Anton Mozgovoy

@amozgovoy

How to create a financial marketplace for 500,000 people 💸. Part I (non-technical)

This article is split into the two parts:

If you are keen on the technical aspects of the global infrastructure we created, check out Part II of this article. Meanwhile, the story begins with a mission and a number.

Finding the most efficient solution

According to the World Bank, there are still more than 1.7 billion unbanked adults, yet two-thirds of them own a mobile phone that could help them access financial services.

That tells us one thing clearly: the traditional banking approach is highly inefficient. Lack of infrastructure: ATM network, collections and deposits, tellers network and internal remittances programs are only a few named obstacles on the way of creating a truly banked experience.

As to the digital wallets and fintech solutions let’s take a look at this chart:

Proportion of cash and non-cash payments worldwide in 2017, by region

The data is based on the World Payments Report 2018. But we aren’t looking directly into these figures. How about the value that digital payment solutions bring in cash-based societies? Well, the basic principle here is: the higher the weight of the cash-based transactions are out there, the less valuable the network is for a participant. And vice-versa, obviously.

What it means is that to transfer the value digitally, someone will have to cash-in and cash-out the value ultimately. That is why ecosystems that are able to keep the money in the system longer than for a simple transfer and go transaction tend to survive better.

At that point we were left with two major thoughts:

  • It has to be a digital bank
  • It has to be not a bank. At least in common sense.

A good place to start. Not very specific, though.

Defining a financial marketplace

As soon as we identified that conventional micro-finance solutions don’t scale and don’t solve the problem, we started learning about the effects of SMEs on the local economies in emerging markets.

The idea of a service where users would have all the required tools to interact both socially and financially. In specifics, that evolved into the four major functionality blocks:

  • Digital KYC system
  • Chat platform with an integrated AI-based personal assistant
  • Crypto wallet
  • Marketplace

The details on technical solutions and decisions made for each block are described in Part II of this article. In here we will only touch base on one aspect of the solution — the financial.

It is worth mentioning that there are a lot of ways of running an internal settlement transaction engine. You can license existing software or you can build your own. And when you decide to build your own, you have even more options.

We decided to stick with the crypto. Running settlement transactions in crypto allowed us easily scale to 46 countries across 4 continents with full legal due diligence. Easy to scale in emerging markets legally — tick ✅.

The next step was deciding on the protocol solution. We gave the Ethereum and EVM a preference over upcoming Hyperledger, Stellar or other protocols.

In early 2017 when we started, Ethereum network showed strongest adoption rate, fastest growing tech community and EVM allows for numerous level 2 scaling solutions, but we will touch on that later as Ethereum also has a lot of drawbacks. The major one is unit economics.

A quick note on why we didn’t go for Hyperledger solution can be described in this follow up quote:

“The objective of the project is to advance cross-industry collaboration by developing blockchains and distributed ledgers, with a particular focus on improving the performance and reliability of these systems (as compared to comparable cryptocurrency designs) so that they are capable of supporting global business transactions by major technological, financial and supply chain companies.”

What was before

A crypto token, based on standard ERC20 contract deployed on Ethereum Network. In order to maintain transparency and consistency, all transactions and emission contract calls had to be done on the Ethereum main-net.

Even though, at the time we started Ethereum had 3 test-nets, none of them suited our needs. We wanted to build the network is built to iterate fast. We also believed that in the future many open and independent networks based on Ethereum protocol will operate and have an interface for interoperability.

Why?

In 2017 the issuance rate of Ether was 14.75%. Roughly five Ethers per block are issued. Because Ethereum rewards Uncles it means that there may be more or less than five Ethers.

By 9/7/2017 miners generated 21,335,541.72 ETH as Mining Block Reward and 1,181,201.88 Mining Uncle Reward. For securing the network, they received a total of 22,516,743.6 ETH. Using the 9/7/2017 price of $303.86, security of the network costs 22516743.6 ETH * $303.86 = $6,841,937,710.296. There are 56,048,767 transactions on the network.

Security of a transaction in the main Ethereum network costs is about $122.07 at the current rate. (dated 9/7/2017)

Following figures would never allow emerging economies to enter the digital market sphere. That is why we started to architecture the solution which will allow for token not only to remain transparent and accessible on the Ethereum main-net but also to provide inexpensive consensus to secure the network. So that our users will be able to perform transactions on the network and spend as much as zero on transaction fees.

How it’s done (benefits)

We have designed and developed our Hybrid blockchain system which consists of the 3 main components:

  • External (Mainnet) Ethereum blockchain
  • Internal main blockchain
  • Internal blockchain for the specific country (one allocated per each country)

With that complex structure controlled by PoH (Proof of Human) consensus algorithm, which is closely tied to the biometric identification throughout our system, we have a set of routing services that direct the transaction traffic from the inside to the outside and vice versa. Following structure also allows us to remain open to any regulatory rules, whether existing or only upcoming.

Final thoughts on crypto

The current consensus in the community is the idea that the protocol will do the heavy lifting, and a thin layer of custom business logic will enable apps to run on each of these heavy protocols. If you believe the world is headed to this direction, there’s a good chance the world will look something like this — there will be a publishing protocol, which will host all of your content, with custom apps for each channel that offers the custom functionality. So the NYT, WSJ and the Economist are going to still be accessed through their own apps, but you’ll pay for your subscription to content through the publishing token. Similarly, for your social media will transition to a social media protocol, and thin apps will provide a custom newsfeed and other social experiences.

Basically, the term token literally becomes the representation of the meaning quantitive value.

Retention, LTV, ARPPU, and CAC

For the product, you create there are infinite metrics you are constantly measuring anywhere from how to acquire the users to how they stick to the product and how they use it; from doing customer development to distinguish core functionality to explore referral mechanisms and viral effects. You get my point, to grow a product you have to deeply understand every aspect of your end customer engaging and using the product. To be even more efficient, you have to focus on 2–3 main metrics.

Easy said. The concept of a financial marketplace, what features and functionality it offers was a very complicated task both technically and product wise. Technically — there had to be a very modular platform being able to handle core services, yet when needed to have an ability to scale horizontally very fast, offering a line of new functionalities within days, not even weeks or months.

A million dollar question for who, though?

An Underserved Segment

So much of the financial world is built on models. Consider for example, the FICO score which takes into account the length of credit history as a crucial factor in determining credit scores and rightly so-consistency is a great predictor. However, there could be young borrowers who don’t have a long credit history but some other compensating factor such as a great education. FinTech models incorporate some of these factors to serve an undeserved segment. Also, they could serve millennials or early emerging affluents who don’t have the savings yet to maintain a deposit account with high balance requirements. This could represent another underserved segment.

On the other hand, small enterprises could be an underserved segment too. Quite often, the level of revenue and or processes needed to appease traditional commercial banks may not have been achieved by small entrepreneurs.

As to the question of how small?

74% of all business activities on the platform are performed by businesses operated solely by the founders.

The turning point

It took us 4 months to develop the core of the platform, to have 3 months to get on the right track with customer development, get to understand the targeted audience and finally start refining the product.

If you look at the chart below, you can clearly see the turning point of the product.

January was the breaking point for an accelerated growth

The growth in January was already defined by other multipliers and finally showed that both: technological and product solutions are paying off.

That is why this story is not about achieving 500,000 users in 10 months. It is about creating an efficient solution for a specific need. It shows how technological solutions can create room for exponential growth.

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