spend around $100,000 on cigarettes. If invested, he could buy a house.

Ndlovu spends close to half of his R7,000 ($500) salary he makes working as a driver for a logistics company in Sandton.

“By the last week of the month, I would be out of money and sometimes I have to ask people if I can borrow or take some on credit from the spaza shop,” he says.

“When I smoke, especially on weekends, I drink as well. So the money I earn is never enough. My children get angry because they think I should be using the money on them. I don’t know how to stop.”

Ndlovu buys his cigarettes from Ntando Debeza, a hundred metres from his home.

Debeza’s spaza shop sells cigarettes, pipe tobacco, snuff, chewing tobacco, hookah and shisha.

“I make about R6,000 ($440)  a month from this small shop. Most of the money comes from tobacco sales but I also sell other day-to-day products like bread and milk. People come to buy and sometimes on credit and I collect money at the end of the month,” says Debeza.

This means Ndlovu’s debt grows. But, that’s not all. Smoking does not only affect the smoker. High levels of nicotine exposure from handling tobacco leaves may cause nicotine poisoning called Green Tobacco Sickness, with symptoms including nausea and vomiting.

Back in Mpherembe in Malawi, Kube says he is aware of the dangers of working in a tobacco field without protective clothing, and mostly its effects on minors. “I know children can get sick but what can we do? We need a lot of hands on the farm because this isn’t an easy crop to plant and prepare. It needs three times more people than corn but we don’t make enough money at all,” says Kube.

He is one of the few rural farmers who know this. And it gets worse. A 2009 survey in China revealed that only 38% of smokers knew that smoking causes coronary heart disease and only 27% knew that it can cause strokes.

“Among smokers who are aware of the dangers of tobacco, most want to quit. Counseling and medication can more than double the chance that a smoker who tries to quit will succeed. National comprehensive cessation services with full or partial cost coverage are available to assist tobacco users to quit in only 24 countries, representing 15% of the world’s population,” says WHO.

Cape Town-based entrepreneur Gareth Carter saw this crisis as an opportunity. He founded WeDoRecover, a company that helps patients who suffer from psychiatric and addiction problems.

“Finding the right addiction program to meet someone’s specific needs is a complex process. The crisis and chaos synonymous with active addiction are overwhelming and the multitude of choices in the marketplace adds to the confusion,” says Carter.

According to Carter, people who smoke are more likely to drink alcohol and vice versa. He says alcoholics frequently present with a co-morbid nicotine addiction.

“As many as 80 percent of people addicted to alcohol and other drugs are frequent smokers, but the bulk will die of smoking-related disease rather than alcohol and drug-related disease…”

The damage doesn’t stop there. Carter adds that major depressive episodes among adults are highest in those addicted to nicotine and lowest in those who have quit or never started smoking.

“With nearly 80 percent of the world’s one billion smokers living in low- and middle-income countries, this is a very real public health care problem for us in Africa. Making nicotine addiction prevention and treatment readily accessible to the youth counteracts a wide range of potential mental, physical and mood-disorder problems with far-reaching ramifications to families, communities and our economy,” he says.

Carter thinks if tobacco was “invented” today it would be classed with other illegal drugs. That’s not the case. The lucrative industry in Africa puffs on unfettered.

Continue Reading
Advertisement
Comments

Cover Story

Forbes Africa | 8 Years And Growing

mm

Published

on

Prev1 of 8
Use your ← → (arrow) keys to browse

As FORBES AFRICA celebrates eight years of showcasing African entrepreneurship, we look back on our stellar collection of cover stars, ranging from billionaires to space explorers to industrialists, self-made multi-millionaire businessmen and social entrepreneurs working for Africa. They tell us what they are doing now, how their businesses have grown, and where the continent is headed. 

Since its inception in 2011, and despite the changing trends in the publishing industry, FORBES AFRICA has managed to stay relevant, insightful and sought-after, unpacking compelling stories of innovation and entrepreneurship on the youngest continent, in which 60% of the population is aged under 25 years.

 Many of those innovations have been solutions-driven as young entrepreneurs across the continent seek to answer questions that have burdened their communities.

 Always on the pulse, FORBES AFRICA has chronicled and celebrated those innovations – prompting the rest of the globe to pay attention and be fully engaged.

 A prime example of this is the annual 30 Under 30 list, which showcases entrepreneurs and trailblazers under the age of 30 from business, technology, creatives and sports. In 2019, we had 120 entrepreneurs on the list, finalized after a rigorous vetting and due diligence process to well laid down criteria.

 We have always maintained the highest standards of integrity in all our reporting.

 As we transition into the next milestone, FORBES AFRICA reflects on the words of civil rights activist Benjamin Elijah Mays, who once said: “The tragedy of life is not found in failure but complacency. Not in you doing too much, but doing too little. Not in you living above your means, but below your capacity. It’s not failure but aiming too low, that is life’s greatest tragedy.”

 With the transformation in the media landscape, the recent awards given to the magazine for the work done by a hard-working, determined and youthful team, serve as a reminder that we are doing something right.

 Early this year, FORBES AFRICA journalist Karen Mwendera received a Sanlam award for financial journalism as the first runner-up in the ‘African Growth Story’ category. In January, FORBES AFRICA’s Managing Editor, Renuka Methil, received the ‘World Woman Super Achiever Award’ from the Global HRD Congress.

 In reflecting on the last eight years, this edition revisits a few of the strong, resilient men and women who have graced our covers.

For some, fortunes have literally changed, as witnessed in the fall of gargantuan African empires such as Steinhoff. Of course, there have been massive moments of triumph too, which have seen some new names feature on the annual African Billionaires List. There have also been moments of tragedy with former cover stars passing away.

 Africa is ripe for the taking and is seen as the next economic frontier. The unique position the continent finds itself in will no doubt give FORBES AFRICA plenty to report on. Here’s to more deadlines and debates for the next eight years.

– Unathi Shologu

Prev1 of 8
Use your ← → (arrow) keys to browse

Continue Reading

Entrepreneurs

Having A Ball With Data

mm

Published

on

Stephan Eyeson started a basketball business at the age of 19. That venture failed, so he tried the data business instead. He is working and playing hard.


First, the facts.

Africa has a data problem. For all the talk about data being the new oil, the continent comprises about 12.5% of the world’s population but only accounts for less than 1% of research output, according to global information and analytics firm, Elsevier.

And Survey 54, an AI mobile survey platform solving the problem of data collection on the continent, wants to offer a solution. Founded by Stephan Eyeson, Survey 54 focuses on providing good quality data essential for governments and private businesses to accurately plan, fund and evaluate their activities.

READ MORE | Owning The African Narrative

“Data in Africa is such a prevalent problem, in a sense of when you are going to start up a business, it is hard for you to get consumer data on say ‘how many people eat out in Lagos every day? what is the transactional value? what are the types of things that people eat? what do they want to eat etc?’ All these things are available in the West but for people who want to move into Africa for business, how do they get their data to make their decisions and how do we make it really easy for them and not just for a startup but for even governments and larger businesses,” says Eyeson.

Fresh out of a master’s program in innovation and management from Loughborough University in the United Kingdom (UK), Eyeson joined Survey Monkey, an online survey development cloud-based software as a service company, as part of the team responsible for building their enterprise function in London as well as looking after customers in the EMEA (Europe, Middle East and Africa). After learning the ropes, he decided to branch out to start his own company to offer a more robust and tailored solution for the African market.

“For people who want to move into Africa for business, how do they get their data to make their decisions and how do we make it really easy for them?”

“The problem around data in Africa and emerging markets is a massive one. So, for us, it’s about how do we become a data platform not just for a company but for governments to help them understand their people easier.”

Data is the first step. Then you need intelligence around that data to enable you to make objective analysis that will shape your decision-making process, as well as provide the foundation for policy-making and budgeting.

“Instead of hiring an agency to go to Ghana and do a face-to-face interview, for example, we look at how governments can get mobile data faster and then how they are able to manipulate that data to get the results they need,” says Eyeson.

READ MORE | The $100 Trillion Opportunity: The Race To Provide Banking To The World’s Poor

Due to the dearth of knowledge, Eyeson’s unique understanding for the data space is relied on by many startups and larger businesses who depend on his expertise to drive results in Africa.

“Stephan has great expertise in strategy and high-level corporate business development. Survey 54 has and will be instrumental for companies to make decisions within Africa and emerging markets, making it easier to use and understand consumer data. A platform like Survey 54 is essential for companies operating on the continent,” says Nana Adomako, head of UK & Ghana growth at Taptap Send.

Born to Ghanaian parents in London, Eyeson’s first stint at entrepreneurship began in his early years at university, when his dream to become a professional basketball player was shattered.

“I had a scholarship into America for basketball and that scholarship was taken away due to some technicality with my results so I couldn’t go and so I started a basketball business instead when I was 19. It helped Americans play in Europe and Europeans play in America. I made the system easier. So, players paid a monthly fee to get seen and coaches paid to get access to talent.”

But unfortunately, the business failed to take off because the market was not big enough for Eyeson to remain profitable.

The data business, on the other hand, is huge: worldwide revenues for data and business analytics are forecast to reach $189 billion this year and $274.3 billion by 2022, according to technology market research firm IDC. Even though Survey 54 is in its first full year of business, the company has already secured contracts with multinationals like Colgate, amongst many others.

READ MORE | A Germ Of An Idea

“I was one of Survey 54’s first clients and it has been a pleasure watching Stephan grow the company into what it is today, working with some of the world’s largest brands.

“There is a significant lack of data in the region so the need for a sophisticated data insight product is essential and I believe Stephan’s mission-driven leadership style will enable the company to become one of the largest software businesses driving investments to the content,” says Yvonne Bajela, Principal and Founding Member at Impact X Capital.

The company has recently secured a spot on the coveted Startupbootcamp platform in Cape Town. While Survey 54 is trying to secure a first-mover lead in data on the continent, challenges remain. As the company scales, they will need to overcome the language barrier across the African continent and learn to interpret data by bringing the cultural context into the surveys organizations are seeking.

Eyeson has his eyes set on moving into the US markets as a long-term plan, but for now, the goal is transferring the abundant and ubiquitous asset of data in Africa into millions for his startup.

Continue Reading

Entrepreneurs

The $100 Trillion Opportunity: The Race To Provide Banking To The World’s Poor

Companies like Tala are at the forefront of the race to deliver rudimentary financial services to the 1.7 billion people on the planet who lack even a bank account.

mm

Published

on

By

Two years ago, Amylene Dingle lived with her husband and 7-year-old daughter in Payatas, an impoverished Manila neighborhood with the largest open dump site in the Philippines. Her husband worked on the security staff in a government building, earning 4,000 pesos a week, the equivalent of $80. She had always wanted to start a business, but she was unemployed, had no money saved, no credit history and couldn’t get a credit card or a bank loan.

Dingle’s fortunes took a dramatic turn after she responded to a Facebook ad for Tala, a Santa Monica-based startup that makes small loans through a smartphone app. After granting Tala access to her phone, through which the app cleverly parses mobile data to assess a borrower’s risk, she got a 30-day, $20 loan. She paid 15% interest and used the money to buy cold cuts, hamburgers and hot dogs. She marked them up 40% and sold them door-to-door, earning $4 in profit after paying back the interest and a small processing fee.

Loan Ranger: Tala founder Shivani Siroya at her startup’s Santa Monica headquarters. She uses cellphone data to establish creditworthiness for people rejected by banks in the developing world. ROBERT GALLAGHER FOR FORBES

Today Tala lends Dingle, 42, $250 a month for her now thriving food business. Her $70 in weekly profits have nearly doubled her family’s income and funded their move to a two-bedroom home in the quiet, clean Batasan Hills district. Tala is thriving, too. Founded in 2011 by Shivani Siroya, a 37-year-old former Wall Street analyst who had worked at the United Nations, it has raised more than $200 million from top U.S. investors, including billionaire Steve Case’s Revolution Growth fund. With estimated 2019 revenue of more than $100 million, Tala is valued at close to $800 million.

Companies like Tala are at the forefront of the race to deliver rudimentary financial services to the 1.7 billion people on the planet who lack even a bank account. Providing them with the basics of credit, savings and insurance is one of the great challenges and opportunities of the century. With access to the financial system, people can buy a car or a home. They don’t have to resort to loan sharks if they face a medical emergency. They are happier. They live longer. They are more productive, and their increased productivity will help lift their nations out of poverty. Serving the unbanked will generate some of tomorrow’s largest fortunes. It is both capitalism’s moral imperative and the route to one of the most significant untapped markets.

While the unbanked pay for everything in cash, an even larger swath of people, the more than 4 billion “underbanked,” may have accounts but struggle to make ends meet, racking up steep fees when checks bounce and resorting to high-interest alternatives like payday loans. Traditional banks alone could boost annual revenue by at least $380 billion if they turned all the unbanked into customers, according to a 2015 Accenture report.

The multiplier effects are staggering. The GDP of emerging-market countries would surge $3.7 trillion by 2025, or 6%, if they adopted a single innovation—switching from cash to digital money stored on cellphones, McKinsey estimated in 2016. Diego Zuluaga, an analyst at the Cato Institute’s Center for Monetary & Financial Alternatives, has studied the likely effects of full financial inclusion: “If we were to give the unbanked and underbanked in the developing world the same kind of access to credit and investments that we have in rich countries, you could easily create an additional $100 trillion in financial assets over the next 50 years.”

 
Tala founder Siroya was raised by her Indian immigrant parents, both professionals, in Brooklyn’s gentrified Park Slope neighborhood and attended the United Nations International School in Manhattan. She earned degrees from Wesleyan and Columbia and worked as an investment banking analyst at Credit Suisse and UBS. Starting in 2006, her job was to assess the impact of microcredit in sub-Saharan and West Africa for the UN. She trailed women as they applied for bank loans of a few hundred dollars and was struck by how many were rejected. “The bankers would actually tell me things like, ‘We’ll never serve this segment,’ ” she says. 

Where banks saw risk, she saw opportunity. For the UN, she interviewed 3,500 people about how they earned, spent, borrowed and saved. Those insights led her to launch Tala: A loan applicant can prove her creditworthiness through the daily and weekly routines logged on her phone. An applicant is deemed more reliable if she does things like regularly phone her mother and pay her utility bills on time. “We use her digital trail,” says Siroya.

Tala is scaling up quickly. It already has 4 million customers in five countries who have borrowed more than $1 billion. The company is profitable in Kenya and the Philippines and growing fast in Tanzania, Mexico and India.

Rafael Villalobos Jr.’s parents live in a simple home with a metal roof in the city of Tepalcatepec in southwestern Mexico, where half the population subsists below the poverty line. His father, 71, works as a farm laborer, and his mother is retired. They have no credit or insurance. The $500 their son sends them each month, saved from his salary as a community-college administrator in Moses Lake, Washington, “literally puts food in their mouths,” he says. 

To transfer money to Mexico, he used to wait in line at a MoneyGram kiosk inside a convenience store and pay a $10 fee plus an exchange-rate markup. In 2015, he discovered Remitly, a Seattle startup that allows him to make low-cost transfers on his phone in -seconds. 

Immigrants from the developing world send a total of $530 billion in remittances back home each year. Those funds make up a significant share of the economy in places like Haiti, where remittances account for more than a quarter of the GDP. If all the people who send remittances through traditional carriers, which charge an average 7% per transaction, were to switch to Remitly with its average charge of 1.3%, they would collectively save $30 billion a year. And that doesn’t account for the driving and waiting time saved. 

Remitly cofounder and CEO Matt Oppenheimer, 37, was inspired to start his remittance service while working for Barclays Bank of Kenya, where he ran mobile and internet banking for a year starting in 2010. Originally from Boise, Idaho, he earned a psychology degree from Dartmouth and a Harvard M.B.A. before joining Barclays in London. When he was transferred to Kenya, he observed firsthand how remittances could make the difference between a home with indoor plumbing and one without. “I saw that $200, $250, $300 in Kenya goes a really, really long way,” he says.

Oppenheimer quit Barclays in 2011 and together with cofounder Shivaas Gulati, 31, an Indian immigrant with a master’s in IT from Carnegie Mellon, pitched his idea to the Techstars incubator program in Seattle, where they met Josh Hug, 41, their third cofounder. Hug had sold his first startup to Amazon, and his connections led them to Bezos Expeditions, which manages Jeff Bezos’ personal assets. The fund became one of Remitly’s earliest backers. To date, Remitly has raised $312 million and is valued at close to $1 billion.

Oppenheimer and his team can keep fees low in part because they use machine learning and other technology to bar terrorists, fraudsters and money launderers from transferring funds. The algorithms pose fewer questions to customers who send small sums than they do to those who send large amounts.

Remitly transfers $6 billion a year, serving senders in 16 countries, including the U.S., Australia and the U.K., and recipients in 45 nations. In the first half of 2019 it added 15 receiving countries, including Rwanda and Indonesia. The company is not yet profitable, but last year estimated revenue came to $80 million. Oppenheimer sees a huge growth opportunity. Fewer than 1% of the world’s 250 million immigrants are Remitly customers. 

In 2012, Dorcas Murunga lived in Gachie, a crime-ridden neighborhood on the outskirts of Nairobi. She earned $80 a month babysitting and cleaning houses, and her husband made $120 installing elevators. He covered most of their expenses while she struggled to save money. Whenever she had cash, she says, she spent impulsively on clothes, junk food and alcohol. She managed to put aside the $5 minimum balance required to open a savings account at Equity Bank of Kenya, but she had a hard time coming up with the $3 monthly fee. To make a deposit, she took a bus an hour each way and waited in line for an hour at the bank. She closed the account after just one year. 

Like most Kenyans, Murunga was already using M-Pesa, a service created by Safaricom to send money via text message. In 2012, Safaricom, a subsidiary of British telecom giant Vodafone, introduced M-Shwari, a savings account and loan service it integrated into M-Pesa. Two years later, it started offering an account that locked up a customer’s funds for a fixed period at a fixed interest rate.

Determined to improve her finances, Murunga committed to saving $1 a day through her locked account. When she got the urge to buy vodka or a pair of shoes, she says, she’d make deposits through her phone instead. She cut her spending by two thirds, to $10 a week. By 2016, she was saving $300 a year. She had started a business making handbags, and the savings helped pay for design courses. She has invested in real estate with her husband and says she spends more than $200 a year helping friends and family. 

The spark for M-Pesa (pesa means money in Swahili), the first mobile money provider in Africa, came in 2003 from Nick Hughes, a Vodafone executive who managed a five-person team tasked with creating wireless products with a social impact. Hughes’ idea: set up a digital money-transfer system that would operate through personal cellphones.

Since M-Pesa launched in 2007, it has exploded in size and popularity. Kenyan taxi drivers complain when riders try to pay in cash. Ninety-six percent of Kenyan households now transact through M-Pesa. Before M-Pesa, only 27% of Kenya’s then 38 million people had bank accounts. Kenya’s population has since risen to 51 million, and 83% have checking or savings accounts. The service has spread to eight countries, including Egypt and India. Sending less than 50 cents is free. M-Pesa charges 1% to 2% for larger amounts. Through its various subsidiaries, M-Pesa generates some $840 million in annual fees for Vodafone.

The adoption of M-Pesa has had a tremendous impact on Nairobi’s startup scene. Durable-goods providers have introduced pay-as-you-go plans that bring in millions of new customers. For example, three-year-old Deevabits, based in Nairobi, sells $80 home solar systems in remote villages with no access to electricity. All its customers use M-Pesa to make an initial deposit. They pay the remainder through M-Pesa in 50-cent daily increments over eight months. “The presence of M-Pesa has transformed how business is done in Kenya,” says Deevabits founder and CEO David Wanjau, 32. “We couldn’t operate without M-Pesa.”

Dixie Moore used to strain to make paychecks last to the end of the month. A 25-year-old single mother with two small children, she earns $12.25 an hour as an assistant manager at a Bojangles’ fast-food restaurant in Canton, Georgia. In 2011, she was paying $30 a month for a Wells Fargo checking account, but when a bounced check and multiple overdraft fees left her with a $1,200 negative balance, she lost the account. She regularly paid up to $6 to get her paychecks cashed. “I was stuck between a rock and a hard place,” she says. Then a friend told her about MoneyCard, a Walmart-branded product offered by Pasadena, California–based Green Dot, the largest provider of prepaid debit cards in the U.S. Now her employer deposits her paychecks directly onto the card, and she uses it to pay for everything from groceries to dentist appointments. “It has really been a blessing,” she says. 

Green Dot offers a financial lifeline to people like Moore. Until she started using the card two years ago, hers was among the 7% of American households—representing some 14 million adults—that get by entirely on cash. Founded in 1999 by a former DJ named Steve Streit, the company initially focused on teenagers who wanted to shop online. But seeing a larger opportunity, in 2001 Green Dot shifted its focus to adults who were using the card because they had bad credit or couldn’t afford commercial bank fees.

One advantage of cash cards: When users spend all the money on their card, it’s like running out of paper cash. They avoid overdraft fees that can run as high as $35 for a single infraction. The cards also make it possible for users to buy online.

Streit, 57, says that nearly 40% of Green Dot’s 5 million customers were previously unbanked.

In 2007, he struck a deal with Walmart that was a boon for the chain’s then 130 million customers: a cash card with a monthly fee of just $3 (today it’s $5). That’s down from the nearly $8 monthly fee paid by users who bought their cards at stores like CVS. The surge in Walmart card sales helped make up for the shortfall from the lower monthly charge.

In 2010, Streit took the company public. Though Green Dot generated revenue of $1 billion last year, its stock slid 40% this past August as it lowered its revenue expectations, citing the increase in well-funded competitors entering the market. But bad news for Green Dot is good news for America’s unbanked. Smartphone-based cash offerings from venture-backed startups like Chime, a six-year-old digital bank based in San Francisco, and digital-payment company Square’s Cash App are signing on millions of customers.

Harvard Business School professor Michael Chu, a former partner at KKR who cofounded Mexico City-based Compartamos, Latin America’s largest microfinance lender, says the opportunity to serve the underbanked in the U.S. is “huge.” But paradoxically, the richest nation on earth poses some of the greatest barriers to financial-inclusion innovators. A patchwork of state laws intended to protect borrowers from predatory lenders and federal laws that guard against money laundering requires startups to navigate through a maze of red tape.

Another problem: The technology that transfers funds between U.S. financial institutions is old, slow and expensive. While M-Pesa zips mobile money across Kenya in seconds at virtually no charge, an electronic fund transfer from Miami to New York can take two days and cost as much as $40. 

But in the grand scheme these are minor obstacles. The Fed has promised to build a new and improved U.S. transfer system by 2024. Entrepreneurs will lobby—or innovate—their way around the bureaucratic barriers. After all, there are billions of dollars to be made—and countless lives to improve.

By Jeff Kauflin, Fintech, Forbes Staff and Susan Adams, Education, Forbes Staff.

Additional reporting by Anna Corradi.

Continue Reading

Trending