Where consumers go, SMEs follow

Photo: Daniel Lee

Spurred by fintech’s success in consumer markets and stronger regulatory frameworks, more businesses are turning to fintech products to meet their financial demands.

By Preetam Kaushik

Diversity is the hallmark of Southeast Asia. ASEAN’s 10 member nations host hundreds of ethnicities, dozens of languages, and a variety of unique cultures and customs. But in the economic sphere, the region shares some key features – especially when it comes to small and medium sizes enterprises (SMEs).

SMEs as the backbone of the regional economy. They account for between 88-99% of all enterprises in the member nations and provide up to 97% of employment opportunities, 30% of exports, and 51% of gross domestic product (GDP) (41% on average).

Unfortunately, despite their importance to the economy, they suffer from numerous challenges, especially in the realm of finance.

Credit and other financial services are in short supply

Limited access to credit is a perennial issue in a region historically plagued by low banking penetration. SMEs are not alone in facing this conundrum. In most of the ASEAN member states, the majority of the population do not have access to basic banking services.

A lack of basic fundamentals like adequate collateral and financial records, discourage banks from lending to SMEs. The traditional credit rating systems in the region, which are based on financial records and other fundamentals, are not friendly towards small businesses.

Without access to credit, SMEs in the region are vulnerable to cashflow fluctuations, especially smaller entities. They often face delays in payments because of a reliance on cash and cheque-based transactions.

New players are filing the credit gap

The emerging field of fintech can provide viable solutions to many of these issues. fintech is enjoying strong growth in ASEAN as new players fill the credit void left by traditional banking and financial services in the region

For startups in this new arena, individual consumers are the low-hanging fruit. Individuals are more receptive to new technologies. Instead of targeting businesses, which want tried and tested products, startups have looked to the B2C segments to build their client bases.  

However, with the development of strong fintech ecosystems and proven successes in the consumer market, the fintech adoption rate among SMEs is rising fast. According to a recent report by Ernst & Young, China has the highest fintech adoption rate for SMEs at 61%, with the global average languishing below at 17%.

As local fintech ecosystems continue to evolve in 2019 and beyond, startups focusing on SMEs can expect similar adoption rates in Southeast Asia as well.

A small business owner in Singapore.
Photo: Luca Sartoni

There are three major spheres where fintech startups are providing alternative solutions to address some of the hurdles that stand between SMEs and financing:

Startups are using unconventional data sources for SME credit rating

One of the main bottlenecks in the realm of SME financing is the credit scoring system. When the main data points required for a credit score simply do not exist, there is a need to look for viable alternatives.

Big data offers a whole new world of possibilities in this. Financial data can be gleaned from SMEs that use online bookkeeping services. Network and mobile phone data can be used to determine if a business is as active as they are claiming to be. Customer reviews and a business’s social media presence could also be used to determine their credibility as a borrower.

Fintech startups are using these unconventional data sources to create their own alternatives to traditional credit scoring systems. In the Phillippines, for example, First Circle is a using these data points, along with their own database on local supply chain networks, to help SMEs access finance.

Many P2P lending startups are also developing their own credit rating systems based on big data, algorithms and human inputs. Funding Societies/Modalku (Singapore, Indonesia, Malaysia) and Koinworks (Indonesia) are prime examples of such lending platforms.  

There is even a startup called EFL in Indonesia that uses psychometric and behavioural data, derived from questionnaires, to determine the willingness of an entrepreneur to repay loans. An Indonesian bank, BTPN, used this approach to provide loans for SME entrepreneurs without any credit history.

By expediting payments, startups are also improving SME cash flows

Cash flow problems are a perpetual headache for most small businesses and enterprises in the region. Businesses that work as vendors in the supply chain to other bigger enterprises are often the worst affected.

For small suppliers, incoming payment delays can be catastrophic, with outgoings like rent, employee paychecks and supplier bills all requiring a prompt payment.  

Acudeen in the Phillippines is one of the pioneers in the field of expediting payments to SMEs. It

focuses on paying invoices to SMEs on behalf of larger corporations. They tie up with multi-national firms and clear the invoices early. This benefits the SMEs who don’t have to wait up to two months for their receivables.

By offering smart contracts and automated payments, Acudeen also benefits their corporate clients by reducing costs and instances of fraudulent billing. They are not alone in ASEAN. In Malaysia, another startup called Capital Bay is doing something similar.

Startups are also leveraging the mobile payment revolution in the region for SMEs

Mobile payments have revolutionised the retail space in the region. E-wallets like Grab-Pay and Go-Pay are used by millions for everyday transactions, changing the payment landscape for SMEs who serve consumer markets.

While e-wallets focus on the consumers, several startups are pioneering affordable Mobile Point of Sale (mPOS) systems aimed at small merchants and vendors. mPOS systems are a new breed of portable and affordable wireless cash registers that can accept many different types of payments from customers, including credit cards, debit cards, and mobile wallet payments.

Across Southeast Asia, several startups have pioneered mPOS systems for SMEs in their local markets. In Indonesia, CashLez has been working on its portable mPOS systems aimed at vendors and other SMEs since 2016. Digio is a Thai-startup working towards a cashless future for SMEs. In Vietnam’s crowded fintech market, NextPay, the result of a recent merger between an e-wallet and an mPOS startup, has attracted 35,000 merchants to the system.

Fintech startups are brightening ASEAN’s economic outlook

Fintech startups are making a tangible difference to ASEAN’s economic outlook. According to the latest World Bank rankings for ease of doing business, three nations from the region rank within the top 30 (Singapore, Malaysia, Thailand), with another two between 60 and 100 (Vietnam, Indonesia).

With the ASEAN organisation and individual governments favouring fintech and other digital technologies, the stage is set for a transformation in the region. We can expect those countries to improve their rankings in the near future as financial inclusion becomes a reality for SMEs.