In our 2021 Agricultural Platforms in a Digital Era report, ISF presented a definition of “Platforms” defined by two distinguishing factors:

1) They are built upon network effects, enabling multiple users on both sides of an exchange to interact.

2) Unlike traditional “pipeline businesses” they do not produce goods or services, but rather link users together to access goods and services.

In that report and subsequent updates, we evaluated the potential role that marketplace platform models connecting users with products or integrated products and services could play in helping smallholder farmers (SHFs) and agricultural small- and medium-sized enterprises (agri-SMEs) overcome many of the market barriers inherent in the sector. The promise of agri-marketplace platforms is clear:

  1. Many digital agri-marketplaces have characteristics that create strong potential for platforms to help markets clear.
  2. Agri-marketplaces are theoretically well-positioned as a channel to scale up financing to SHFs and agricultural micro, small and medium enterprises (MSMEs).

However, platform models have struggled to realize this potential. This update offers a reevaluation of the sector to understand why this is the case. It outlines new thinking around how we segment agricultural marketplace platforms, evaluates the key challenges and emerging success stories in the space, and discusses the current state and future potential for embedded finance (i.e., integrated financial services or products) within these models.

Broader Market Evolution

Our evaluation of how digital marketplaces have proliferated in developing countries reveals clear differences between services-based marketplaces, general e-commerce marketplaces that cover rural areas, and agriculture-specific marketplaces:

  • Services-based marketplaces built around transport services have rapidly multiplied and matured into diversified businesses that cover delivery, mobility, entertainment, and financial services (e.g. Bolt in Africa, Grab and GoJek in Asia).
  • Fast-moving consumer goods-anchored general product marketplaces have similarly grown into major companies including Pinduoduo, Rural Taobao (Alibaba’s rural brand), Flipkart, and Shopee, with a range of embedded vendor finance, buy-now-pay later, and insurance offerings.
  • Agricultural marketplaces as a niche vertical have struggled to establish pure-play digital platforms (i.e., focused solely on facilitating a digital exchange between suppliers and consumers of goods/services), with almost every business pivoting to either focus on a niche service or deeply embedding themselves in value chains as active facilitators.

Making the unit economics work for pure-play, digital infrastructure-based platforms in agricultural marketplaces is challenging for many reasons: the seasonality of trade, low-transaction values around smallholder production systems, the fragmented and highly localized nature of many supply chains, the low digital literacy/digital access of many smallholder farmers, and the low level of maturity of many enabling sectors including transport, logistics, storage/cold chain, and payments.

Whilst this is true across all developing countries, it should be noted that the enabling environment in China and India is much more advanced (e.g., high levels of rural internet penetration, government support for market-based solutions connecting farmers with value chain actors and service providers, significant enabling digital public infrastructure). We see this reflected in both investment trends, the number of models, and the results of those models. In Africa, Kenya, Nigeria, and South Africa also clearly stand out as leaders, even as those markets lag the current progress in India.

Emerging Agriculture-specific Marketplace Business Models

Our 2021 report revealed a wide range of marketplace platform models operating in the agricultural sector. Broadly, we divided them into three models:

  1. Product marketplace: connects smallholder farmers to physical markets both to and from the farm, including farm inputs suppliers and various kinds of off-takers (processors, trader, retailers, consumers).
  2. Integrated product and services marketplace: facilitates access to a holistic, bundled offer to farmers. Similar to a product marketplace, but offering broader range of services to farmers.
  3. Services marketplace: shared economy platform that links farmers to equipment and/or other service providers.

Whilst many companies started with expectations of running digital e-commerce marketplaces in agriculture, we are seeing all of them pivot into a range of different business model orientations (many of which still integrate a marketplace function) that involve much deeper integration into agricultural markets. Many of these models are still attempting to find their niche and scale, but to make some sense of the market we’ve segmented models within the broader 3 buckets primarily based on emerging positioning within the value chain:

Considering this landscape of nine sub-segments, it has become clear that:

  • The only product marketplace models that are succeeding are those with limited links to smallholder farmers:
    • Both the Food Delivery (business-to-consumer (B2C) companies connecting food retailers with end consumers) and Re-Stockists (business-to-business (B2B) distributor platforms typically selling a combination of produce and fast-moving consumer goods to retail shops) segments have experienced growth. However, the former offers no direct link to smallholder farmers while the latter has limited links on the fresh produce sourcing side.
    • We anticipate further consolidation in the Re-Stockist landscape due to the sector’s hyper-competitive dynamics, characterized by thin margins and operational intricacies such as multi-homing customers. The recent challenges faced by the once-successful Twiga underscore these pressures.
    • Other product marketplace models have all had to pivot to either B2B models or a broader set of services.
  • A range of integrated product and services marketplace models are working at scale with high levels of market infrastructure (e.g., input supply or sourcing networks/warehouses) and often direct participation in output markets (e.g., commodity trading). 
    • There are three foundational variations in these models with a range of other differences in how they configure distribution, product bundling and finance. However, all of these models now need to be considered as marketplace-hybrids as the marketplace element of the model is now only one (often small) part of how they claim margin.
  • A small set of farm services marketplaces exist in the form of tractor and other equipment (e.g., irrigation) rental companies that are proving capital-intensive to scale with limited embedded finance outside of some leasing finance for the tractor owners.

The Rise & Potential of Digitally Native Marketplace Hybrids

Moving forward, we expect a handful of business models within the Integrated Product & Services Marketplace segment to emerge from the dynamic landscape and achieve commercially viable scale. These Digitally Native Marketplace Hybrids are poised for success across various value chain positions:

  • Farm & Input Services focused on the input portion of the market and leveraging strong relationships with farmers and access to data (e.g., DeHaat, DigiFarm, Farmcrowdy).
  • Commodity Exchange+ models emphasizing the output portion of the value chain through a combination of trade facilitation, service provision, and cross-subsidized commodity trading (e.g., AFEX, Origo, Nile.ag).
  • Dual-focused Holistic Marketplaces utilizing their key position across the value chain on both the input and offtake side but with a narrower commodity focus (e.g., Samunnati, AgroMall, AgroStar, Ninjacart).

Success for these Digitally Native Marketplace Hybrid models will depend on the establishment of physical infrastructures parallel to their digital platforms, enabling traditional margin capture for these companies across supply chains, financial services, and trade operations. Given the deep market integration associated with these models, growth trajectories will be largely dictated by country-specific agricultural market conditions, including inherent margins, market fragmentation, and the maturity of last-mile distribution networks.

The Embedded Finance Opportunity & Current State

Lending by agricultural marketplaces continues to be relatively niche (less than 2% of total agricultural lending today). This is primarily due to the challenges associated with scaling embedded finance, but more importantly, it reflects the nascent nature and limited scale of these marketplaces in general.

Within these ”marketplace models” embedded finance can typically take four primary forms:

Each of these forms of finance has a different positioning and value in the underlying models in the market:

  • Input finance is the most directly related finance for SHFs and is virtually non-existent. In Africa, no partnerships with financial service providers (FSPs) are working, and direct lending is either being done sporadically using equity or in the form of value-chain-finance where offtake/trading value can make up for the cost/risk (e.g. AFEX). In India, even highly scaled and well-capitalized models that are firmly entrenched in providing integrated farm services, such as DeHaat, are having limited success.
  • Buy-now-pay-later (BNPL) is being used with some frequency in Re-Stockist models and in a very limited way with input-marketplaces for SHFs. However, this finance is heavily constrained by the capital requirements of the marketplace providers and involves very high short-term interest rates for customers and can often be predatory in nature.
  • Trade finance is a key part of many marketplace models working on the offtake side of the market and can be both profitable and scalable, but has limited real impacts on SHFs. Models like AFEX, Origo, Samanati, and Ninjacart are providing trade finance to a range of small to medium traders and processors to finance inventory facilitated through the platform. These finance arrangements typically involve relatively longer loan tenors than input loans or BNPL products (e.g., 3-6 months) at interest rates typically ~15-25%, and when well managed have a reasonable cost of risk.
  • Warehouse receipt finance is being used in some instances by marketplace related models, especially those heavily integrated into the post-production value chain areas such as Commodity Exchange +, but are inherently more dependent on a tightly regulated system or specialized partnership.

Lending is being done largely in service of trying to establish market share (primarily through higher conversion rates and / or transaction sizes) and doesn’t yet seem to be a stand-alone profit-generating activity. While there are wide variations across models, the lending economics can be relatively streamlined on the operating expenses and cost of risk side (particularly for those with embedded de-risking mechanisms e.g. access to markets) but high cost of funds (particularly of earlier stage models), small loan sizes (e.g., rarely exceeding $500) and short tenures (e.g. maximum 3 months and typically much lower), make the unit economics challenging.

Most marketplaces that are providing lending are doing so directly off their own balance sheet – this is consistent across lending products and even more prevalent for input finance and BNPL. Due to tight margins in the core businesses, most have to finance their lending activities directly with equity, increasing fundraising demands and compounding risk.

Off-balance sheet finance models are essentially non-existent in Africa and only present at limited scale in India. A majority of the FSPs continue to be reluctant to underwrite credit to smallholders and agribusiness through agricultural marketplaces due to the limited scale, the lack of portfolio performance track record, and the uncertainty around the value and accessibility of data. When FSPs do engage (e.g., as in certain Indian marketplaces), they often do so at high interest rates, and / or with inadequate financial products that do not meet the needs of the SHF and / or MSME transacting through the platform.

Forward Outlook

It is becoming increasingly clear that any embedded finance in agricultural platforms might start to resemble traditional value chain finance rather than “standard” digital e-commerce financing. The highly nascent stage of the market means it is still too early to see which models and financial products will ultimately benefit target populations, and to assess the extent to which they can be replicated. But the concept of “marketplace hybrids” offers a new perspective, blending traditional value chain models with digital innovations. These hybrids could leverage new approaches to distribution, product bundling, and data utilization, providing interesting alternatives to traditional value chain finance models.

Get in Touch

If this has sparked interest or you would like to discuss ISF’s market perspective further, please reach out to:

 

  • Matt Shakhovskoy – ISF Director (matt.shakhovskoy@isfadvisors.org)
  • Hayden Aldredge – ISF Manager (hayden.aldredge@isfadvisors.org)

Slides for Further Reading

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