Kati Suominen, Founder and CEO of Nextrade Group; Technical Director of the Alliance for eTrade Development
The Covid-19 crisis is accelerating consumers and businesses’ migration online. In the Alliance's many recent business surveys, micro, small, and medium-size enterprises’ (MSMEs) around the developing world highlight ecommerce and digital marketing capabilities as their top priorities for 2021. However, one important challenge for online seller MSMEs is accessing finance, particularly fast-disbursing working capital loans for fulfilling order received online. For example, in a recent eTrade Alliance survey, 65 percent of Mexican MSMEs that sell online identified the lack of access to working capital as an “enormous challenge” or “one of the leading challenges” for growing their online sales. Could Fintechs bridge online seller MSMEs’ financing gaps?
This question is very timely now that many governments and development organizations are working to enable MSMEs to both access financing and engage in ecommerce as a means to overcome the COVID-19 crisis. Fintechs have also proliferated in recent years and more is by now known about their impacts on MSMEs. For example , in the United States, Fintechs have helped small, unbanked and remote firms in regions deserted by banks to access working capital loans, and in Europe, Fintechs have been found to open access to finance for more remote firms, women-led firms, and for innovative firms light on collateral.
Our new report and firm-level survey with over 2,000 firms in Mexico, a booming ecommerce market with a vibrant Fintech sector, seeks to pioneer in identifying whether and how Fintechs might support MSMEs that sell online. We find that:
Mexican firms across size categories still favor bank loans, but especially midsize and large online sellers located in major urban centers have started to use Fintechs and are pleased with Fintechs: 36 percent of surveyed micro and small online sellers and 40 percent of midsize and larger sellers in first-tier cities identify Fintechs as their top-2 choice as a source of capital, alongside banks. Meanwhile, micro and small firms in rural areas are least likely to use Fintechs, and consider Fintechs their least preferred source of financing in comparison to banks, personal funds, credit cards, and microfinance entities.
Fintech borrower MSMEs report they have used Fintech loans to fulfill orders received online and to grow domestic and export sales. Fintech borrowers typically borrow relatively small sums (less than $20,000 at a time) and use the proceeds to purchase materials and supplies to fulfill orders and expand their production. Almost 60 percent of micro and small online sellers agree that Fintech loans have had a “very significant” or “significant” impact on their ability to fulfill orders received online in particular, and 55 percent of the surveyed Fintech borrowers report that Fintech loans have helped them expand exports.
Fintech borrowers are typically larger and better performing firms that have access to alternative financing sources. Over a third of Fintech borrowers believe that they could get financing from other sources, as opposed to only a fifth of non-Fintech borrowers. This suggests that Fintechs offer well-performing firms unique benefits such as faster loan decisions and more flexible and customized loan terms than firms could obtain from banks and other traditional sources.
MSMEs across sectors and geographies would borrow more from Fintechs if Fintechs’ interest rates were lower and terms were clearer. Some 30 percent of surveyed firms believe they might borrow from Fintechs if they understood Fintechs better. Rural firms and offline sellers are in general suspicious of Fintech and feel Fintechs are expensive and have opaque loan terms. However, they also perceive Fintechs as offering faster and easier access to capital than offered by banks, and express interest in learning more about Fintechs.
There do not appear to be gender disparities in firm performance, use of Fintechs, or gains from Fintech loans. Women-led firms are just as likely as comparable male-led firms to use Fintechs. The differences in the use of Fintechs and in firms’ export participation and growth are driven by firm size, online sales activity, and location (urban vs. rural areas), not the gender of the firm’s CEO.
These findings suggest that Fintechs and ecommerce are symbiotic in helping MSMEs: ecommerce enables firms to reach global customers in a scalable manner, while Fintechs enable firms to service their customers in a timely manner. Championing Fintechs, in short, helps promote MSMEs that engage in ecommerce.
Policy ideas to enable more firms to access financing from Fintechs include awareness-building about Fintechs especially with MSMEs in tier-3 cities and rural areas, and government credit enhancements and loan guarantees on Fintech-issued loans. This is not a stretch: governments around the world have after all for decades guaranteed bank loans to MSMEs. Now they could do the same for Fintechs-issued loans. The guarantee concept could also be applied over time to export credit agencies (ECAs) that in many countries guarantee bank-issued export working capital loans for MSMEs.
Government agencies that lend directly to MSMEs could also themselves leverage Fintechs’ algorithmic loan underwriting methods to accelerate and scale their own underwriting processes.
A further possible means to accelerate online sellers’ access to finance is accelerating banks’ know your customer (KYC) processes. One tool to accomplish this could be a data-rich corporate digital identity, something the eTrade Alliance looks to pilot in 2021. Used already in a number of advanced markets such as the Netherlands and Singapore, a corporate digital identity that is unique to each MSME and associated with the MSME’s enterprise and transactional data could accelerate banks’ KYC processes, as well as B2B marketplaces and other service providers’ MSME customer authentication and verification processes, and MSMEs’ trust-building with prospective foreign buyers.
The author’s views expressed in this document do not necessarily reflect the views of the United States Agency for International Development or the United States Government. The author would like to thank Erica Vambell for research assistance.