Before the COVID-19 pandemic struck, the Senegalese FinTech industry was growing steadily. Gradually stimulating the interest of investors, FinTechs in Senegal rolled out a range of products and services to bridge gaps in existing financial services. This report attempts to understand the impact of the pandemic on FinTechs in Senegal, the measures policymakers took to support FinTechs, and their effectiveness. It further highlights the sentiments of investors toward this sector.
Before the pandemic struck, the Ivorian FinTech industry was growing steadily. Gradually stimulating the interest of investors, FinTechs in Côte d’Ivoire rolled out a range of products and services to bridge gaps in existing financial services. This report attempts to understand the impact of the pandemic on FinTechs in Côte d’Ivoire, the measures policymakers took to support FinTechs, and their effectiveness. It further highlights the sentiments of investors toward this sector.
Experts estimate that the digital credit industry worldwide will be worth more than USD 890 billion by 2024. Users of digital credit around the world appreciate its convenience and immediacy. While digital credit has catalyzed access to finance for the mass market, it has barely begun to meet the needs of MSMEs.
The demand for affordable, relevant, and quality financial services for MSMEs has grown over the past few decades. In 2010, McKinsey estimated that the total unmet need for credit by all formal and informal MSMEs in emerging markets was worth USD 2 trillion. However, a recent study by CGAP estimates that the unmet need for credit among micro and small enterprises (MSEs) in emerging markets is around USD 4.9 trillion. Several factors constrain access to credit for MSMEs. These include the high cost of accessing credit, limited awareness, lack of credit history, and short repayment periods.
The COVID-19 pandemic has further reduced the supply of formal financial services to MSMEs, which currently face a squeeze on credit, have limited access to capital, and face stifled growth. The process of their recovery from the debilitating effects of the pandemic will call for enhanced access to suitable financial services. As per our research, almost one-fifth of entrepreneurs gradually began using digital platforms to sell their products during the pandemic. As the entrepreneurs build their digital footprint and profile, financial service providers have an opportunity to use digital information to assess creditworthiness and offer digital credit facilities.
The chance to use digital approaches to enhance access to finance for the entrepreneurs
Financial institutions have a clear opportunity to enhance access to formal financial services to MSMEs by:
Supporting MSMEs to build digital footprint:
Financial service providers can increase access to finance for entrepreneurs by understanding their footprints better—whether they are digital or potentially digital. As the providers build the footprints of entrepreneurs, it is crucial to assess their readiness and receptivity to transition to a digital future and segment the entrepreneurs accordingly. For example, at MSC, we have learned that providers cannot promote merchant payments through standard “cookie-cutter” solutions. Therefore, we need to look at merchants as distinct personas to decipher their characteristics and explore ways to change their behavior. Our research identified that merchants embody one of four key personas: go-getters, receptive reticent, high-hanging fruits, and easy-catch merchants.
Notably, while MSMEs have some digital presence, most transactions remain in silos. The entrepreneurs themselves are not aware of the data trails they generate and remain in the dark about potential use-cases for data, now or in the future. Moreover, financial institutions cannot utilize the data trails fully to increase financial access. A snapshot of data trails generated by an entrepreneur below illustrates what data could financial institutions digitize to enable better credit assessment.
Lenders and financial institutions can build a nuanced understanding of the status of the digital data footprint of entrepreneurs across different segments and activities. Assessing the digital footprints may include answering questions, such as:
What are the digital data streams? Who owns them?
What is the availability of data? Is it aggregated or disaggregated? Is it analog or digital?
What is the depth and quality of the existing digital data footprints?
How can data be aggregated and ownership restored with the entrepreneur?
Does the entrepreneur have control over the data to open it to financial institutions and inform credit decisions?
How can the entrepreneur use data for better services and services at a better price point?
In light of regulations on data privacy, how does a financial institution ensure security and ethical use around ownership, usage, handling, storage, and data transfer?
Once the financial institutions have helped MSMEs enhance their digital footprints, they may use the digital data to develop new business models, innovate risk management approaches, and formulate and implement new products anchored on alternate data.
Building skills and capacities of MSMEs on business management
As discussed in our previous blog, “Digitizing the operations of MSMEs: A big step to strengthen their resilience”, we argue that financial institutions may support enterprises to trust, navigate, and use technology to market their products and services, receive payments, and access digital financial services. Carefully designed and delivered digital skilling programs based on an understanding of their mental models can enable MSMEs to use digital technology to grow their businesses.
Developing a digital business model and digital solutions for MSMEs;
Digitizing front-end and back-end processes;
Using an omnichannel approach and embed digital channels to distribute financial services to enterprises;
Providing superlative user experience using a digital engagement approach.
Developing and implementing adequate digital products for MSMEs
Financial service providers, including FinTechs, have the opportunity to design and implement customized and relevant digital products for MSMEs. Such products may include:
· Short-term loans with a tenure of a day to a week to help market traders who currently use loans repayable over weeks or a month to finance their business cycles, which run from early morning to afternoon. Mahindra Finance, a non-bank finance company from India has plans to launch digitally-driven small-ticket loans in 2021.
· Goal-based savings and loans offer a new approach to wealth management that helps an individual plan for a specific life-cycle goal. Such products have an appropriate financial planning tool embedded in the app or USSD interface. Many financial institutions offer goal-based products to their customers. ALAT, Nigeria is Africa’s first fully digital bank launched by Wema Bank. It provides simple, automated saving plans that are goal-based and earns an annual interest of 10%—triple the typical bank rate. Similarly, Equity Bank offers EazzySave to helps customers save toward a goal and often backs it up with a loan.
Digital credit for enterprises: Digital credit provides instant, automated, and remote credit to users. Millions of users have benefited from digital credit to meet their consumption needs. While some enterprises use digital credit for their sundry needs, digital credit is seen as a last resort to meet larger working capital needs. Digital credit providers may develop MSME-specific products to on alternate data sources, customized credit-scoring approaches, and aggregating existing and potential digital footprints. We see this in action as in the case of U GRO Capital, a small-business lending platform from India. The platform plans to roll out an end-to-end digital lending platform for the sector and plans to reach out to 500,000 MSME clients.
A merchant cash advance (MCA) is a point-of-sale (POS)-based loan product for entrepreneurs offered for a fixed tenure (usually less than 24 months) to meet their working capital needs. Such products enable automatic access to credit as lenders can tap into the entrepreneurs’ cash-flows to use them to help make credit assessments, disburse loans, and collect repayments linked to the sales automatically. The sales-linked repayment allows the entrepreneurs much more flexibility than a regular loan. Bidvest Bank in South Africa offers merchants a loan facility based on the business’s future turnover. It has designed MCA alongside Merchant Capital and catering South African MSMEs. Similarly, Neogrowth in India assesses creditworthiness based on the cash flows through the POS terminals of merchants. It electronically collects loans each day from the sales on the POS terminals, thus addressing issues around seasonality in merchants’ business.
Receivables-based, invoice-based, and inventory finance help MSMEs easier access to credit. Like their larger counterparts, micro and small entrepreneurs also buy and sell on credit and maintain stocks and inventory—albeit in analog format. Lenders could help MSMEs digitize sales, cash flows, stock movement, invoices, receivables, and inventory details to assess credit risk and extend credit at a discounted value to the entrepreneurs. The receivables, invoices, and inventory could also act as a psychological guarantee. The increasing use of digital contracting and push from governments toward formal invoicing by enterprises irrespective of their size provides further impetus for this type of finance. Reserve Bank of India, which is India’s central banker, instituted an online bill-discounting platform, the Trade Receivable Discounting System (TReDS). This gave MSMEs the power to raise funds by selling trade receivables from corporates.
How can we help providers and entrepreneurs utilize digital approaches to enhance access to finance for MSMEs?
The market offers a clear opportunity to use digital tools to enhance access to finance, skills, and market linkages for enterprises through a multi-pronged approach at the level of policy and regulation, providers, and entrepreneurs. Such an approach will help resolve the legal, operational, and other barriers for enterprises to access finance, skills, and market linkages. Significantly improving digital financial services design and delivery will require an ecosystem-wide approach to enable entrepreneurs to choose, use, and prefer digital tools and approaches.
MSC plans to build a holistic Enterprise Finance Lab (enFinLab) to:
Support providers develop customer-centric products;
Support enterprises transform digitally;
Build digital platforms to enhance better access to finance, skills, and market linkages; and
Work with policymakers and regulators to build a conducive environment for the growth of enterprises.
We invite investors, donors, and financial institutions interested in partnering with us to get in touch to participate in the enFinLab and enhance access to credit to millions of un(der)served enterprises
In our second Master class series, we spoke to Leesa Shrader, the Director of the AgriFin Accelerate Program at Mercy Corps. She is a trailblazer in the financial inclusion space and specifically in the agriculture sector. She spoke at length about her professional journey, key achievements, challenges and lessons learnt and also leaves a few nuggets of wisdom for the future breed of women leaders.
This conversation goes deeper to focus on:
The role of agricultural digital platforms in agricultural transformation, and inclusive financial systems in Sub-Saharan Africa. She gave us a walkthrough Digifarm, one of the successful cases of the agriculture digital platforms and lessons learnt in building future platforms
Key lessons on partnerships and collaborations emerging from the current digital agriculture platforms
The role of youth in agriculture digital ecosystems
The medium to long-term impact of COVID-19 on inclusive agriculture finance systems and
Recommendations for the players in the agriculture ecosystem
The COVID-19 pandemic has left micro, small, and medium enterprises (MSMEs) decapitalized. With nowhere to turn for reasonably priced credit to reboot their businesses, many will likely be forced to shut down.
In May, 2020, at the peak of the pandemic, only 22% of the enterprises that MSC surveyed in India, Indonesia, Bangladesh, the Philippines, Uganda, Kenya, and Ghana had managed to access credit from formal financial sources. With the onset of COVID-19, the incomes of MSMEs dropped while their access to credit decreased. Struggling to manage liquidity in the wake of rising household and business expenses, MSMEs continue to dip into their savings.
What are the key constraints that limit the growth of MSMEs?
The illustration below highlights the range of challenges MSMEs face. More than 35% of enterprises rated limited access to financial services as the key constraint that prevents them from growing their businesses.
Several studies on the MSME sector suggest that the multiple growth constraints mentioned above can be linked largely to inadequate access to finance. Lack of access to formal credit from financial institutions forces most entrepreneurs to seek funds from family, friends, and informal lenders. Though easily accessible, informal credit comes at prohibitive costs with interest rates of 3–10% per month.
Why do MSMEs have limited access to formal finance?
Information asymmetry: The inherent nature of MSMEs is the reason behind the demand-supply gap in access to finance. MSMEs are generally informal and young, have less publicly available information, and operate in unfamiliar sectors. This results in higher information asymmetries and risk, which discourages banks from lending to them.
Lack of documentation: Most MSMEs do not have enough assets that they can use as collateral. Moreover, financial institutions often require documents, such as certificates of incorporation.
Process inefficiencies: Most informal enterprises use manual processes, which are costly and inefficient. Process inefficiencies negatively affect record-keeping, cash flow management, and profit optimizing, and compromise loan appraisal metrics by financial services providers.
Limited digital footprints: Since most MSMEs are informal, the entrepreneur’s profile and business transactions are likely unrepresented or underrepresented in the formal financial ecosystem. This leaves the financial institution with limited digital transactional trails to build a credit score and provide customized financial solutions.
Perceived as low-return enterprises: Financial institutions do not view MSMEs as a viable target segment compared to large corporate firms. Their perception of MSMEs as high-risk enterprises that offer inadequate returns does not warrant lending to them.
Inadequate solutions: Limited information and the perception of low returns of MSMEs affect the development of financial services for this sector. This results in none or limited customization of solutions for MSMEs.
Limited reach to MSMEs: In developing markets, many MSMEs are located outside main market areas. This marginalizes them from the reach of formal financial touchpoints.
How can financial institutions use digital transformation approaches to help MSMEs recover from the impact of the COVID-19 pandemic?
Financial institutions have a clear opportunity to enhance access to finance for MSMEs in emerging economies. Financial institutions may use a multi-pronged approach anchored on digitization to support MSMEs, revive businesses, and build resilience. This will lead to enhanced access to useful, relevant, appropriate, preferred, and used financial solutions for MSMEs delivered using digital tools. The table below summarizes the approach financial institutions can employ to enhance access to finance for MSMEs:
Let us look at each of these aspects in detail.
What digital technologies can financial institutions embed in their business models for MSME finance?
Existing formal financial solutions fail to meet the needs of MSMEs, which presents a significant opportunity for innovation in business models and products. Some approaches to the adoption of innovative business models are as follows:
Traditional financial institutions that use specialized services in collaboration with service providers, offer technology-driven services, such as credit assessment and risk monitoring, electronic document management, workflow management, digital inventory management and record-keeping, and process automation.
A focus on enterprises along specific clusters and segments, such as Kopo Kopo in Kenya for mobile money merchants, Neogrowth in India for merchant cash advances, Konfio in Mexico for micro-businesses, and Tienda Pago in Peru for small stores.
A digital marketplace or platform for financial services, such as SME Corner in India and Yoco in South Africa.
How could financial institutions develop better financial solutions for MSMEs?
Financial institutions can enrich their assessment of client needs, profiles, and segments by better understanding their footprints—digital or potentially digital, to innovate products and services. This data, clubbed with an analysis of behavioral patterns, could lead to hyper-customization of solutions on the go to meet specific needs of MSMEs. Some interesting product-level innovations include digital overdrafts or working capital credit for enterprises, merchant cash advances, invoice discounting within a value or supply chain, receivables financing, and reverse factoring.
How can financial institutions enhance the efficacy of MSME finance by digitizing processes?
An omnichannel experience involves using technology platforms to improve customer acquisition and user experience while transacting. It allows customers to interact with numerous distribution and delivery channels simultaneously. The emergence of digital platforms and alternative channels has changed the way customers bank. The more access points they have, the better the user experience. Increasingly few customers now want to step into a bank branch.
With the changing market dynamics and preference for more ways to connect and transact, financial institutions need to consider using multiple seamlessly integrated channels to enable entrepreneurs to transact. Despite the complexity of an omnichannel experience, it provides entrepreneurs with a holistic brand experience while financial institutions benefit from the unified view of an entrepreneur. To serve entrepreneurs effectively, financial institutions can use agents, mobile banking applications, internet banking applications, and API-based integrations, besides branches and ATMs.
MSC, through its experience of enabling the digital transformation of financial institutions, has observed that “phygital” models, a combination of physical approaches with the use of digital tools, work better as opposed to an entirely digital model. This is especially the case when users are about to make a decision. A human interface at the point of decision-making reassures users and encourages them to prefer, choose, and use digital financial services confidently. Financial institutions can use trained agents to help entrepreneurs understand solutions and decide which ones to use.
A great user experience involves customer-centric solutions and a manner of delivery that mimics the behaviors and attitudes of users. This ensures that the provision of services is clear, obvious, and intuitive for end-users. To build a customer-centric solution, financial institutions need to focus on user experience, assess bottlenecks that hinder users, incorporate the customer journey approach, embed the progressive learning curve of users, implement design thinking, and personalize user experience.
Financial institutions can utilize digital technology to enhance access to finance for MSMEs. The use of digital technology to enhance access to finance has assumed greater importance since the onset of the pandemic. For this, financial institutions first need to resolve key constraints through the following measures:
Use alternative data to accurately assess key risks in lending to enterprises and make informed decisions on providing access to finance to MSMEs
Use cost-effective digital channels to reach MSMEs
Enhance the efficiency of processes through business process re-engineering and automation to enable a quicker turnaround
Enhance returns through low-cost, digitally-enabled operations
Deliver end-user customizable solutions that MSMEs will prefer, chose, and use
About 17% of businesses surveyed by MSC in India, Indonesia, Kenya, and the Philippines have closed due to local restrictions and low demand for goods and services. Meanwhile, micro and small enterprises (MSEs) in the informal sector fared worse. MSMEs, which have been the pillar for many economies, have been struggling to survive in the post-COVID-19 world.
According to the World Bank, SMEs contribute about 90% of businesses and 50% of employment worldwide. Formal SMEs contribute around 40% to the national GDP in emerging economies. MSMEs have an even higher share in the economy if we include informal enterprises. COVID-19 created a challenging environment for MSMEs and only agile businesses have a better chance to survive the crisis. Yet only a few enterprises have realized that digitization may bring agility and resilience to the operations and expand their reach. In a survey conducted by MSC in India, Indonesia, Kenya, and the Philippines, only 38% of respondents have reported that they either increased the use of digital payments or started using digital modes of payment for transactions.
Digitization brings ample opportunities to MSMEs
Digitization of MSMEs offers them the chance to differentiate themselves from the competition. The 2019 APEC SME Ministerial Statement noted that e-commerce platforms allow SMEs to gain greater access to diverse global markets and can mitigate risk within supply chains. Digitization enables enterprises to implement digital technology to:
Expand geographical reach and acquire new customers: With the growth of digital platforms, the rising prominence of e-commerce, and the low barriers to entry, MSMEs can expand their market and overcome the limitations of physical location. E-commerce has also paved the way for MSMEs to serve rural and remote customers, ultimately adding to their customer base. In Africa, 82% of the enterprises engaged solely in cross-border e-commerce are micro and small enterprises. E-commerce also offers easy access to the international markets for women-owned enterprises.
Better customer engagement: MSMEs that operate digitally can manage their customer base effectively by using social media to ensure higher engagement levels. As per a survey of US consumers, in March, 2020, online spending increased by 30%. As customers have radically altered their buying patterns, digitization has become essential to run a business.
Cost-effective business operations: MSMEs that used the Internet lowered their costs by about 22% to source raw materials, manage inventory, and achieve higher productivity.
Increased business profitability: MSMEs that spent more than 30% of their budget on Internet technologies raised revenue nine times as fast as MSMEs that spent less than 10%. Digitization can help MSMEs enhance revenue by 26%. In India, MSMEs that adopted e-commerce have reported 27% higher revenue growth than their offline counterparts.
Higher and better access to finance: As MSMEs increase their digital footprint, they become more visible to banks and lenders. MSMEs can easily access credit as financial institutions can utilize digital data to assess credit risk more accurately.
Efficient customer credit management: With digitization, MSMEs can track customer credit and also can set a limit of credit for customers. It can act as a risk mitigation measure and keep a check on the credit loss and help maintain an efficient cash flow in the business.
Opportunity comes with challenges
Nonetheless, MSMEs that wish to embrace digitization face various challenges.
Lack of understanding of how technology helps: MSMEs lack awareness of the benefits of technology. Most MSMEs have doubts about the return on investment from adopting technology. The lack of awareness and skepticism around the benefits lead to low uptake. Furthermore, MSMEs lack the skills to understand and participate in the digital economy, which contributes to the limited adoption.
Cost of technology adoption: A lack of disposable funds to acquire technology for the business limits the ability of MSMEs to benefit from digital technologies. The vast majority of MSMEs have been decapitalized by the pandemic—they have run down stocks, depleted savings, and had to borrow from informal sources just to stay afloat. So, enterprises will need access to credit to resume business and adopt technology and digitize their operations. 19% of enterprises in Africa find the high commissions taken by e-commerce platforms as a major bottleneck. For these businesses, securing loans from traditional banks and financial institutions is a time-taking and tiresome process. The Government of India and the Reserve Bank of India (the central bank in India) have implemented PSB loans in 59 minutes to respond to this challenge. The initiative has digitized the lending process so that a borrower can access a loan within 59 minutes. Such programs that digitize and automate access to finance for MSMEs through a marketplace platform will help entrepreneurs access credit with greater ease.
Concerns around data privacy and exposure to digital fraud: Cybersecurity firm McAfee estimated the impact of cybercrime on the global economy at nearly USD 600 billion pre-COVID. Post-COVID, the value at risk due to cybercrimes may increase even further as the adoption of digital tools for procurement, payment, inventory management, etc. has risen significantly. While large businesses and government-owned enterprises can track and protect themselves against cyber threats, the associated costs and lack of awareness about these threats make the management of cybercrimes difficult for MSMEs.
What is needed to catalyze the digitization of MSMEs?
MSMEs need better access to e-platforms, better payment and delivery services, streamlined customs procedures, a robust data privacy system, and targeted skill-building to ensure they can benefit from e-commerce.
The first step to digitize MSMEs’ operations is to build the digital capacities of entrepreneurs
Many MSME entrepreneurs cannot intuitively appreciate the benefits or value proposition of the use of digital technologies. They struggle to trust, navigate, and use technology to market their products and services, receive payments, and access digital financial services. Carefully designed and delivered digital skilling programs based on an understanding of their mental models can enable MSMEs to use digital technology to grow their businesses. While building the digital capability of MSMEs, a mix of the following works best:
Supporting the journey of digitization for MSMEs during the pandemic requires an innovative approach that will allow them to reap its benefits while overcoming challenges. Entrepreneurs need support at all stages of their digital journey, as they start as beginners, move to intermediate level, and acquire experienced status.
At the beginner level, entrepreneurs are new to the digital world. Influenced by their peer group and family, they start with the use of various social media applications, mostly to communicate and acquire knowledge. At this stage, they need support to enable digital payments for their business, participate in various basic social media and e-commerce platforms, and access credit using digital platforms.
Once they reach the intermediate level, entrepreneurs become comfortable with using digital tools for functions they have learnt at the beginner level. At this stage, they may need help in using digital tools for intermediate functions, such as customer service and credit management, branding and marketing, participating in value chains and supply chains, and taxation.
At the experienced level, entrepreneurs are comfortable with digital applications and can navigate applications that support the business. At this stage, they expect assistance on tools on product standardization, copyright, and trademark registration, use of advanced digital marketing including search engine optimizations (SEO), Google Ads, and other marketing tools.
As MSMEs build their skills and embrace technology, policymakers may take steps to support their digital transformation in the following ways:
MSMEs still have significantly low adoption of technology, such as the use of social media and other online channels for business communication. The government may incentivize the use of digital channels by MSMEs and provide access to subsidized credit for MSMEs to digitize. The government may also develop appropriate digital infrastructure to make the digitization of MSMEs possible. For example, the Government of India has recently launched the Digital Saksham Initiative in collaboration with MasterCard to strengthen the ability of MSMEs to market products better through greater know-how and digital payment acceptance.
Digital literacy will play a role to catalyze the uptake of digital technologies and address skill gaps. Public and private agencies must join hands to promote digital literacy and enhance trust in digital solutions. The government can promote this as a part of the academic and vocational curriculum in colleges and training institutes. In India, the government, EdTech start-ups, and tech businesses have joined hands to help MSMEs to grow their business online.
Make mobile money and digital credit more accessible and affordable. To promote mobile money in the country, policymakers and think tanks can mandate lower transaction fees. During the pandemic, Kenya and other countries took this step to promote online payment. In Kenya, more than one-fourth of the adult population uses digital credit and most of them use it to meet their needs of working capital. The government may push for the expansion of digital credit beyond consumer finance to cater to the financial needs of MSMEs by nudging or mandating providers to focus on enterprise finance.
Enable policies to protect users against digital fraud and cybercrime. The government and policymakers can develop suitable policies to ensure that the average user is safeguarded against the risk of digital fraud and cybercrime. The government could also develop and deliver awareness campaigns for users to inform them of key issues and ways to mitigate the risk of fraud.
Although digitization is an ongoing process, the COVID-19 pandemic has compelled MSMEs to transform their businesses through digital means. The digitization of MSMEs will add more revenue to the entire economy. The CISCO 2020 APAC SMB Digital Maturity Study found that a shift of 50% of MSMEs to the digital challenger stage (the enterprises where all core processes are automated and productivity rates are increasing) could add between USD 2.6 and 3.1 trillion to Asia Pacific’s GDP by 2024.
In Africa, MSMEs currently provide more than 50% of GDP. We envisage that as MSMEs digitize, their contribution to the national economies will increase significantly. With the said potential, the time is ripe now to focus on the digitization of MSMEs. Using digital means, the MSMEs can utilize e-commerce, social commerce, and digital payments to support their recovery after their pandemic, while reviving their businesses and building greater resilience to survive similar crises.
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