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How Fintech Is Bridging The Trade Finance Gap Among MSMEs

By Kiara Taylor. Originally published at ValueWalk.

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Securing funding has long been problematic for micro, small and medium enterprise (MSME) businesses. Bank loans often require solid credit history, a long track record, or proof of ample cash revenue to gain approval. This is simply not possible for many small businesses and is especially cumbersome for small companies located in developing countries such as India and Mexico. Although investments are the key to growth for these populations, it is often hard to come by from traditional financial institutions.

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Enter fintech. Financial technology (fintech) companies have helped bridge the gap between ambitious small businesses and funding opportunities from banks, which are often out of reach. Fintech embraces a more modern approach adapted to today’s business climate. As a result, they have emerged as serious competitors to traditional banks, which often lag behind in technological developments.

Banks have historically struggled to adequately provide targeted funding for MSMEs. Small and medium-sized businesses require a much higher level of funds than those provided by consumer loans but vastly less than large corporations. Consequently, fintech companies have stepped in to serve this ignored market, which is hungry for funds. This article will discuss how fintech can serve small businesses, especially in emerging markets such as India, Latin America, and Africa.

Traditional Banks Fell Asleep Behind The Wheel

In an era of rapid technological advancement, it’s easy to see how a whole industry could fall behind. It’s also easy to understand how traditional financial organizations – lofty institutions of power and prestige whose histories span centuries – grew complacent with their status. Until now, banks never felt the need to expand their services or target a wider customer base. However, current data and research suggest that fintech is posing a significant threat to the dominance of traditional financial institutions.

For one, fintech provides an easy and convenient way for small companies to obtain loans. Formerly, small businesses would have to schedule in-person appointments coinciding with their local bank’s operating hours to apply for a loan, which was often rejected. Fintech, on the other hand, puts user experience at the forefront, allowing any business to apply for a loan with only a few keystrokes.

Many fintech proponents argue that fintech is beneficial for financial inclusion since it empowers rural people who would otherwise be unable to obtain funding to apply for loans easily. Small businesses often play a huge role in local economies within developing nations. For example, Mexico has over 6 million small businesses that could benefit from a line of credit or extra funding, which is six times more than their more developed neighbor Canada.

Innovations in alternative lending platforms, online banking, and mobile payments – all fueled by fintech developments – challenge the status quo by bringing banking services to previously underserved segments of the globe. While small businesses in emerging markets frequently rely on cash transactions for revenue, this payment method is notoriously susceptible to theft or mismanagement. The widespread adoption of fintech services by small businesses globally will play a huge role in lifting struggling regions out of poverty, encouraging consumerism, financial education, technological adoption, and providing much-needed funds for aspiring business ventures.

Tribal Credit, for example, is a fintech company centered around the Mexican market that has now expanded to Chile, Columbia, and Peru. The company focuses on speeding up access to credit and providing local businesses with methods to receive payments integrated with local tax laws. This ensures that small businesses that scale up aren’t suddenly hit with due tax bills and helps them establish legitimacy in the eyes of the government and society as a whole.

Global Demographics Provide Momentum For Fintech Adoption In Emerging Markets

Emerging markets comprise over 85% of the world’s population yet produce less than half that percentage of global economic input. Fintech provides a solution to unmet demands from small businesses in developing countries. It can fill the gaps left by traditional financial institutions that often focus only on serving the nation’s wealthiest political elite. For regions that suffer from political unrest and unstable governments, fintech can offer a solution by providing customers with means for storing crypto during times of uncertainty about the local currency.

According to research from Ernst & Young, providing services to unbanked individuals globally could generate $200 billion in revenue, meaning the business relationship is mutually beneficial. While setting up a retail bank in a remote or impoverished region isn’t a stellar investment for obvious reasons, fintech relies heavily on technology.

Not only does this approach result in lower overhead costs, but it also enables fintech companies to reach a much larger portion of the planet. According to recent statistics, 62% of people surveyed prefer to manage investments with an app rather than through a traditional bank, making this method of managing finances a preferred way for many across the globe.

Fintech Connects Small Businesses With Vital Market Data

Funding isn’t the only disadvantage MSMEs are faced with. Due to their small size and lack of connections within the larger global economy, small businesses are often ill-suited to predict future demand. Furthermore, lack of information can make it difficult for small businesses to grapple with supply chain issues and logistics. Fintech companies, however, can provide these businesses with electronic marketing data across entire trade regions and financial cycles that can help them prepare for potential market outcomes.

In an era of increasingly widening financial disparities, fintech provides market transparency by giving everyone the same data. The coronavirus pandemic has concentrated wealth into the hands of the already very wealthy. The corporations that had the funding and resources to pivot abruptly when global trade came to a halt were the ones that were able to pick up the slack when smaller businesses couldn’t.

However, the story isn’t over just yet. There is still a huge desire for consumers in emerging markets to support their local communities. By providing small businesses with the means to market their products and services in their communities by injecting them with much-needed funding, fintech can make a huge difference in the most impoverished regions in the world.

Conclusion

Emerging markets in Latin America, Mexico, and India are excellent investments that are often overlooked because of the risk inherent in areas where political instability or natural disasters are common. However, the best way for these regions to develop and grow economically and politically is through their small businesses, which are often underfunded.

Fintech helps close this gap by providing services to segments of the globe that were often cut off from traditional financial support. By connecting MSMEs to investors, lines of credit, business data, and tools to control their financial data, fintech can transform local economies worldwide.

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