Editor’s Note
This article was adapted by EUVC from an original insight published by Better Society Capital.
How impact-driven innovation can unlock new markets
Some customer groups remain underserved not because demand is absent, but because existing business models make them too expensive or risky to reach. Better Society Capital’s argument is that solving deliberately for impact can stimulate the innovation needed to change those economics.
Financial inclusion shows how this can work. New operating models, data and technology can reduce the cost of serving customers, improve risk assessment and make previously difficult market segments commercially viable.
Key takeaways
Impact intent can focus innovation on barriers that conventional models have accepted as fixed.
Unlocking an underserved segment depends on changing its unit economics: the revenue, cost and risk associated with serving each customer.
Microfinance shows how a new delivery model can turn an excluded group into a viable market.
Open Banking and earned wage access illustrate how data and product design can create new ways to assess and price risk.
How impact intent can change market economics
Unit economics describe the revenue, cost and risk attached to serving one customer or completing one transaction. A market segment may look unattractive when customer acquisition, diligence, servicing or expected losses are too high relative to the revenue available.
That was the position of many formal and quasi-formal lenders toward people on low incomes before microfinance developed. Customers could be costly to reach, particularly in remote locations. Unstable cash flows and limited reserves also made conventional lenders view them as high risk.
The impact-driven question was not simply whether this group met the requirements of the existing model. It was whether the model itself could change.
How microfinance made an underserved segment viable
In Bangladesh, Muhammad Yunus and Grameen Bank developed solidarity group lending. Instead of treating each small loan as an entirely separate underwriting and servicing problem, the model distributed loans across groups whose members supported repayment.
The structure could reduce transaction costs and use shared responsibility to address repayment risk. A Yale School of Management case study describes how group members could cover one another’s instalments and how collective consequences discouraged default.
The significance was economic as well as social. By reducing some of the costs and risks of serving low-income borrowers, the model showed that lending to a previously excluded group could become viable.
The market subsequently expanded at scale. The 2019 Microfinance Barometer estimated that, in 2018, microfinance institutions served 139.9 million borrowers and held a $124.1 billion credit portfolio. Those figures are a historical snapshot, but they show how far the segment had moved from being considered unserviceable.
How data and technology create new routes to financial inclusion
The same mechanism continues in newer financial products. Technology is often central, although the underlying innovation can also come from the business model or the way risk is structured.
Using Open Banking data to assess risk differently
Open Banking allows UK customers to share their financial data securely with authorised providers. Better Society Capital highlighted Credit Kudos as an example of using that data to help credit unions make faster, more informed lending decisions.
The broader principle is that better individual-level data can reveal differences that a conventional credit process misses. If a provider can assess risk more accurately, it may be able to approve customers who would otherwise be excluded without simply accepting higher losses.
Using earned wages to reduce risk
Wagestream’s earned wage access product uses pay that an employee has already earned, but not yet received, as the basis for making money available before payday.
That changes the risk structure. Rather than relying on the same trade-off as traditional unsecured lending, where higher default risk may be offset by higher interest charges, earned wage access can make funds available against wages already accrued. In the original article’s analysis, this reduces risk and cost while making the customer group more viable to serve.
The recurring mechanism behind market creation
Across these examples, impact-driven innovation follows a consistent sequence:
A customer group is excluded because the prevailing model is too costly, risky or poorly designed for its needs.
An impact objective directs attention toward that constraint.
A new model, new data or new technology changes how cost or risk is managed.
Improved unit economics make a previously difficult segment commercially viable.
The central claim is not that impact sits alongside commercial value. It is that, in some cases, the effort to create impact can be the source of the innovation that unlocks commercial value.
Innovation driven by a desire to create impact can unlock markets previously considered difficult to serve, generating both impact and financial returns.
Impact can be a source of business value
Microfinance provides historical evidence that changing a model around the needs of an underserved group can create a large market. New approaches in financial inclusion continue to test the same thesis through better data, more dynamic risk assessment and products designed around customers’ actual financial lives.
For investors and company builders, the practical implication is that an impact lens can do more than identify a desirable outcome. It can expose a market failure worth solving and point toward the innovation required to solve it.
For additional context on applying impact thinking across the investment process, see the related VC Impact Playbook.
About the original author
Nicholas Andreou wrote the original article while serving as Associate Venture Impact Partner at Big Society Capital, now Better Society Capital.
Better Society Capital is a UK social impact investor focused on increasing investment in solutions to social issues and inequalities. Learn more about Better Society Capital’s work connecting capital with organisations and investment opportunities that aim to deliver social outcomes and financial returns.
Source
This article was adapted by EUVC from an original article published by Better Society Capital.
