As an entrepreneur, I am constantly fascinated by how emerging technology drives progress across communities. The fintech sector alone is creating new financial habits and standards, allowing individuals to play a more proactive role in managing their financial health.
Perhaps even more interesting is how fintech trends are impacting communities where transparency and accessibility to funds are lacking.
In fact, a global gap of over $5 trillion (U.S.) exists between the financing needs of micro-, small- and medium-sized enterprises (MSMEs) and the institution-based financing available to them (according to the SME Finance Forum).
And that statistic demands an examination of where smaller businesses can find financing, because formal institutions’ mobile platform services rarely cater to the specific needs of small businesses.
With advances in fintech, however, digital platforms can provide low-cost financial services to underserved enterprises, giving owners the opportunity to streamline activities and grow their businesses.
The importance of MSMEs in the global economy
The international SME Finance Forum and the International Financial Corporation of the World Bank both define "micro" enterprises" as those with one to nine employees, and "small" enterprises as those with 11 to 49, while "medium" businesses are defined as those with 50 to 249 employees. (A large enterprise is one employing 250 or more people.)
In this context, MSMEs may be individually small, but they account for half of global GDP and two-thirds of all jobs worldwide. Ninety percent of businesses are classified as small-, micro- or medium-sized enterprises, and many are financially underserved.
As of 2017, an estimated 40 percent of MSMEs in developing countries were underfinanced, according to the SME Finance Forum. Yet, flexible and accessible banking services are vital to the success of small businesses; without them, necessary activities like payments to suppliers, access to credit and even employee salaries can create cash flow problems and jeopardize these businesses' viability.
MSMEs in the developing world
Micro-enterprises are common throughout the developing world, especially in small rural communities. Home-front grocery stores and restaurants, market stalls and mobile vendors are prevalent throughout Latin America, but most are still cash-only enterprises, lacking access to credit or digital payments.
The United Nations has referred to MSMEs as “the safety net for inclusiveness.” They employ a larger share of the more vulnerable sectors of the population, such as newcomers to the workforce, women and the poor, and are sometimes the only type of business in rural areas.
These crucial enterprises then, are in a precarious position when banking and credit options don’t support their business needs.
In the United States, according to the 2017 State of Latino Entrepreneurship report from Stanford University, Latino-owned businesses are the fastest-growing demographic in the country, outpacing all other groups. This group also has the highest rate of creation of new firms and the highest rate of new entrepreneurs, but the lowest rate of access to financial institution-based loans.
In Latin America alone, according to Devex, there is a need for an estimated $250 billion in credit for MSMEs that is not being met through formal financial institutions. That's why nongovernmental organizations (NGOs) like the International Development Bank (IDB) are turning to fintech companies to address this shortfall and help increase global financial inclusion.
How fintech development can support MSMEs
A majority of small business owners who use mobile banking services were surveyed by Ratewatch and reported dissatisfaction with the mobile tools provided to them. Mobile banking platforms usually offer informational services (bank balances, ATM locations) and some transactional services (transfers, money deposits to prepaid cards, prepaid cards), but businesses have more complex banking needs.
To be successful, businesses need to access a range of financial services, including flexible payment options, payroll and access to credit. Needed services include:
Flexible payout. Payments from a business's wallet to another wallet, card or bank account are needed that are easy to use and low cost. A company needs to pay its suppliers, employees, subcontractors and temporary staff both instantly and worldwide.
Payroll and rewards. Businesses need to be able to use the batch pay option, to transfer funds instantly from their wallet, both domestically and internationally. To run payroll through the app, businesses need to receive rewards tokens which work for in-app purchases and fees.
Microloans, credit-building and banking partners. MSME entrepreneurs in developing communities don’t need justpayout and payroll options to grow their businesses; they need real-time access to credit, as well. Companies wIth the ability to make timely financing requests can build a usage history within the platform, creating a credit profile which will be recognized by financial partners worldwide. Those businesses' users can then have the opportunity to access financing, even if they lack an existing credit score.
With a focus on accessibility, security and transparency, blockchain-based fintech solutions are driving much of the growth in this arena.
One example of a company dedicated to implementing accessible financial services in developing communities is Uulala, a blockchain-based, mission-driven organization that accelerates the financial inclusion of the underbanked and unbanked population across the Americas. The Uulala platform empowers these communities by providing financial tools for them to build credit, send money, participate in ecommerce and reach a higher platform than just a cash-only environment.
Overall, what the global entrepreneurial community needs to do is expand its support for business owners in developing communities. But support alone isn’t enough.
By making it easier and more cost-effective to both carry out business activities and keep track of them, emerging fintech platforms are driving new global opportunities across the MSME sector. And those actions are helping to reduce barriers to growth and increase chances for success.
By spearheading continued fintech and blockchain progress, and making these applications more accessible to all, entrepreneurs have a shot at supporting real and sustainable economic progress.