The next Fintech revolution: Agricultural finance
A farm worker works in a field near the city of Arvin, California. California’s Central Valley is … [+]
The last few years of tech news headlines were dominated by the word “fintech”. From massive fundraising to customer growth to product launches to scandals, new disruptions were everywhere in consumer banking, credit, payments, investments and crypto.
You have good reason to believe that we have reached the pinnacle of fintech.
But the industries where most fintech is focused today represent only a fraction of the $23 trillion global financial services market. Products like Cash App, Robinhood and Chime all tackle markets that are intuitive to everyday consumers, but consumers are only seeing the tip of the iceberg.
Fintech’s next wave will focus on improving the lesser-known, less “sexy” markets that are fundamental to the global economy – and one of the biggest markets poised for disruption is agricultural finance. 2022 saw a quiet but steady rise in fintech products being built for the massive agricultural industry, and they’re just getting started.
So – why disrupt agricultural finance to begin with? For the two best reasons in technology: the size of the market and the limitations of existing service providers.
Farms and farm-dependent industries account for 5% of annual US GDP.
Looking at the United States alone, while farms contributed $134.7 billion to GDP in 2020, the industries dependent on agriculture—food manufacturing, food services, textiles—contributed over $1 trillion to the economy, accounting for over 5% of annual GDP. For many emerging markets, agriculture’s share of the overall economy is significantly higher – as much as 25% in some countries.
And yet financial services are not as competitive as you would expect in an industry the size of agriculture. Looking again at the US market – one of the most well-served in terms of agricultural finance – farm debt has continued to rise over the past year, farm loan rates are rising sharply, and farm loans continue to increase while the number of farmer-focused banks continues to fall.
Even as farm loans continue to increase, the number of institutions making them is declining.
Enter fintech.
In a world where demand for food is expected to increase by 70% by 2050, requiring $80 billion in annual investment, sluggish legacy players create a large and growing opportunity for new entrants.
While “agricultural finance” refers to a large and heterogeneous set of activities – equipment lending, supply chain finance, commodity trading, farm banking – new fintechs have been focused on a few sub-sectors:
Agricultural loans: Oxbury Bank in the UK raised funds twice last year to provide £650m in agricultural loans to UK farmers. Tarfin in Turkey and Agro.Club in Eastern Europe provide supply chain financing to underserved medium-sized farmers who generally have to turn to their ag input suppliers for loans at exorbitant rates. Companies such as Crowde in Indonesia and Campo Capital in Brazil created a peer-to-peer farm lending network. Players like Traive, AgroLend, Terra
Farm Payments: Agriculture tends to be a laggard in the adoption of new payment methods, with transactional products such as checks still estimated at 90% of the industry. Bushel recently launched a payment facilitator, digital wallet and embedded payment functionality that connects buyers to 40% of grain suppliers in the US.
Pricing of data and merchandise: The deep markets for grain, livestock and other commodities are essential to well-functioning agricultural supply chains, and accurate price data is the lifeblood of the industry. These markets allow buyers to hedge against rising food prices, and large agricultural businesses to hedge against fluctuations in the supply chain. FarmLead is one company that focuses on digitally connecting cash grain trade networks and integrating trade data into other digital tools for farmers and grain buyers.
Insurance: Agriculture is the most delicate industrial sector in terms of climate change risk, due to occurrences of droughts, floods and natural disasters. Insurance is incredibly important to avoid the collapse of precarious farm systems, but traditional insurance companies have a hard time underwriting farms. This is where platforms like World Cover, which provides satellite-enabled climate insurance to smallholder farmers in countries such as Ghana, Uganda and Kenya, or GramCover, focused on providing insurance access to farmers in India, come into play.
Marketplaces: While e-commerce platforms like Shopify have opened up global retail markets to independent sellers, most farm marketplaces still function as centralized offline exchanges. In Kenya, startups such as Twiga Foods, FarmShine, ShambaPride and M-Farm have built platforms to connect farmers directly with buyers, listing readily available price information.
Banking services: The biggest prize for fintechs is winning over new customers in one vertical, such as lending or insurance, and cross-selling them banking products built specifically for their needs. DeHaat in India provides financial services to farmers across credit, material procurement, advisory and sales. New Zealand’s Figured provides financial planning tools for farmers. FarmDrive creates a credit score for Kenyan farmers. Seso offers hiring, workforce management and asset management tools to simplify payroll on US farms.
Over the next decade, we will see a parallel market of products across all fintech categories – banking, lending, savings, payments, investment, HR, payroll and commerce – develop with a particular focus on agriculture.
While agriculture may not be the most obvious market for fintech to pursue, it is definitely one of the largest and most consistent, and I expect to see many of these companies grow rapidly and dominate the next fintech wave.
