The Three Multipliers for the Next Billion

The middle class has long been the engine of the US economy. Consumer demand is not only driving economic growth, but also driving innovation -- it is no coincidence that the FAANG stocks that have come to dominate market capitalization tables started life as consumer companies. The conventional wisdom seems to be that this trend will continue, with demand for gadgets and on demand services continuing to create unicorn after unicorn.

This is very much a backwards looking view. If you look forwards, the picture is quite different.

The global middle class is now bigger than it has ever been in written history -- it is now more than half the world’s population, projected to grow to 4 billion by 2021 as five people enter the middle class every second. But this growth is not coming from the US or other developed economies, but in emerging markets. 88% of the additions to the middle class by 2030 will be in Asia. By any measure this represents an attractive new market, and indeed Bain was already talking it up to its CPG clients in 2012.

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 just think about it -- the US and developed world middle classes are in the business of replacing, while emerging market middle classes are buying all sorts of things for the first time -- and they will continue to buy as their incomes increase..

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. Below is an overview of what new users in Asia expect from the Internet (source).

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. Uber famously neglected to consider this when launching in India, leaving an opening for Ola which now is in a neck and neck race with Uber in India and challenging Uber in London.
• 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 my travels into emerging markets with PayJoy, I have observed almost an order of magnitude difference in the talent and capital available to early stage companies vs my experience in California. In fact, in some countries I was 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.

What this means is that there is a significant opportunity for the next wave of companies, or initiatives within the current companies, that recognize this new market. In my next post, I plan to talk about the type of companies that will win -- but would also love to hear from you in the comments on who you think will win. Will US-based tech titans end up dominating? Or is the startup scene changing in emerging markets?