How fintech can boost financial inclusion for Latin American SMBs

Despite being the backbone of emerging economies, small and medium-sized business (SMBs) in Latin America face significant challenges in terms of scaling and growth.

Solutions such as blockchain and open banking could help boost SMB growth

SMBs comprise the majority of Latin American business, generating 67% of formal productive employment and 40% of the GDP. Nevertheless, businesses face challenges of poor financial inclusion, minimal competition among financial institutions, and strict banking regulations. It makes it extremely difficult for them to even open a bank account, much less take out a loan.

These obstacles are a threat to both employment and economic growth across the region. It is critical to devise solutions for these issues to leverage more finance access for SMBs and encourage progress and development.

Why SMBs struggle with financing access

Almost half of the region’s population is without access to traditional banking services and SMBs are severely limited in their ability to acquire funding. SMBs represent 99.5% of businesses in Latin America, 9 out of 10 of which classify as “micro-enterprises”, according to the Organization for Economic Co-operation and Development (OECB).

Multiple reasons exist for why SMBs cannot access funding:

1. Bank accounts are difficult and time-consuming to open

Emerging markets in many countries often face strict banking regulations. Opening a bank account can usually only be done in person and requires a heap of personal documentation. The mere process of opening an account can take as long as several months, eating up the precious time that a small business owner can rarely afford to waste. This is why many entrepreneurs and business owners choose to operate without a bank account at all.

2. Heavy restrictions on online cross-border payments

These days, no business, small or large, can operate without the use of digital services. Platforms that offer these services are often based internationally and can only be maintained with monthly or annual subscription fees. The fees for these services can be massive, due to heavy restrictions from local banks on cross-border payments.

Some SMBs turn to low-limit credit cards to cover expenses, which can make reimbursement for work expenses difficult. Others transfer money to foreign contacts to cover payments on their behalf, resulting in a juggling act that takes a lot of time and effort.

3. Severe lending gaps between need and provision

Globally, an estimated $2 trillion gap exists between what SMBs need and what financial institutions will provide. This enormous imbalance largely stems from difficulties local banks have evaluating SMBs, many of which do not have reliable accounting systems or collateral against which to borrow.

Even when an SMB can provide audited financial statements, tax returns, or five-year projections, the application process can often take many weeks and usually ends in rejection. Many banks, simply as a matter of policy, don’t accept any loan request from SMBs under $50,000.

Solutions for tackling financing difficulties

Here are some solutions that could ease some of the difficulties SMBs face in securing access to credit. Some have already been implemented in several countries across the region, with highly successful results.

Open banking

Open banking, a currently growing trend where a third-party financial service is given access to a customer’s financial data by using application programming interfaces (API), makes customer financials more easily assessed.

The practice promises to drive new levels of innovation and healthy competition across the banking sector, ideally resulting in lower costs and better customer service in the market. It can also help customers get a better sense of their finances before taking on any debt.

Community investment trust funds

Since most banks are hesitant to provide loans for SMBs due to high risk, establishment of community-based trust funds to promote lending for start-ups could prove to be an effective and manageable solution.

These trust funds would not be guaranteed by deposit insurance corporations, instead leaving risks to be taken on by investors themselves. The terms of the funds would need to be carefully explained to prospective investors, but since they would be project-driven, risks could be distributed to strengthen confidence. Government regulation and supervision would be necessary to provide transparency and avoid fraud.

Fintech

Recent years have seen a huge growth in fintech lenders for SMBs, providing new models for lending that are faster, easier, more cost effective, and more transparent than traditional lenders.

Using advanced analytics and artificial intelligence (AI) technology, these platforms can provide loans for SMBs in as little as 24 hours, with a minimum of paperwork — usually only a bank statement to demonstrate cash flow. Some platforms offer supplemental services such as corporate credit cards that can be accepted worldwide in order to make international payments and track expenses.

Blockchain

Another technology opening new avenues for SMB growth is blockchain. Originally designed to underpin the exchange of cryptocurrency, blockchain has evolved into one of the fastest-growing emerging technologies available. In addition to providing easy transfer of payments around the world via crypto, it is also creating new opportunities for businesses in every sector that are looking to expand.

For SMBs struggling with cash flow issues, blockchain can provide a potential solution with the advent of “smart contracts”. Not only does this automate agreements between suppliers and customers, it also enforces them as long as certain preconditions are met. This makes the process of getting invoices paid much easier.

As an added benefit, the decentralised network means little risk of fraud, making it perhaps the safest system in the world for sending and receiving payments.

If SMBs thrive, everyone thrives

For any emerging market seeking to grow, complete financial inclusion for all businesses (not just corporations) is not just beneficial, but essential. Every component in the system has a part to play if the SMB credit gap is going to close, from government regulators and service providers, to insurers, credit agencies, and financial institutions.

If successful, the result could very well be an explosion of growth for entrepreneurs and small business owners, leading to more jobs and a stronger, more robust economy.