Project Everest

Free the Market!

Summary

The idea centres around addressing inefficiencies of financial markets in developing economies. It aims to reduce the information asymmetry present in credit markets by providing lenders access to financial information of the borrowers. The effect will be to reduce interest rates being charged to small businesses, and allow them to reap greater rewards from financing. It is about making rural credit markets more efficient, by making it more transparent.

Current Issue with Microfinance

Recent studies into Microfinance suggest that high interest rates (20+%) and overbearing repayment schedules (can be weekly) has limited its effectiveness. This problem stems from the perceived risk of lending to these small businesses. This stems largely from a lack of information about these businesses, leading to an uncertainty premium in the interest rate being charged. 

The Idea

The idea for the service has two parts. One, a traditional consulting service to small businesses; by working closely with them, we will gain access to their financial information. Two, by providing lenders access to this financial information, the perception of risk and uncertainty is reduced and these financial institutions will be able to provide a lower rate of interest to small businesses.

I envisage two revenue streams: one, revenue from consulting service - this may be in the form of subscription, or a percentage of increase in profit; two, revenue from providing data to financial institutions - by reducing uncertainty in the lending process, it will lower costs and hence the data will have monetary value.

Scaling Up - the potential

I see the end product as being an online consulting platform (working with cognitive computing) to provide financial advice to small businesses. This will be tied in with an accounting software which captures data from the operations of these businesses. From this, financial statements will be provided to lenders so that they can assess the appropriate rate of interest. 

By individualising this product, it will move away from the microfinancing model where money is lent to a community of borrowers that have joint liability for the money being borrowed. 

Hopefully, it will also allow them to gain access to finance from traditional institutions, and not just microfinancing organisations. This will increase competition between lenders and hopefully lead to lower interest rates once again. 

MVP

In my eyes, the MVP would be to start with the social consulting service and work closely with a few small businesses. This work can be done all offline, and the data captured can be transformed into a financial report. The Test would be to present this information to financial institutions and see if they will be prepared to provide lowered interest rates. 

The barriers to success

1. Assumption is that there are inefficiencies in credit markets for small businesses. Need to prove that there is an uncertainty risk premium for small rural business owners compared to more established businesses. This will be done by providing the financial information to lending institutions and comparing interest rates with and without that data.

2. The effectiveness of the consulting service - if the consulting service itself is not valuable, then there will be no customers and hence no business full stop.

Nate/ Nathan Lucas Jul 17, 2017

This idea, as you have said, has some real legs. I will definitely look to incorporate some preliminary research into the feasibility of the idea within the last 2 weeks of project in Fiji. I see one large barrier: access to technology. I appreciate your idea is based around business owners having ample access to enter their revenues, expenses and general cash flows into a database. I see 2 solutions to this:
1) Provide an incentive. This could be in the form of an initially free consultation, which could assist them by running through the technology or provide them with general advice/training to assist with their business.
2) Provide the technology. A little less feasible and could be a logistical nightmare, however we may simply have to provide the access to the technology. This may only be needed to show the business owners the importance of accessing the technology themselves.

Any other insight would be appreciated!

Reply 1

William Lee Jul 17, 2017

Yes I agree; access to tech will be tough. However, I fail to see the distinction between the two options. When you say provide an incentive/technology - do you mean this as an issue for onboarding consumers?

1. I think you would have to go through the technology with the users. But I don't see the need to provide extra incentive (e.g. free consultation), unless this is an issue of sales/marketing.
2. I think the MVP won't require online technology for the user. Therefore, I don't think it is an issue yet. For the MVP, the user can provide that data organically (and offline) as you work with the business on a consultancy level, and PE can input that data to any free accounting software that is available.

Reply 1

Nate/ Nathan Lucas Jul 17, 2017

I see what your saying, but doesn't that hinder the scalability of the model? If we require a employee to go out and collect data for every single merchant out there, that creates a costly, logistical nightmare. That's why I'm suggesting we provide an incentive within the service, e.g. providing free consultancy with which we can generate a digitised report (maybe not even a free one on one consultancy) which neatly display all their financials, and then the consultancy provided comes at a cost?
Just spit ballin here ofcourse.
Do you see what I mean?

Reply 0

William Lee Jul 17, 2017

Yeah that's a really good point. I think that suggestion would be a very low operating cost solution.
The challenge there would be:
1. How effective the consulting service would be without direct involvement.
2. The possibility that poor financial literacy would lead to incorrect data inputs and hence poor consulting outputs.

Reply 0

Nate/ Nathan Lucas Jul 18, 2017

So with that being said, we would have to figure out a solution where we could minimize, not eradicate, the need for one on one consultancy. This will improve the scalability of the project and ensure that the correct inputs are being fed into our system. Figuring out the logistics within the business plan would be the biggest issue.

Reply 1

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