Refugees in Europe are struggling to access basic financial services, and though this would have typically represented an opportunity for fintechs, companies in the space are facing major barriers that are hampering their ability to adequately serve these underbanked populations, according to a new research by Village Capital, a venture capital (VC) firm focusing on the sectors of financial inclusion, agriculture, education, energy and health.

In a report titled Breaking Down Barriers: Fintech Solutions for Refugees, the VC shares insights collected from dozens of entrepreneurs and startup ecosystem leaders on the main challenges they face when developing offerings and delivering financial services to refugees.

According to the study, European fintechs currently face three major obstacles. They cited the first challenge as being the difficulty in forming partnerships with institutions such as refugee outreach organizations, government agencies, services providers, and funders, to develop their products, ensure regulatory compliance and reach the refugee populations. The startups said they often struggle in connecting with the right people and lack the expertise to speak the “professional language” of potential partners, the report notes.

Another obstacle fintechs face is navigating regulations related to anti-money laundering and combating the financing of terrorism (AML/CFT), as well as know-your-customer (KYC) requirements. Obtaining proper licenses can also be challenging, especially when operating across multiple jurisdictions, the research found.

Finally, access to capital was found to be fintech entrepreneurs’ third biggest challenge when looking to serve refugee populations. Startups said they have trouble raising funding from angel investors, family offices, VCs or institutional donors, stating that investors often perceive refugee-focused ventures as high-risk and low-return investments.

Fintech to improve financial inclusion for refugees

As of the end of 2019, an unprecedented 79.5 million people were displaced, according to the UN Refugee Agency.

Of the 79.5 million, 45.7 million were people who had fled to other areas of their own countries. The rest were people displaced elsewhere, 4.2 million of them being people awaiting the outcome of asylum requests, while 29.6 million were refugees and others forcibly displaced outside their country.

For refugees, financial inclusion is an important element when it comes to their well-being and dignity, as it allows them to build strong social, economic and cultural ties with their host communities and rebuild their lives.

Yet, a large segment of these populations still lack access to proper banking and financial services, remaining largely overlooked by financial services providers.

In this context, fintechs are well positioned to help fill the void, the Village Capital report says. It highlights three key segments which it believe have the most relevance for this community:

• Digital identity, because many refugees live without the basic identification needed for access to fundamental services, including financial services;
• Digital banking, because such services can be tailored to this population’s specific needs and conditions such as the difficulty in producing the requisite identity documents; and
• Alternative lending, because very few traditional banks actually offer credit or loan facilities to refugees. Such tools can help refugees get over the hurdles around KYC requirements and lack of credit history or collateral.

The report names three examples of startups operating in these fields: Gravity, a Kenyan venture providing digital identity services; Arcadia, an Estonian startup providing business-to-business-to-customer (B2B2C) financial services for NGOs and aid organizations; and Wajenzi, a Dutch crowd-investing platform that allows refugee and migrant entrepreneurs to submit investment opportunities to sell shares of their companies and access funding.

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