Fintech

Fintech: Unleashing the potential of the digital economy

MSMEs face obstacles to accessing financial services due to a lack of collateral or credit history or even informal. Moreover, during the Covid-19 pandemic, the need for contactless payment methods has highlighted the importance of e-payments, even for traditional MSMEs. Fintech offers several advantages in this regard. Digital innovation could help MSMEs gain access to finance, which is imperative for productivity enhancement and sustainable growth in the long term.

Financial technology (fintech) describes new tech that seeks to improve and automate the delivery and use of financial services. At its core, fintech is utilized to help companies, business owners, and consumers better manage their financial operations, processes, and lives by using specialized software and algorithms on computers and, increasingly, smartphones. Fintech now includes different sectors and industries such as education, retail banking, fundraising and nonprofit, and investment management. Fintech refers to integrating technology into offerings by financial services companies to improve their use and delivery to consumers. It primarily works by unbundling offerings by such firms and creating new markets for them. Startups disrupt incumbents in the finance industry by expanding financial inclusion and using technology to cut operational costs. Consequently, fintech can significantly change the dynamics of the relationship between MSME and its bank. Advances in the fintech space could reduce the transaction costs of providing credit to small-scale businesses and provide alternative scoring mechanisms that banks can employ to have a higher degree of confidence about the risks entailed. Furthermore, other advances in the fintech space hold the promise of linking the finance provision more closely to the various core aspects of the company’s business. Such integration allows the finance to be better integrated with the multiple functions of the firm, and the MSME has fewer concerns in managing its cash flows. For the finance provider(s), the financing is more closely tied or bundled with the specific activities it is being used to fund and lessens the risk to which the company will misallocate those funds to support alternative activities.

In comparison with traditional banking, fintech uses new technological solutions to complement, automate or replace conventional banking services. By using data and analytics, fintech firms can perform more efficiently than traditional banks. For fintech firms, each customer transaction is valuable as it generates data, which can be used in models to measure the creditworthiness of an individual, helping to avoid the need for collateral or credit histories.²⁵⁷ For example, when a person buys a product or service online, they transfer money and data, joint development of fintech services. At the same time, this data can be combined with other data, such as social media data. This leads to faster credit scoring and other innovations. The innovative uses of data generate the efficiencies of fintech companies but raise concerns regarding the use of such data and its adequate protection, for instance, against data breaches. The innovative and data-driven nature of fintech has attracted new players such as telecom companies, mobile network operators, and cash agents in the financial markets. The common fintech-based financial products and services include (but are not limited to):

• Peer-to-peer (P2P) lending - lending flexible amounts of money to borrowers without physical bank branches and with no collateral requirements.
• E-commerce finance - platforms such as Alibaba, Amazon, and eBay are offering working capital loans for MSMEs through their platforms for selling goods.
• Online supply chain finance - relieves many inevitable risks, such as information asymmetry, bogus transactions, and operational risk caused by insufficient information flows between enterprises and financial service providers along the supply chain. With all the data online, those participating in the supply chain can enhance and monitor capital flows timely, securely, and transparently while increasing liquidity.
• Equity crowdfunding - raising funds from a large number of people (the crowd). Equity crowdfunding is a type of crowdfunding where issuers raise funds via an online platform in return for equities/shares. It is a method of raising capital typically used by start-ups and early-stage companies. Each investor is entitled to a stake in the company proportional to their investment.

Besides developing new and alternative financial products and services for individuals and MSMEs, fintech has also changed the processes of some financial transactions. For instance, during a loan application process, fintech tools can help financial institutions capture, validate, and analyze the creditability of their MSME customers remotely. AI and ML algorithms can also enhance the approval process for MSME loans, compensating for the lack of financial data. In Singapore, more than a hundred fintech start-ups are either in the B2C or B2B market.²⁵⁸ Fintech firms can operate alone, in direct competition with banks, or cooperation with banks and other financial entities. They can offer products ranging from mobile wallets and mobile money to complex financing. In payments, fintech enables various digital payments methods, including mobile payments via scanning QR codes, peer-to-peer money transfers, and point of sale payments (POS). These methods are highly relevant due to the pandemic and will continue benefiting from adoption after 2020.

Across countries in Asia and the Pacific, there are different players in the digital payments space, including e‐wallets from Grab, Alipay, GoPay, WeChat, among several others. Some fintech firms have special programs to help with small business digitalisation, including integrating these into their payment systems. GrabMerchant is a B2B platform that allows companies to build their online stores, set a cashless payment option, and create ads. This platform uses GrabPay remote payment link solution, which gives merchants a URL sent to customers to execute the payment. The merchant receives GrabPay credits immediately.²⁵⁹ This provides an advantage over MSMEs only using social networks that do not integrate payment solutions. In some cases, fintech companies have partnered with traditional financial entities to expand their offering. The MasterCard Network powers the GrabPay card.

Beyond the easing of payments, digital payments can also benefit MSMEs in other ways. The Ministry of Micro Small and Medium Enterprises of India incentivizes digital payments to improve the credit scores of MSMEs, which can help them later access finance. It is worth to remark India’s broader plans to move towards a cashless economy.²⁶¹

Fintech also holds promise in the area of supply chain finance. In January 2019, Ant Group announced the launch of its new subsidiary, Ant Shuanglian Technology or Ant Duo-Chain, involved in blockchain supply chain finance. This initiative targets SMEs working with large corporate customers. By using blockchain, each transaction is recorded and can be transmitted in real-time. This allows that transactions between a large corporate customer, MSME and banks can be verified immediately. The execution of the pilot illustrates this point. A car manufacturer raises an order, and the SME delivers the goods and sends the invoice. As soon as the buyer approves the invoice, the SME can sell this invoice to a bank, which, knowing the ability to pay the car manufacturer, buys the invoice and executes the payment. Meanwhile, the car supplier can pay when the invoice is due directly to the bank. All this can happen through blockchain, enabling each stakeholder to verify transactions immediately, avoiding any risk of duplication or fraud.²⁶² Project Ubin, a blockchain solution implemented by Temasek and the Monetary Authority of Singapore, also seeks to facilitate blockchain supply chain financing.²⁶³

Another area where fintech can be used is resource mobilization. Kitabisa²⁶⁴, a crowdfunding platform based in Indonesia, allows individuals to organize fundraisers, donate, and distribute resources. During the Covid-19 pandemic, Kitabisa has allowed companies to raise money by connecting with individual donors.²⁶⁵ Crowdfunding can also play a role in overcoming the lack of domestic venture capital investment. UNCTAD (2017, 2010) notes that facilitating crowdfunding can increase international investments in the local digital industry, particularly equity investments. Platforms for equity crowdfunding investments exist in Asia and the Pacific countries. Crowdo²⁶⁶ is a regional fintech platform operating in Singapore, Malaysia and Indonesia. Crowdo connects businesses with investors and so far has helped to finance 3,500 projects. Yet equity crowdfunding is subject to domestic financial and foreign investment regulations. In India, equity crowdfunding is illegal,²⁶⁷ while in other countries such as the Republic of Korea, financial regulations have been eased to allow equity crowdfunding for small companies.²⁶⁸

To sum up, the rapidly expanding digital economy offers opportunities for MSMEs to improve their business processes, access international markets, and get access to finance. By establishing their digital presence or using e-commerce platforms, MSMEs can access new markets without investing in their infrastructure.²⁶⁹ Simple steps, such as having a website, can enable firms in developing countries to start their engagement in Global Value Chains (GVCs) as importers or exporters.²⁷⁰  One of the critical attributions that businesses pay attention to when they want to enter into a business relationship with MSMEs is the level of ICTs usage.²⁷¹ Similarly, there is a reduction of trading costs thanks to digital platforms and access to digitally-enabled services (such as back office, data processing, etc.).²⁷² Importantly, MSMEs can also access finance thanks to fintech solutions.

Fintech for MSMEs: Policy recommendations

Although fintech is relatively new compared with conventional banks, it offers a broad opportunity to expand the reach to unserved and under-served MSMEs and individuals, allowing the narrowing of the financial inclusion gap. Policymakers must assist MSMEs to leverage fintech for survival and foster their integration in the digital economy. The recommended policies include²⁷³:

• Providing MSMEs with access to finance promptly
  Fintech provides an alternative to traditional financing, facilitating MSMEs to access loans that otherwise require credit histories and collateral. Fintech also enables new payments such as e-wallets and QR scanning widely used among consumers, particularly the younger population. Governments, aware of the risks of using data in fintech products and other risks, such as cybersecurity, have been implementing regulatory sandboxes to try out new products in controlled environments and with a specific number of users. This approach is a balanced one, promoting innovation in the financial industry and benefiting MSMEs.
• Integrating MSMEs in digital platforms
  By joining a platform, MSMEs may be less intimidated to go online. This will benefit least-equipped MSME groups, for instance, those in very traditional industries with little or no digitalisation experience. If these MSMEs forgo digitalization, they can face an existential risk in the digital economy. Advances in fintech could pose a more holistic solution, as digital platforms are developed that reduce the transaction costs of undertaking trade finance agreements and the risks to financiers of underwriting cross-border trade deals, as a consequence of the greater visibility provided by digitalization.
• Developing national payment system
  To develop a healthy digital finance industry, each country must first develop a national payment system as the basis of a digital finance infrastructure. Government should encourage the use of regulatory sandboxes to trial new financial products, services, and their providers within a ‘live’, but controlled, market context, from which all stakeholders can learn valuable lessons.
• Balancing growth and security
  The challenge for regulators and the frameworks they enforce will be to strike the right balance between ensuring that the financial system is adequately protected while simultaneously allowing new products and services to be piloted and scaled up where successful. Regulators will also need to start getting more comfortable with ostensibly non-finance companies moving into the business of finance provision as part of a broader portfolio of MSME-friendly support services. They may also need to adjust their regulatory mandates to ensure that these activities are adequately governed and enforced.
• Modernizing government services
  This will allow MSMEs a better avenue to adopt digitalization. The availability of one-stop-shop government platforms can facilitate the business environment for MSMEs, both while doing business at home and when the time to export comes. 
• Ensuring that data flows are not inhibited unnecessarily
  The exchange of data between companies (for instance, data sharing or data portability) should be encouraged to unlock the value of this data and promote competition and innovation. Digitalization is about using data to optimize the business processes, create value, to innovate. As such, it is crucial to adopt data utilization frameworks and revisit data privacy laws. Governments should ensure that the main objectives and rationale of data privacy law are conducive to a thriving digital business environment while safeguarding the rights of data subjects. Cross-border data flows should also be encouraged. There are also regulatory linkages between data, competition and consumer protection that need to be reassessed.
• Closing the ICT infrastructure gap, particularly affecting rural areas
  In many countries, broadband is part of universal service frameworks. In others, access to the internet is considered a fundamental right. According to ITU, increasing access to networks cannot be delayed. This will require public spending and clever regulation, particularly considering that developing countries may lack the financial capacity to make significant investments.²⁷⁴
• Training human capital for the digital economy
  While immediate training in relevant skills for digital literacy can be offered in the short term, countries also need to think about reskilling the workforce to thrive in the digital economy, particularly as digitalization will rapidly alter the nature of jobs. New technological needs will require a new set of skills. Policy responses range from ensuring that school curricula are updated with technology demands and a rapidly changing market to providing life-long learning opportunities for workers who need to reskill or change professions.