COVID-19: Digital Finance Models to the Rescue of SMES in Latin America
Jul 04, 2020
A virtual roundtable summary.
Latin America has become the new epicenter of the COVID-19 pandemic. In Brazil, Peru, Chile, Venezuela, and other countries, the virus continues to spread quite aggressively. With this new reality, the region is facing numerous challenges to revive economies and SMEs have been deeply hit by the crisis. In this context, emerging FinTech companies have been extremely alert, working to provide help to SMEs and keep these businesses included in the larger financial eco-system. As part of a weekly webinar series on COVID-19 mitigation efforts, the SME Finance Forum hosted a virtual roundtable on LAC New Digital Models. The panel was hosted by Matthew Gamser (IFC) and moderated by Kumaran Padayachee (Spartan SME Finance) and Jose Etchegoyen (IFC) with Tony Qiu (Didi), Fernanda Boschi (Itau Unibanco Brazil), Gregorio Tomassi (Konfio) and Adam Klappholz (Paypal) sharing their knowledge and experiences on how the COVID-19 crisis has affected their businesses’ policies and strategies in Latin America.
According to the World Bank, back in 2018, only 45% of small enterprises had access to credit from formal financial institutions in Latin America and the Caribbean versus 67.8% for large enterprises. Technology had begun addressing this disparity in access to banking even before the COVID-19 crisis, with groups like PayPal working to expand their SME services in the region. However, since the outbreak of the pandemic, which led to numerous SMEs to close or consider shutting down, FinTechs and financial institutions have accelerated their pace to find financial solutions for SMEs. For instance, the mobile transportation company DiDi has been leveraging its technology and in particular artificial intelligence to improve the situation in Mexico. Some of their initiatives would include, monitoring the drivers’ temperatures through a specific app they developed, or making sure that the drivers are wearing masks, sanitizing the cars etc.
Despite the fact that Latin American countries are notably suffering from the pandemic’s consequences, these countries have been hit at a later stage compared to other places, such as China. This has given an edge to companies like DiDi and PayPal, which had the time to learn from their Chinese colleagues. As a result, they have largely been able to replicate the successful models of business support and relief adopted in China and elsewhere in the world, despite the variations in local regulations.
Financial institutions are primarily concerned with expanding payment and lending methods in the region. In many countries in Latin America, people are still not used to digital payments, as cash is the traditional and customary method of handling transactions.
However, with the ongoing crisis, large banks such as Itau are leading a widespread implementation of digitalization. In fact, not only is their internal work structure shifting to include digital solutions, but they are also strongly incentivizing their customers to shift to digital transfers, preventing them from going to non-digital banks and teaching them how to utilize their online services. In this case, communication is key, and part of the communication strategy is to develop online knowledge platforms. However, despite the strong desire of banks and FinTechs to shift financial activities from in-person to digital, companies like PayPal are also adopting measures that help small businesses and individuals get cash and improve their liquidity. These measures, including removing fees for cash withdrawals for the near future, are aimed to help the customers increase their cash flow during these critical times. Another essential priority is to continue lending. In order to achieve this, new partnerships are being made between banks and FinTech companies and models are being re-evaluated to make them more flexible and more adaptive to the businesses. For example, PayPal is working to promote their QR code contactless payment services, which allow SMEs to conduct sales while mitigating health risks due to COVID-19.
Mexico specifically serves as clear example of the changes banks and FinTech organizations are making to support SMEs. As in most countries, SMEs in Mexico are responsible of the vast majority of employment. Despite this, they are substantially behind in terms of relative contribution to the country’s GDP and there is a striking gap of productivity between MSMEs and large companies. This creates a unique opportunity for FinTechs such as Konfio to step in and develop new digital models for SMEs. To be a leading growth partner to SMEs, data is key, particularly transactional data which helps understand the needs and demands of clients. As an emerging FinTech in Latin America, Konfio has launched measures of payment reliefs for struggling clients, all based on data and information. Data is key because it also helps understand which sector and clients will recover the fastest. This in return, is important for FinTechs to prioritize loans provision.
As Latin American countries are experiencing increased volatility, with market declines and unstable exchange rates, SMEs need and will continue to need more support to survive in the short and medium term. As a result, there is a new opportunity for FinTechs and banks to innovate and invest in sustainable and digital solutions that can benefit SMEs in the long run.