SME Fintech Opportunity in the Developing Countries

SME Fintech Opportunity in the Developing Countries by Sam Ghosh 11th January 2021
MSMEs in the Developing Countries
Executive Summary
● There were around 30 million Small and Medium Size Enterprises (SMEs) in the developing countries before the pandemic. 2/3rd of global SMEs were located in
developing countries. Developing countries with top SME populations are China, Thailand, Bangladesh, Indonesia, Tanzania, India, and Brazil, etc.
● Most of these SMEs in the developing countries are in the informal sector lacking formal financing options and proper business processes. The pandemic has tested
these SMEs to the extreme damaging their existing sales channels, supply chain, and financing sources. Governments in the developing countries (ex. China) pushing
the SMEs for digital adoption to deal with revenue losses amid social distancing. This policy support can be very beneficial for startups in the sector.
● COVID-19 pandemic has accelerated digital adoption in developing countries as consumers are forced to adopt digital channels for services such as education,
healthcare, and grocery, etc. At the same time, small businesses are adopting digital channels for survival. This creates a unique opportunity for tech startups serving
small businesses in developing countries.
● The major problems that the small businesses are facing are revenue losses, operating challenges due to social distancing, lack of credit access, supply-side issues
such as labor shortages, raw material access, etc. Tech startups can tap into the market by providing solutions to these pain points - sales platforms to deal with
revenue losses, process automation to deal with operating challenges, alternative lending to deal with lack of credit access, HR management technologies to deal with
the labor shortages, etc.
● Small businesses often do not have defined operating processes. Changing customer preferences for digital modes require that small businesses also define their
internal processes. The tech companies in this sector need to hand-hold small businesses by helping them design internal processes. Process automation companies
are likely to benefit from this.
● Often small businesses are dependent on one or few key people. As the pandemic brought drastic changes to our daily lives, the human aspect of the pandemic cannot
be ignored. For example, many female entrepreneurs experienced the increased daily burden of homeschooling their children as the schools were closed. This kind of
aspect brings unique opportunities for tech companies to design products for the sector.
MSMEs amid COVID-19 SME Fintech Primer Way forward

MSMEs amid COVID-19 SME Fintech Primer Way forward

MSMEs in the Developing Countries MSMEs amid COVID-19 SME Fintech Primer Way forward
MSMEs in the Developing Countries: Introduction
● 2/3rds of the formal Small and Medium Enterprises are located in the developing countries as per World Bank data.
Source: World Bank and World Bank
Indicator Micro Small Medium-Size
Number of
Employees < 10 10 < 50 10 < 50
Total Assets < $100,000
$100,000 < $3
million
$3 million < $15
million
Annual Sales < $100,000
$100,000 < $3
million
$3 million < $15
million
Annual Sales < $100,000
$100,000 < $3
million
$100,000-$1 or $2
million

MSMEs in the Developing Countries: Number of MSMEs
● There were more than 300 million Micro, Small, and Medium size businesses in developing countries before the pandemic. Around 90%
of those were micro-enterprises. This means that the number of SMEs in developing countries was around 30 million.
● A major proportion of those MSMEs are located in China, India, Indonesia, Nigeria, and Brazil.
● Countries with top SME population (i.e. MSMEs excluding Micro Enterprises) are China (2/3rds), Thailand, Bangladesh, Indonesia,
Tanzania, India, Brazil, etc.
Source: World Bank

MSMEs in the Developing Countries: Finance Gap
● A major issue that SMEs are dealing with is the lack of formal financing. The finance gap is largest in China, followed by Brazil and India.
Source: World Bank

MSMEs amid COVID-19

MSMEs amid COVID-19: Economic Impact of COVID-19
● The global economy is going through some unprecedented shocks due to the pandemic. As per IMF, the global economy is expected to
contract by 4.4% in 2020. The central banks reacted to economic distress by lowering policy rates to record low levels. These low-interest
rates make time deposits much less lucrative and likely to make capital markets much more enticing especially after the COVID delated
economic conservativeness fades away.
● Unprecedented low-interest rates and liquidity push more than salvaged the capital markets. But, the loss of corporate earnings especially
in Q1 and Q2 of 2020 sooner or later expected to catch up with the market valuations
● The lockdowns have caused a spike in unemployment rates. Although, the unemployment rates are improving after the economies
opened up. Many economies may still face fresh lockdowns for new COVID waves. Persistent unemployment is likely to cause a dip in
demand for wealth management services especially services targeting low and medium-income investors.
Data: IMF Data: US Department of Treasury Data: FRED
Economic Impact State of MSMEs Policy Measures

MSMEs amid COVID-19: Economic Impact of COVID-19: Impact on Production
● Sentiment in the global producers improved significantly after July - August 2020.
Data: Markit Economics

MSMEs amid COVID-19: State of MSMEs
● As per Facebook’s Global State of Small Business Report, 26% of surveyed small businesses closed operations during the period
January-May 2020. 62% of SMBs reported a loss of revenue. The most affected sectors were Hotels, cafes & restaurants, Transportation
& logistic followed by Manufacturing and Retail.
● Although many governments extended financial support to the SMB sector, the SMBs getting support varied from country to country. At
the time of the report (July 2020), less than a quarter of the surveyed SMBs received financial support. Lack of demand is the most cited
business challenge.
Source: Facebook Report
Proportion of operational SMBs reporting a decline in sales, by regionBusiness closure rates across the aggregate sample
Proportion of businesses who stated lack of demand, cash flow, or
outstanding loans as a future challenge, by region

MSMEs amid COVID-19: State of MSMEs
● The business closure rates reduced during and after July (Wave II).
Source: Facebook Global State of Small Business

MSMEs amid COVID-19: State of MSMEs: Case Study: USA
● Let us see some data about small businesses in the US. A report by economist Prof. Robert Fairlie of the University of California, Santa
Cruz shows that in the USA the pandemic impacted the unincorporated businesses much more than the incorporated ones.
● Businesses led by females and minorities fared worse.
Data: Robert Fairlie

MSMEs amid COVID-19: State of MSMEs: Case Study: USA
● Given the rules of the lockdowns, the small businesses in the “nonessential” industries were severely impacted but the small businesses
in the essential industries were impacted negatively as well.
● Apart from the agriculture sector, all other industries were impacted negatively. Small businesses in the ‘Personal and Laundry services’
were impacted the worst.
Data: Robert Fairlie

MSMEs amid COVID-19: Policy Measures
● China: Guiding and encouraging SMEs to adopt digital channels with vouchers and encouraging platform businesses to lower entry fees.
Reduced regulatory pressure on foreign exchange and imports, pushed for electronic labor contracts, introduced fee and rent waivers,
introduced tax concession on utilities, debt moratoriums, increasing government purchases from SMEs, introduced training and wage
subsidies, and introduced various tax cuts, etc.
Source: World Bank

SME Fintech Primer

SME Fintech Primer: Business Models
Banking Expense Management
Accounting / Invoicing /
Tax
Procurement Equity Fundraising
Business Models Players
Debt Fundraising Payroll Retirement Business Insurance Payments Payments - API
Funding

SME Fintech Primer: Players (Primarily US)
Tax
Player Location Business
N26 Berlin, Berlin, Germany N26 offers mobile banking in 25 markets.
BREX San Francisco Bay Area, USA Brex is the financial OS for growing companies, with credit cards, cash management, and controls in a single account.
Atom Bank Durham, Durham, United Kingdom Atom Bank is a mobile banking application that offers a range of personal and business banking products.
Monzo London, England, UK Monzo is a digital-only bank platform and marketplace that allows customers to access a range of products and services.
Starling Bank London, England, UK Starling Bank provides a mobile banking application and a debit card that enable users to manage their finances.
Konfio Mexico City, Distrito Federal, Mexico
Konfio provides digital banking and software tools designed to boost growth and productivity for small and mid-size
enterprises.
Cross River Bank Fort Lee, New Jersey, USA Cross River is a financial institution that offers banking services and loan products to consumers and businesses.
Satispay Milan, Lombardia, Italy Satispay is a fintech company that provides a bank account enabled mobile payment platform.
Qonto Paris, Ile-de-France, France
Qonto makes business banking easy, efficient, and transparent, leveraging technology, elegant design, and world-class
customer support.
Tide London, England, UK Tide is a business banking platform on a mission to save small businesses time (and money) on their banking and admin.
Funding

Tax
Tripactions Palo Alto, California, USA TripActions is a corporate travel management company that keeps travelers safe while driving business travel continuity.
Divvy Lehi, Utah, USA Divvy helps businesses manage payments and subscriptions, build strategic budgets, and eliminate expense reports.
Deserve Menlo Park, California, USA Deserve offers fair credit products for young people and a cloud-based credit card platform for businesses.
Swile Paris, Ile-de-France, France Swile provides digital solutions for employee rewards and benefits through a custom card and app.
Spendesk Paris, Ile-de-France, France Spendesk is a smart spend management software designed for both finance teams and employees.
NiYO Solutions Bengaluru, Karnataka, India NiYO is a fintech company that helps salaried employees access company benefits and other financial services.
Expensify San Francisco Bay Area, USA
Expensify is a financial services startup that provides integrated expense management and corporate card product for
customers worldwide.
Travelbank Daly City, California, USA TravelBank is the modern all-in-one business travel and expense management platform.
Rocketrip New York, New York, USA
Rocketrip helps businesses reduce travel spend by incentivizing employees to save when they travel for business.
Acquired by Mondee.
Karmic Labs San Francisco Bay Area, USA Karmic Labs is a B2B payment infrastructure company.
Funding

Tax
Avidxchange Charlotte, North Carolina, USA AvidXchange is a software company specializing in automating invoice and payment processes for mid-market businesses.
Tipalti San Mateo, California, USA Tipalti is a global payables automation platform that provides a cloud solution to scale and automate global payables operations.
Bill.com Palo Alto, California, USA Bill.com is a provider of cloud-based software that simplifies and automates back-office financial operations.
HighRadius Houston, Texas, USA HighRadius offers software as a service platform for companies that leverage artificial intelligence-based autonomous systems.
Chromeriver Los Angeles, California, USA Chrome River Technologies is a global provider of expense reporting and invoice management. Acquired by Certify.
Restaurant365 Irvine, California, USA
Restaurant365 is a smart restaurant management software that combines restaurant modules with an integrated accounting
system.
MineralTree Cambridge, Massachusetts, USA MineralTree provides mobile and online accounts payable automation software for finance professionals at growing organizations.
FloQast Sherman Oaks, California, USA FloQast is close management software built by accountants for accountants so they can close faster and more accurately.
Billtrust Lawrenceville, New Jersey, USA Billtrust develops a payment cycle management platform designed to automate every step in the invoice-to-cash process.
Scalefactor Austin, Texas, USA ScaleFactor provides accounting and finance software with automated bookkeeping, proactive alerts, and other features.
Khatabook Bangalore, Karnataka, India Enabling micro, small and medium businesses to increase business and financial efficiencies
Funding

Tax
Tradeshift San Francisco, California, USA Tradeshift is a cloud-based business network connecting buyers and suppliers.
Ivalua Orsay, Ile-de-France, France
Ivalua provides web-based spend management solutions that offers a modular suite covering the Spend Management
spectrum.
Fairmarkit Boston, Massachusetts, USA
Fairmarkit is an intelligent sourcing platform that empowers organizations to more eﬃciently purchase the goods and
services they need.
Kinnek New York, New York, USA
Kinnek is a single platform for small businesses that makes discovering and transacting with suppliers easier than ever
before. Acquired by Fundation.
Funding

Tax
CircleUp San Francisco, California, USA
CircleUp is the investment platform providing capital and resources to innovative, early-stage
consumer brands.
AlgelList San Francisco, California, USA
AngelList is a U.S. website for startups, angel investors, and job-seekers looking to work at
startups.
Seedinvest New York, New York, USA
SeedInvest is an equity crowdfunding platform that connects investors with startups. Acquired by
Circle.
Funding

Tax
Kabbage Atlanta, Georgia, USA Kabbage is a fintech company that offers cash flow management solutions to small businesses. Acquired by American Express.
Quarterspot New York, New York, USA QuarterSpot is an online lending platform that offers small businesses working capital.
CAN Capital Kennesaw, Georgia, USA CAN Capital provides capital to small and medium-sized businesses, using its own real-time platform and risk-scoring models.
BlueVine Redwood City, California, USA BlueVine is an online platform that provides small to medium-sized businesses access to financial products.
Fundbox San Francisco, California, USA Fundbox is a B2B payment and credit network that transforms how funding flows.
C2FO Leawood, Kansas, USA C2FO provides a platform with many dynamic tools to help manage businesses' accounts payable and accounts receivable on-demand
Biz2Credit New York, New York, USA Biz2Credit is a digital-first provider of small business funding and offers its Biz2X Platform to help financial institutions manage risk.
Liftforward New York, New York, USA
LiftForward provides corporations with payment solutions that power subscription services, membership programs, and Hardware as a
Service.
Street Shares Reston, Virginia, USA StreetShares Platform is a saas technology that powers banks, credit unions, and non-financial organizations.
Behalf New York, New York, USA Behalf's mission is to empower commerce for businesses large and small with well-priced, on-demand payment tools
Linklogis Shenzhen, Guangdong, China Linklogis is a supply chain financing service provider that is based in China.
Funding

Tax
Zeneﬁts San Francisco, California, USA Zenefits delivers a complete, all-mobile HR experience for small and medium businesses.
Gusto San Francisco, California, USA Gusto provides a cloud-based payroll, benefits, and human resource management solution for businesses.
Betterment New York, New York, USA
Betterment is a goal-based online investment company, delivering personalized financial advice paired with low fees and
customer experience.
Namely New York, New York, USA
Namely is an all-in-one platform that manages all HR data in one place, with personalized service to help companies get better
and faster.
Rippling San Francisco, California, USA Rippling is a human resource management company that manages employees’ payroll, benefits, devices, and apps.
Justworks New York, New York, USA
Justworks is an online platform that handles the payroll and payments procedure, benefits facilities, and compliance issues of
its users.
Guideline San Mateo, California, USA
Guideline is an all-inclusive 401(k) and full-stack solution that automates plan administration and compliance to growing
businesses.
Payactive San Jose, California, USA PayActiv offers a holistic financial wellness platform for employees.
PayFit Paris, Ile-de-France, France Payfit allows small and medium enterprises to easily and quickly pay their employees.
Papaya Global New York, USA Papaya Global provides a cloud-based HR and payroll platform for global workforce management.
Funding

Tax
Betterment New York, New York, USA
Betterment is a goal-based online investment company, delivering personalized financial advice paired with low fees and
customer experience.
Guideline San Mateo, California, USA
Guideline is an all-inclusive 401(k) and full-stack solution that automates plan administration and compliance to growing
businesses.
Human Interest San Francisco, California, USA Human Interest offers easy and affordable employee retirement plans.
ForUsAll San Francisco, California, USA ForUsAll fixes retirement plans for millions of small and medium-sized businesses.
Funding

Tax
NEXT Insurance Palo Alto, California, USA Next Insurance is an online-based insurance company for entrepreneurs and small businesses.
Pie Insurance Washington, District of Columbia, USA Pie is transforming small business insurance—starting with workers’ compensation.
Coalition San Francisco, California, USA Coalition operates as a cyber insurance and security company that helps businesses manage and mitigate cyber risk.
Vouch Insurance San Francisco, California, USA Vouch is a provider of insurance services intended for startups.
At-Bay San Francisco, California, USA At-Bay is a cybersecurity insurance company for the digital age.
EMBROKER San Francisco, California, USA Embroker is a digital insurance brokerage company.
Coverwallet New York, New York, USA CoverWallet is an online platform that offers insurance management services to its clients. Acquired by Aon PLC
Superscript London, England, UK Superscript provides business insurance designed specifically to meet the fast-changing needs of small businesses.
Huckleberry San Francisco, California, USA Huckleberry Insurance Services is a licensed insurance producer, resident
Bunker San Francisco, California, USA Providing instant business insurance solutions and compliance monitoring for small businesses and enterprises.
Funding

Tax
Klarna Stockholm, Stockholms Lan, Sweden Klarna is an eCommerce payment solutions platform for merchants and shoppers.
Nubank São Paulo, Brazil
Nubank issues, administrates, processes, and transfers payments related to post-paid credit cards and equity investment
in other entities.
Toast Boston, Massachusetts, USA
Toast is an all-in-one point-of-sale and restaurant management platform for businesses in the food service and hospitality
space.
Paidy Minato, Chiba, Japan Paidy is a platform that enables consumers to buy online without a credit card or pre-registration.
Payoneer New York, New York, USA
Payoneer empowers global commerce by connecting businesses, professionals, countries, and currencies with its
cross-border payment platform.
SpotOn San Francisco, California, USA SpotOn develops innovative software and payment solutions that help businesses increase revenue.
Revel Systems San Francisco, California, USA Revel Systems provides an iPad point of sale solution for restaurant and retail establishments.
BlueSnap Waltham, Massachusetts, USA BlueSnap provides an All-in-One Payment Platform designed to accelerate commerce for B2B and B2C businesses.
SHOPKEEP New York, New York, USA ShopKeep is a cloud-based iPad point of sale system for restaurants and retail stores. Acquired by Lightspeed POS
PingPong Hangzhou, Zhejiang, China PingPong is an innovative payment service provider for cross-border eCommerce sellers.
Funding

Tax
Stripe San Francisco, California, USA Stripe is a developer-oriented commerce company helping small and large companies accept web and mobile payments.
Marqeta Oakland, California, USA
Marqeta is a modern card issuing platform that provides infrastructure and tools to help companies build and manage
payment programs.
Airwallex Quarry Bay, Hong Kong Island, Hong Kong Airwallex is a financial services platform committed to building global financial infrastructure to scale the digital economy.
Checkout.com London, England, UK Checkout.com is an API-based platform providing online payment solutions that improve the user's checkout experience.
Pine Labs Noida, India
Pine Labs is a merchant commerce platform that provides financing and last-mile retail transaction technology to
merchants.
GoCardless London, England, UK GoCardless is a payment company that makes collecting payments by direct debit easy for everyone.
Bolt San Francisco, California, USA Bolt is developing a checkout experience platform that helps retailers convert and retain more of their shoppers.
Razorpay Bangalore, Karnataka, India Razorpay is a platform that enables businesses to accept, process, and disburse payments.
Rapyd London, England, UK Rapyd is a fintech-as-a-Service platform that provides local payments network services.
Mollie Amsterdam, Noord-Holland, The Netherlands Mollie is a payments platform that offers an easy-to-implement process for integrating payments into a site or app.
Funding

SME Fintech Primer: Funding
● Funding in the SMB Fintechs bounced back after Q1 of 2020. Late-stage companies automating finance for small businesses are
attracting the most funding.
● Some noteworthy examples are Avidxchange, Tipalti, Taulia and Klarna.
● Other significant funding involved Business Insurance (NEXT Insurance) and HR (Rippling and PayActiv).
Data: Cb Insights
Funding

Way forward

Forces at Play
SMEs
in the
Developing
Countries
Supply-Side
Issues
Layoffs
Financial Impact
Forces at Play Impact
Digital AdoptionLiquidity Issues
Policy Support

Way forward: Forces at Play: Financial Impact
● Most small businesses do not have enough financial reserve to sustain the kind of the financial distress COVID-19 pandemic has brought.
● Many developed country governments brought policy initiatives such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act
and the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 in the USA.
● Unfortunately, the developing countries lack the fiscal strength to provide comparable support to the small businesses. Most small
businesses in the developing world are vulnerable especially the non-digital ones.
● Apart from that, a significant portion of the small businesses in the developing countries are in the informal sector making access to formal
financing and government support out of reach.

Way forward: Forces at Play: Supply-Side Issues
● Small businesses also are dealing with many Supply-Side issues due to the pandemic.
● Labor shortages, restrictions of raw material movement, lack of access to finance, etc. created severe pressure on the small businesses.
● Some of the Supply-Side issues likely to persist for some time due to the restrictions on international trade, travel, and social distancing.
● These restrictions are increasing the operating costs for many small businesses.

Way forward: Forces at Play: Liquidity Issues
● Small businesses often lack cash reserves. The revenue losses due to the pandemic obviously created cash pressure on them.
● Apart from revenue losses. Payments held back by large companies exacerbated the liquidity problems for the small companies. Many
small businesses in the developing countries are in the informal sector and lack access to formal financing sources such as banks. The
pandemic has restricted those sources. For example in India, The credit uptake by the MSME sector is severely affected - far greater than
the large companies. The MSME sector is dependent on the NBFC sector. There was already a liquidity crisis in the Indian NBFC sector
after the defaults by Infrastructure Leasing & Financial Services Limited (IL&FS) in 2018. The situation has been worsened by the COVID
19 creating credit availability issues for the MSMEs.
● Liquidity problems are the major reason for COVID-19 related business closures for small businesses.
Data: RBI

Way forward: Forces at Play: Policy Support
● As the pandemic hit, governments around the world introduced several policy steps to protect small businesses.
● The steps involved debt support, employment support, tax support, steps to reduce the business cost for small businesses, and regulatory
relaxations.
● Some governments such as China pushed SMEs for digital adoption. China introduced vouchers for remote business services and
encouraged platform businesses to reduce entry costs. China also pushed electronic labor agreements.
Data: RBI

Way forward: Forces at Play: Digital Adoption
● Consumers in the developing economies were forced to use digital channels for many services such as education, grocery, healthcare,
pharmaceuticals, etc.
● At the same time, small businesses rapidly adopted digital channels for business continuity. As per CRISIL in India, “About 29% of the
MSEs surveyed were using digital sales channels such as online aggregators/ market places, social media, and mobile marketing before
the pandemic struck. That number has shot up to 53% among small enterprises and 47% among micro-enterprises as of November.
Despite their limitations, micro-enterprises are not very far from small enterprises in digital adoption. Also, many more are now saying they
will take the digital route soon. This underscores the fact that increasing digitalization enlarges the footprint of MSEs, helping them tap
newer markets and improving their access to credit.”
● This creates unique opportunities for tech startups providing tech to small businesses.

Way forward: Forces at Play: Layoffs
● As the lockdowns started, small companies resorted to rapid layoffs. After the economies stabilize, the continuing firms need to hire
rapidly to start operations and take advantage of the new opportunities.
● But the situations have changed. The work-from-home culture emerged apart from the limited travel. This brings new opportunities for
startups that support HR for small businesses.
Data: OECD

Way forward: Impact
● COVID-19 pandemic has fastened the digital adoption in developing countries as consumers are forced to adopt digital channels for services such as
education, healthcare, and grocery, etc.
● At the same time, small businesses are adopting digital channels for survival. This creates a unique opportunity for tech startups serving small
businesses in developing countries.
● The major problems that the small businesses are dealing with are revenue losses, operating challenges due to social distancing, lack of credit access,
Supply-Side issues such as labor shortage, raw material access, etc.
● Governments in the developing countries (ex. China) push the SMEs for digital adoption to deal with revenue losses amid social distancing. This policy
support can be very beneficial for startups in the sector.
● Although lack of demand may restrict the credit uptake for a few quarters, credit quality issues likely to discourage banks from extending credit to small
businesses, and tech lenders can take this opportunity to grab market share.
● Small businesses often do not have laid out operating processes. Changing customer preferences for digital modes requires that small businesses also
create internal processes. The tech companies in this sector need to hand-hold small businesses by helping them design internal processes. Process
automation companies are likely to benefit from this.
● Often small businesses are dependent on one or few key people. As the pandemic brought drastic changes to our daily lives, the human aspect of the
pandemic cannot be ignored. For example, many female entrepreneurs experienced the increased daily burden of homeschooling their children as the
schools were closed. This kind of aspect brings unique opportunities for tech companies o design products for the sector.

Thank You

SME Fintech Opportunity in the Developing Countries

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