While consumers have financial inclusion at their fingertips, many Small and Medium Enterprises (SMEs) around the world are still striving for it. Financial inclusion for unbanked SMEs in developing countries and underbanked SMEs in developed countries is slowly gaining momentum. More and more FinTechs, governments, and banks are now realising how big the opportunity is to serve the SME market, as well as the need to customise solutions to meet various regional and country needs.
A Developing Story – Citizens speeding up financial inclusion for SMEs
According to the World Bank, the problem of SME financing in developing regions remains the biggest roadblock for financial inclusion; where around two-thirds of SMEs in developing countries cannot gain access to funding or enough funding, compared to one-sixth of SMEs in developed countries. What’s worse is that the impact that those small businesses could have on the GDP of a developing country could be transformative. In Indonesia there are over 60 million SMEs, accounting for over 100 million jobs, which have limited access to funding. Having FinTechs participate as alternative lenders could close the financing gap that traditional banks are not willing to fill. These small businesses serve as the backbone of Indonesia’s GDP, currently representing around 60% of its GDP, with only 20% considered to be banked. The 80% gap of unbanked is estimated to be worth US$75 billion, as noted by the World Bank.
While FinTech is creating the path towards financial inclusion for consumers, it is in the same way paving a sidewalk for SMEs. As discussed in our “Financial Inclusion: Payments” blog post, India is making headway to financial inclusion through the Aadhaar scheme. This government scheme enables the country and over 1 billion citizens to be financially included through digital means. As of November 2016, India reduced 86% of its fiat money in the attempt to stabilise its economy, modernise, and push the country closer to financial inclusion. Through Aadhaar citizens will be able to pay for transactions through biometric channels such as a finger print or an eye scan, but the country still needs its merchants to be able to accept these payments. In order to combat the issue of having a cash driven society and promote a cashless economy, the government of India will provide free Point of Sale terminals in villages of over 8,000 people. Furthermore, through the India Stack, an organisation of FinTechs developing API solutions for Indian citizens and SMEs, merchants are becoming empowered to accept these biometric payments. In conjunction with the new FSS Aadhaar Pay system, SMEs will be able to leverage India Stack’s Unified Payment Interface (UPI) to accept biometric and mobile payments and transfer the funds between any bank accounts in India. UPI transactions can be peer-to-peer, peer-to-merchant, and business-to-business thus bridging the financial inclusion gap between SMEs and their customers. This new payment system and the merchant friendly solutions offered by the India Stack are speeding up the track to financial inclusion by providing SMEs with a full range of banking solutions from funds transfers to cashless transactions. The FinTech sector in India, between 2014 and 2015, accounted for over 158 investment deals worth US$1.7 billion. The potential for FinTechs to help Indian SMEs to become an even bigger part of the demonetisation movement is unprecedented.
The SME Highway — merging services for back end financial inclusion
In other parts of the world, SMEs in the developed regions are no longer the average business customer. As technology and financial services become more readily available to SMEs through all different aspects of FinTech, they are starting to have that day-after-tomorrow business approach, the “this is what I can get now, but what I really need is…”. They are trying to take advantage of the FinTech networking effect. As FinTech Strands Finance explains it, “SMEs don’t want a mere service provider anymore. They want a business partner.” They want an entity that will understand their needs and if the FinTech cannot supply them with the service need, they want the FinTech to at least be able to integrate with the entity that will. Many SMEs are currently still doing things one by one and have an individual system for every part of their operations; their frustration with this traditional way of doing their back end operations has now led them to start looking for a streamlined suite of services, or a means to aggregate and connect everything. FinTechs that offer the value of integrating: invoicing, reconciliation, cash management, and financial accounting, as well as the openness to partner with other FinTechs will prevail. FinTechs such as Ebury help SMEs execute cross-border transactions as well as manage foreign exchange risk, accept foreign payments, and even finance imports of goods. Another example is Stripe, the payments FinTech worth US$9 billion, which enables international start-ups and SMEs to expand their businesses by providing them with the means to operate within the US. For US$500, Stripe not only sets up SMEs to start receiving payments, but through its Atlas program offers them extra services such as setting them up with: a US bank account, tax ID number, and Stripe account, while also providing businesses with tax, legal, and accounting advice for doing business in the US.
Although the biggest speed bump for SMEs’ growth is still access to financing in both developing and developed countries, SMEs in those regions have different priorities in focus. On one hand, the SMEs in developing countries are looking for the tools and the means to expand their businesses as opportunities are being presented to them with the help of government actions. The FinTechs that provide the funding and the right financial tools to those SMEs will make it possible for them to help their fellow citizens by creating more jobs as well as furthering the movement of financial inclusion. On the other hand, SMEs in the developed regions of the world are looking to simplify their business operations. The FinTechs that provide SMEs with the means to streamline all of their current pain points and act as a business advisor will empower them to grow and increase their business activities beyond a national market.
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