How Fintech is Bridging the Trade Finance Gap Among MSMEs
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Obtaining finance has long been problematic for micro, small and medium-sized enterprises (MSMEs). Bank loans often require a strong credit history, long track record, or proof of sufficient cash income to be approved. This is simply not possible for many small businesses and is especially cumbersome for small businesses located in developing countries like India and Mexico. Although investments are the key to growth for these populations, they are often difficult to access from traditional financial institutions.
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Enter fintech. Financial technology (fintech) companies have helped bridge the gap between ambitious small businesses and bank funding opportunities, which are often out of reach. Fintech is taking a more modern approach suited to today’s business climate. As a result, they have become serious competitors to traditional banks, often lagging behind in technological developments.
Banks have always struggled to provide adequate targeted financing to MSMEs. Small and medium-sized businesses need a much higher level of funds than those provided by consumer loans, but much less than large businesses. Hence, fintech companies have stepped in to serve this ignored and fund-hungry market. This article discusses how fintech can serve small businesses, especially in emerging markets such as India, Latin America, and Africa.
Contents Pin up
1. Traditional banks have fallen asleep behind the wheel
2. Global demographics are driving fintech adoption in emerging markets
3. Fintech connects small businesses with vital market data
Traditional banks have fallen asleep behind the wheel
In an era of rapid technological advancements, it’s easy to see how an entire industry could fall behind. It’s also easy to understand how traditional financial organizations – lofty institutions of power and prestige with histories spanning centuries – have become complacent about their status. Until now, banks have never felt the need to expand their services or target a wider customer base. However, current data and research suggest that fintech poses a significant threat to the dominance of traditional financial institutions.
On the one hand, fintech offers small businesses an easy and convenient way to get loans. Previously, small businesses had to schedule in-person appointments to coincide with their local bank’s opening hours to apply for a loan, which was often turned down. Fintech, on the other hand, puts user experience at the forefront, allowing any business to apply for a loan with just a few clicks.
Many fintech proponents argue that fintech is beneficial for financial inclusion because it allows rural people who otherwise could not get finance to easily apply for loans. Small businesses often play a huge role in local economies in developing countries. For example, Mexico has more than 6 million small businesses that could benefit from a line of credit or additional financing, six times more than its more developed neighbor Canada.
Innovations in alternative lending platforms, online banking and mobile payments – all fueled by fintech developments – are challenging the status quo by bringing banking services to previously underserved segments of the world. While small businesses in emerging markets frequently rely on cash transactions to generate revenue, this payment method is notoriously susceptible to theft or mismanagement. The widespread adoption of fintech services by small businesses around the world will play a huge role in lifting struggling regions out of poverty, encouraging consumerism, financial literacy, technology adoption and providing much-needed funding for budding businesses. .
Tribal Credit, for example, is a fintech company focused on the Mexican market that has now expanded into Chile, Colombia and Peru. The company is focused on accelerating access to credit and providing local businesses with methods to receive payments that are integrated with local tax laws. This ensures that growing small businesses are not suddenly hit with due tax bills and helps them establish their legitimacy in the eyes of government and society as a whole.
Global Demographics Driving FinTech Adoption in Emerging Markets
Emerging markets represent more than 85% of the world’s population, but produce less than half that percentage of global economic input. Fintech provides a solution to the unmet demands of small businesses in developing countries. It can fill the gaps left by traditional financial institutions that often focus solely on serving the country’s wealthiest political elite. For regions that suffer from political unrest and unstable governments, fintech can offer a solution by providing customers with ways to store crypto during times of uncertainty regarding the local currency.
According to a study by Ernst & Young, providing services to the unbanked 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 area is not an exceptional investment for obvious reasons, fintech relies heavily on technology.
Not only does this approach result in reduced overhead, but it also enables fintech companies to reach a much larger swath of the planet. According to recent statistics, 62% of respondents prefer to manage their investments through an app rather than through a traditional bank, making this method of managing finances a preferred way for many people around the world.
Fintech connects small businesses with vital market data
Funding is not the only drawback that MSMEs face. Due to their small size and lack of connections within the global economy, small businesses are often ill-suited to forecasting future demand. Additionally, lack of information can make it difficult for small businesses to deal with supply chain and logistics issues. Fintech companies, however, can provide these businesses with e-marketing data across entire business regions and financial cycles that can help them prepare for potential market outcomes.
At a time when financial disparities are widening, fintech provides market transparency by giving everyone the same data. The coronavirus pandemic has concentrated wealth in the hands of already very wealthy people. The companies that had the funding and resources to pivot sharply when global trade ground to a halt are the ones that were able to pick up the slack when smaller businesses couldn’t.
However, the story is not over yet. Consumers in emerging markets are always very keen 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 poorest parts of the world.
The emerging markets of Latin America, Mexico and India are excellent investments that are often overlooked due to the risk inherent in regions 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, often underfunded businesses.
Fintech is helping bridge this gap by providing services to segments of the world 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 around the world.
Updated on February 15, 2022 at 2:22 p.m.
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