Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises G20 Global Partnership for Financial Inclusion Contents 5 ACRONYMS 53 DIGITAL INNOVATION AND ALTERNATIVE FINANCING 9 PRODUCTS AND SERVICES ACKNOWLEDGEMENTS 54 6.1 Factoring 10 EXECUTIVE SUMMARY 55 6.2 Reverse Factoring 13 The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC encourages dissemination of its INTRODUCTION 57 6.3 Secured Revolving work and will normally grant permission to reproduce portions of the work promptly, and when Lines of Credit the reproduction is for educational and non-commercial purposes, without a fee, subject to such attributions and notices as we may reasonably require. 17 METHODOLOGY & APPROACH 59 6.4 Merchant-Receivables Financing IFC does not guarantee the accuracy, reliability, or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and 21 REPORT STRUCTURE 60 6.5 Peer-to-Peer (P2P)/ Marketplace Lending technical errors) in the content whatsoever or for reliance thereon. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank Group concerning the legal status of any territory or the 25 DIGITALIZATION OF THE MSME ECOSYSTEM 63 6.6 Equity Crowdfunding endorsement or acceptance of such boundaries. The findings, interpretations, and conclusions 66 6.7 Embedded Finance expressed in this volume do not necessarily reflect the views of the Executive Directors of the 27 4.1 E-Commerce World Bank Group or the governments they represent. 68 6.8 Distributed Ledger 29 4.2 The Gig Technology and The contents of this work are intended for general informational purposes only and are Economy and the Blockchain Finance via not intended to constitute legal, securities, or investment advice, an opinion regarding the Role of Cross- Tokenized Assets appropriateness of any investment, or a solicitation of any type. IFC or its affiliates may have Border Payments an investment in, provide other advice or services to, or otherwise have a financial interest in, certain of the companies and parties (including named herein). 31 4.3 Digital MSME Business Services 71 PUBLIC SECTOR/POLICY APPROACHES TO SUPPORT All other queries on rights and licenses, including subsidiary rights, should be addressed to IFC MSME FINANCE Communications, 2121 Pennsylvania Avenue, N.W., Washington, D.C. 20433. 35 THE RISE OF DIGITALLY- ENABLED NEW FINANCIAL 72 7.1 Incentives About IFC AND ACCOUNTING IFC — a member of the World Bank Group — is the largest global development institution SOLUTIONS FOR MSMEs 73 7.2 Risk Sharing and focused on the private sector in emerging markets. We work in more than 100 countries, Guarantee Schemes using our capital, expertise, and influence to create markets and opportunities in developing 36 5.1 Digitizing Business countries. In fiscal year 2023, IFC committed a record $43.7 billion to private companies and Processes 74 7.3 Data Sharing Initiatives financial institutions in developing countries, leveraging the power of the private sector to end 37 5.2 Digital Credit Scoring/ extreme poverty and boost shared prosperity as economies grapple with the impacts of global Credit Risk Assessment 74 7.4 Government Lending compounding crises. For more information, visit www.ifc.org. Programs for MSMEs 39 5.3 Digital Payments © International Finance Corporation 2023. 77 7.5 Securitization of MSME 42 5.4 Digital Banks Portfolios All rights reserved. 45 5.5 Open Banking/Open Finance 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 49 5.6 Insurance Technologies Internet: www.ifc.org (Insurtech) Acronyms Contents 79 RISKS AND CHALLENGES 91 ANNEX LINK TO CASE DATABASE 93 83 POLICY, REGULATORY 92 ENDNOTES AND SUPERVISORY CONSIDERATIONS 84 9.1 Improving Policy, Regulatory and Supervisory Frameworks 84 9.1.1 Policy considerations AA Account Aggregator (India) 85 9.1.2 Regulatory considerations ABL Asset-based lending ACH Automated Clearing House (USA) 86 9.1.3 Supervisory considerations ADB Asian Development Bank AI Artificial Intelligence 86 9.2 Consumer Protection Issues AML Anti-Money Laundering AFIN ASEAN Financial Innovation Network 86 9.2.1 Policy considerations API Application Program Interface 86 9.2.2 Regulatory APIX API Exchange considerations ASIC Australian Securities and Investments Commission 87 9.2.3 Supervisory B2B Business-to-Business considerations B2P Business-to-Person 88 9.3 Improving Risk BaaS Banking-as-a-Service Management BI Bank Indonesia 88 9.3.1 Policy considerations BIS Bank for International Settlements 88 9.3.2 Regulatory BOI Bank of Industry (Nigeria) considerations BOT Bank of Thailand 88 9.3.3 Supervisory CBE Central Bank of Egypt considerations CCAF Cambridge Centre for Alternative Finance 89 9.4 Cross-Border CDR Consumer Data Right Act (Australia) Coordination CDRI Climate and Disaster Risk Insurance 89 9.4.1 Policy considerations CFT Countering the Financing of Terrorism CGAP Consultative Group for the Advancement of the Poor 89 9.4.2 Regulatory considerations CGC Credit Guarantee Company (Egypt) CMA Capital Markets Authority (Saudi Arabia) 89 9.4.3 Supervisory considerations CRSPs Credit Reporting Service Providers ©World Bank Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 4 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 5 EC European Commission OECD Organization for Economic Cooperation and Development DLT Distributed Ledger Technology OJK Otoritas Jasa Keuangan (Financial Services Authority in Indonesia) DFS Digital Financial Services P2P Peer-to-Peer EBA European Banking Authority POS Point of Sale EmFi Embedded Finance PPP Public-Private Partnership EU European Union PSD2 Payment Services Directive 2 FATF Financial Action Task Force PSPs Payment Service Providers FCA Financial Conduct Authority PwC PricewaterhouseCoopers FIAP Financial Inclusion Action Plan QR Code Quick Response Code FIP Financial Information Provider (India) RBI Reserve Bank of India FIU Financial Information User (India) ReBIT Reserve Bank Information Technology PrivateLimited (India) FNG Fondo Nacional de Garantías (Colombia) SaaS Software as a Service FSB Financial Stability Board SAMA Saudi Arabian Monetary Authority FTC Federal Trade Commission SCF Supply Chain Finance GCC Gulf Cooperation Council SDGs Sustainable Development Goals GDP Gross Domestic Product SEC Securities and Exchange Commission GDPR General Data Protection Regulation (EU) SME Small and Medium-sized Enterprise GPFI Global Partnership for Financial Inclusion SMEFUND SME Financing and Risk Sharing Facility (Nigeria) HLPs GPFI High-Level Principles for Digital Financial Inclusion TReDS Trade Receivables Discounting System (India) IDB Inter-American Development Bank UAE United Arab Emirates IFC International Finance Corporation UPI Unified Payments Interface ILO International Labor Organization UK United Kingdom IMF International Monetary Fund US United States IoT Internet of Things USSD Unstructured Supplementary Service Data KYC Know Your Customer WEF World Economic Forum LEI Legal Entity Identifier LGU Local Government Unit (Philippines) MAS Monetary Authority of Singapore MCAs Merchant Cash Advances MENA Middle East and North Africa MFS Mobile Financial Services ML Money Laundering MNO Mobile Network Operator mPOS Mobile Point of Sale MSMEs Micro, Small and Medium Enterprises NFC Near Field Communication NPCI National Payments Corporation of India Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 6 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 7 Acknowledgements T his report was produced by Saal, Qamar Saleem, Mehdi Cherkaoui, International Finance Corporation Adel Meer and Natalia Kaur (all IFC), and (IFC), in collaboration with the Marie-Sarah Chataing and Hourn Thy (SME SME Finance Forum for the G20 Global Finance Forum) for their oversight of the Partnership for Financial Inclusion (GPFI) Case Database. under the Indian Presidency of the G20. The team was led by Ghada Teima (IFC) The report presents a stock take of in collaboration with Matthew Gamser various cases and examples that highlight (SME Finance Forum), and comprised policy and regulatory approaches as of John Owens, Ashutosh Tandon, and well as private sector initiatives in G20 Fangfang Jiang (all IFC). The team is and non-G20 countries. The report is not grateful for the guidance and leadership of intended to be an analysis or evaluation the G20 GPFI co-chairs and would like to of any model. Cases are presented for acknowledge the contributions of all G20 illustrative purposes only and do not GPFI Implementing and Affiliated Partners1 constitute an endorsement by IFC or the as well as Wendy Werner, Matthew G20 GPFI. ©World Bank Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises G20 Global Partnership for Financial Inclusion 9 Executive Summary securitization of MSME lending portfolios, financial literacy, consumer protection, and other measures taken to support small data privacy, and cybersecurity regulations; businesses financially. strengthening supervisory capacity to effectively monitor and assess risks While innovations in MSME financial services associated with innovative financing represent a huge opportunity in increasing models; and improving regional and access to and the usage of finance, they international sharing and collaboration to come with risks and challenges which need facilitate cross-border oversight on fintech to be mitigated and addressed through activities. a supportive regulatory framework that encourages responsible and inclusive Regarding risk management, policy digital financial practices. There is a need considerations include developing for a balanced and proportionate regulatory guidelines and standards for risk approach that supports fintech innovation management in fintech lending, including T while safeguarding against cyber threats, credit risk assessment, loan underwriting, he Global Partnership for Financial to provide a more holistic and insightful money laundering, and fraud. Ideally, and collection practices; and promoting Inclusion (GPFI) is committed examination of the evolving landscape of policy reforms would include harmonizing the adoption of sound risk management to advancing financial inclusion digital finance in the context of MSMEs. This regulations across jurisdictions and practices, including stress testing, portfolio globally by increasing quality expansion underscores the importance of promoting international cooperation in monitoring, and risk mitigation strategies. access to, as well as usage of, sustainable exploring the diverse financial ecosystems sharing knowledge of successful innovations. For regulatory considerations, critical formal financial services, thereby that empower businesses, both large and practices include: expanding opportunities for underserved small, in today’s digital age. The report cites several effective and excluded households and enterprises, policy, regulatory and supervisory • Establishing minimum standards Digitizing the MSME ecosystem through including women-owned Micro, Small, and recommendations, such as considerations for risk management frameworks e-commerce, the gig economy, and digital Medium Enterprises (MSMEs). to improve MSME finance frameworks so and approaches for fintech lending MSME business services has an impact on the that they include policies that: platforms, including criteria for borrower India’s presidency of the G20 has prioritized digital-transformation of small businesses. assessment, loan pricing, and risk the development of an open, inclusive, These digital advancements have reshaped • proactively expand debt and equity diversification. and responsible digital financial ecosystem the landscape for MSMEs and enabled new platforms based on the presence of a sound and opportunities for growth and expansion. The • Requiring regular reporting and disclosure • broaden coverage of credit registries effective digital public infrastructure (DPI) rise of digitally enabled new solutions for of risk metrics, loan performance data, and bureaus to cover more MSMEs and for the advancement of financial inclusion MSMEs such as the digitization of business and stress testing results by fintech incorporating the expanding range of and productivity gains. processes, digital credit scoring and risk firms to enhance transparency and risk lenders and data sources assessment utilizing alternative data, digital monitoring. While the primary focus of this report is • develop modern secured transactions payments, insurtech, digital banking, and the • Implementing regulatory requirements on Small and Medium Enterprise (SME) frameworks to support the introduction concept of open banking/open finance has for adequate capital and liquidity buffers financing, we have broadened the report to of fintech asset-based lending products advanced MSME access to financial services. for fintech firms engaged in lending cover micro enterprise financing as well. Our for MSMEs There are digitally enabled financing activities to mitigate systemic risks. decision to incorporate micro-enterprise • improve digital identification products and services which provide various • Promoting advanced analytics and financing stems from the rich array of infrastructure for MSMEs options such as factoring, reverse factoring, artificial intelligence tools for practical risk case studies we received, with a particular supply chain/accounts receivable financing, • facilitate public and private dialogues, assessment and credit decision making. emphasis on emerging markets. Within secured revolving lines of credit, merchant- industry codes of conduct, and these case studies, we found a noteworthy Specific supervisory considerations include receivables financing, peer-to-peer (P2P)/ knowledge sharing as well as exploring concentration of financing options for both conducting regular audits and examinations marketplace lending, equity crowdfunding, the use of innovation hubs and regulatory micro enterprise and small enterprises, of fintech firms to evaluate their risk embedded finance, and blockchain sandboxes. especially in the categories of peer-to-peer management frameworks, systems, and finance via tokenized assets. Governments, lending, alternative credit scoring methods, In addition, key regulatory and supervisory controls; and collaborating with industry regulators, and public institutions have a and gig entrepreneurs. considerations can include flexible and stakeholders to share best practices in role in fostering MSME finance including proportionate risk-based regulatory risk management and enhance the overall By broadening the report’s scope to incentives, risk-sharing facilities, guarantee frameworks; reviewing and enhancing resilience of the SME financing ecosystem. include micro enterprise financing, we aim schemes, government lending programs, Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 10 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 11 1 Introduction ©IFC Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 12 G20 Global Partnership for Financial Inclusion T he G20’s commitment to leadership and global advocacy to facilitate financial ecosystem based on the presence approaches, and policies in addition to expanding financial services efficient and effective coordination, using of a sound and effective digital public innovations in MSME financial services, for has underpinned internationally its partners as leverage to encourage infrastructure (DPI) for the advancement of example, credit and insurance that have recognized efforts to advance responsible financial inclusion efforts financial inclusion and productivity gains. successfully facilitated and promoted financial inclusion. This undertaking is worldwide. MSME financing. The examples build on the One of the 2023 Presidency outputs will “Digital and Innovative Financial Products embodied in the GPFI. Created by the G20 in 2010 at the Seoul G20 Summit, the GPFI The government of India assumed the be this report on Innovations in Financial and Services for MSMEs” database launched is an inclusive platform for G20 countries, presidency of the G20 in December 2022. Services for Micro, Small and Medium-Sized under the G20 Indonesian Presidency. non-G20 countries, implementing partners, India plans to build on the work and Enterprises. This report aims to promote achievements of previous presidencies in innovative and responsible access to digital It is important to note that COVID-19 has and affiliated partners. The GPFI is enhancing financial inclusion of vulnerable financing to unleash its full potential and had a profound impact on economies committed to advancing financial inclusion and underserved populations and sectors, consequentially enhance contribution worldwide and in particular on MSMEs globally by increasing quality access to, as over the past three years. Lockdowns, well as usage of, sustainable formal financial which will subsequently contribute to to GDP in both advanced and emerging social restrictions, and reduced consumer services2, thereby expanding opportunities the achievement of the 2030 Sustainable markets. Through a stocktaking exercise, spending have presented significant for underserved and excluded households Development Goals (SDGs). The Indian it will summarize countries’ effective challenges for these enterprises, forcing and enterprises including women-owned presidency has prioritized the development approaches to tackle existing impediments many to shut down or struggle to stay MSMEs. The GPFI deploys its political of an open, inclusive, and responsible digital that prevent the implementation of afloat. However, amid the adversity, the pandemic has also acted as a catalyst, accelerating the digitization of businesses, and prompting a surge in the adoption of digital financial services (DFS) by micro, small, and medium enterprises (MSMEs) across the globe. The need to adapt to new norms and maintain operations remotely has compelled many MSMEs to embrace technology, such as online platforms, digital payments, and e-commerce, to continue serving their customers. This paradigm shift has highlighted the importance of financial inclusion and the role of digital infrastructure in supporting the growth and resilience of small businesses. In addition, the aim of this report is to build on previous G20 presidencies’ efforts by referencing the related work that has been produced by the GPFI and its current Financial Inclusion Action Plan (FIAP). The report concludes with policy recommendations and guidelines, which could be implemented voluntarily based on national context. ©IFC Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 14 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 15 2 Methodology and Approach ©IFC Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 16 G20 Global Partnership for Financial Inclusion the segment was specifically mentioned, the term SME is used. Also, while the primary focus of this report centers on Micro, Small, and Medium Enterprise (MSME) lending, it is crucial to acknowledge the occasional intersections between enterprise financing and consumer lending. Individuals who are entrepreneurs or own micro or small enterprises are frequently assessed based on their overall household income. In certain instances, particularly within the domains of alternative credit scoring and peer-to-peer lending, there may exist similarities in the evaluation criteria applied to individuals seeking either consumer or enterprise loans. Additionally, it is worth noting that there could be parallels in consumer protection measures that are applicable to both consumer lending and MSME financing. These measures aim to ensure fair and ethical treatment for borrowers across these domains. However, it is essential to underscore that the primary emphasis of this report remains firmly on enterprise lending. One limitation of the research design was that the survey was voluntary, which may have resulted in a biased sample of respondents. Additionally, the data collected was self-reported, which may have introduced response bias. These ©World Bank limitations are partially addressed through desk research and sourcing additional case studies to fill in gaps in the database. Cases highlighted in this report were selected T he research design used in from international standard setting were developed based on input from G20 based on certain criteria which included: this report was a combination bodies, research by leading international member countries and experts in MSME • relevance to the various categories in the of quantitative and qualitative organizations and G20 implementing finance. The survey provided quantitative report methods. This report built on the partners, as well as previous GPFI work. data that could be analyzed to identify • the impact of the innovation in terms of survey-based approach used under the The desk research also sourced additional trends and patterns, while the desk research outreach and scale G20 Indonesian Presidency to collect data examples to fill some of the informational and case studies provided qualitative data from G20 member countries on their MSME that allowed for a more in-depth analysis • the potential for replicability in other gaps. finance policies and practices. The survey of specific policies and practices. The term countries was administered online through the G20 This design allowed for an analysis of MSME MSME is used through out the report, given Providing a balanced and diverse database from January 2022 to April 2023. finance policies and practices across both the segments being covered include micro, representation from countries and regions The analysis of this survey is complemented G20 member countries as well as other small and medium enterprises. However, was also a consideration when selecting by desk research that draws from reports non-G20 countries. The survey questions in some examples and case-studies where examples to highlight. Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 18 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 19 3 Report Structure ©World Bank Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 20 G20 Global Partnership for Financial Inclusion T he report provides a stocktaking and their impact on MSME financial of the main areas of innovation services. The third section, Digital-Enabled in digital MSME financing and is Financing Products and Services, provides divided into several sections. The an in-depth exploration of the specific first section, Digitizing the MSME Ecosystem, digital financing tools available to MSMEs. It explores the impact of digital transformation examines options such as factoring, reverse on MSME businesses. It delves into three factoring, supply chain/accounts receivable key areas: e-commerce, the gig economy, financing, secured revolving lines of credit, and digital MSME business services and merchant-receivables financing, peer-to- examines how these digital advancements peer (P2P)/marketplace lending, equity have reshaped the landscape for MSMEs crowdfunding, embedded finance, and and enabled new opportunities for growth blockchain finance via tokenized assets. and expansion. The second section, The Each subtopic explains the nature of the Rise of Digitally Enabled New Solutions financing method and its potential benefits for MSMEs, highlights emerging trends for MSMEs. The fourth section, Public and innovations in the realm of digital Approaches to Support MSME Finance, financing. It covers topics such as focuses on the role of governments and digitization of business processes, digital public entities in fostering MSME finance. credit scoring and risk assessment utilizing It discusses different approaches including alternative data, digital payments, insurtech incentives, risk-sharing facilities, guarantee (insurance technologies), digital banking, schemes, government lending programs, and the concept of open banking/open securitization of MSME lending portfolios, finance. This section sheds light on the and other measures taken to support MSME transformative potential of these solutions businesses financially. ©World Bank The report also addresses the risks and to encourage responsible and inclusive challenges associated with digital financial digital financial practices. By covering services for MSMEs, identifying potential these key areas, the report aims to provide obstacles and providing insights into how a comprehensive understanding of the governments are mitigating and managing landscape of digital financing for MSMEs, these risks and challenges. Additionally, it equip policymakers with valuable insights, covers policy, regulatory, and supervisory and offer recommendations for fostering considerations, highlighting the need an enabling environment for MSME growth for a supportive regulatory framework and development. ©World Bank Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 22 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 23 4 Digitalization of the MSME Ecosystem ©World Bank T he digitalization of the MSME to access affordable labor and resources. The rise of digital payments, Insurtech, ecosystem has revolutionized Moreover, digital business management digital banking, and now Open Banking and the way MSME businesses tools, accounting software, and e-invoicing Open Finance have led to an increase in operate. From e-commerce have made it easier for MSMEs to manage digital credit services for MSMEs. With the to the gig economy, new digital MSME their day-to-day operations, streamline digitization of payments, MSMEs can now business tools and services have emerged, processes, and reduce costs in these access a variety of digital payment solutions, including digital business management markets. These new digital tools and enabling them to accept payments online tools, digital accounting, and e-invoicing. services can help MSMEs overcome or through mobile devices.3 The use of E-commerce platforms such as Amazon, traditional barriers to growth and success Insurtech has also enabled MSMEs to access Alibaba and Mercado Libre have enabled and have also helped MSMEs to access more affordable and customized insurance MSMEs to reach a wider audience and financing. Figure 1 demonstrates the range products, providing greater protection compete with larger companies. In several and interactions between various digitally against unforeseen risks.4 Moreover, digital markets, the gig economy has also enabled solutions, products and services banking has provided MSMEs with access provided new opportunities for MSMEs for MSMEs. to a range of banking services, such as online account management, digital Figure 1: Digitalization of the MSME Ecosystem payments, and real-time financial data, making it easier for MSMEs to manage their finances and to onboard them for financial E ECOSYSTEM MSMNew opportunities services including credit.5 The latest for growth and expansion developments in Open Banking and Open SOLUTION Finance have started to expand access to EN ABLED S FO financial services for MSMEs, allowing them RM LLY Trends and ©World Bank TA innovations in digital financing SM to leverage their financial data to access IGI Es D ABLED FINA new credit products and services.6 As a LY EN G ITAL DUCTS & SERVIC NCIN result, the combination of digital payments, DI PRO Financing ES G approaches Insurtech, digital banking, and Open Banking Block Digitizing Enabled chain finance has created a more supportive ecosystem Finance via tokenized Insur duced transaction costs and demonstrat- of business for MSMEs, providing them with tools that assets Tech processes ed the potential to decrease information help them to manage their business and P2P/ asymmetry, enabling financial institutions Marketplace increase their access to financing. It should Factoring Lending to provide financing to MSMEs that were be noted, however, that all these services previously unable to obtain credit due to MSME ACCESS are new opportunities for MSMEs and a lack of credit history or collateral.8 More- E-commerce TO FINANCE Equity Gig economy MSME owners need to properly understand over, digital documentation and the au- crowd Reverse funding them to advance financial inclusion in a Factoring tomation of many processes have helped LIC SECT concrete way. Supply UB Govt and O MSMEs to register and verify their identity P R chain/ DFI support These digital financial services (DFS) have more easily, while tailored products have Accounts Receivable RSFs Incentives paved the way for the creation of new addressed barriers such as financial liter- Digital Financing Guarantees Digital payments Securitization banking business models and digital financial prod- acy, lack of collateral, lack of insurance Govt. of MSME Secured lending lending ucts, such as digital credit and crowdfund- coverage for micro and small businesses Revolving programs porfolios Lines of Merchant ing platforms that provide equity capital. as well as the high costs to serve MSMEs.9 Receivables Credit Financing By automating onboarding, underwriting, due diligence tasks, and payment collec- 4.1 E-commerce tion, DFS have demonstrated their poten- tial to make the lending and capital-raising E-commerce has become an important processes faster, easier, and more cost-ef- channel for MSMEs to reach new customers fective.7 The use of mobile devices and and expand their market share. The rise of Digital MSME Business alternative data sources, combined with e-commerce platforms, such as Alibaba, Services big-data analytics, artificial intelligence Tencent, Amazon, Tokopedia, Flipkart, (AI), and machine learning (ML), has re- and Mercado Libre, have made it possible Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 26 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 27 Figure 2: Retail e-commerce sales compound or credit histories. The increasing use of annual growth rate (CAGR) from 2023 to 2027, digital financial services including business by country. tools, payments and credit services offered by or via e-commerce providers is enabling MSMEs to seize new business India 14.11% opportunities, optimize their business Brazil 14.07% operations, and drive economic growth. Argentina 13.63% Global growth rates of e-commerce are Turkey 13.57% expected to grow at an annual rate of Mexico 12.93% 11 percent over the next five years with Russia 12.78% faster growth rates in several G20 markets, particularly India, Brazil, Argentina, Türkiye, China 12.17% Mexico, Russia, China, South Africa, Italy, South Africa 11.89% and the United States.12 Italy 11.59% One example of a digital finance provider United States 11.22% for SMEs is Indonesia-based OVO’s Dana Global 11.16% Tara,13 for SME e-commerce merchants that Canada 10.55% sell on Indonesian e-commerce platforms. Indonesia 10.41% In addition to providing credit services to Spain 9.87% SMEs, OVO has also facilitated PayLater Australia 9.78% services for clients of SMEs that sell on Japan 9.75% the e-commerce platform, Tokopedia. The integrated approach has empowered ©World Bank Germany 8.11% SMEs by providing them with access to France 7.89% working capital and credit services that United Kingdom 7.77% were previously difficult to obtain. By South Korea 2.89% leveraging alternative data sources and advanced analytics, OVO assesses the support SMEs to register their businesses 0% 2% 4% 6% 8% 10% 12% 14% 16% creditworthiness of SMEs based on their 4.2 The Gig Economy and with business identification numbers (NIBs), Source: Statista Digital Market Insights © Statista 2023 transactional e-commerce history, allowing and has especially targeted women-owned the Role of Cross-Border them to extend financing to businesses SMEs, vastly improving their access to fi- Payments that may lack traditional collateral or credit for MSMEs to access new markets, nance.14 E-commerce development to empower histories. This has enabled SMEs to seize reduce transaction costs, and streamline MSMEs has also led to the growth of new business opportunities, optimize their OVO’s model and Tokopedia’s SME their supply chain.10 In addition, these the gig economy. The gig economy has operations, and contribute to economic registration process are replicable in e-commerce platforms are increasingly become increasingly important for MSMEs growth. other countries with similar e-commerce offering digital financial services, especially globally. The gig economy is a labor OVO has established partnerships with platforms. The integration of digital financial market characterized by the prevalence business tools, payments, and credit services often via embedded finance or prominent e-commerce platforms in Indo- services with e-commerce platforms as of short-term contracts or freelance work, merchant advances.11 They allow MSMEs nesia, including Shopee, Bukalapak, and well as supporting the formalization of as opposed to permanent jobs. Many to obtain working capital quickly and Tokopedia. These platforms are crucial for business processes is proving to be a MSMEs are now using gig workers to help more efficiently than via other channels as SMEs to reach wide customer bases and successful strategy for improving SMEs’ them meet their business needs, such as offers are made directly to businesses with expand their market presence. By collabo- access to financing. IT services, marketing, and deliveries. It amounts often pre-approved. These digital rating with these e-commerce giants, OVO should also be noted that many gig workers has been able to reach large numbers of However, risks associated with e-commerce are also entrepreneurs. This pool of new credit services use alternative data sources, big-data analytics, AI, and ML to assess SMEs and provide them with tailored finan- also need to be addressed, especially in entrepreneurs and workers enables MSMEs transactional e-commerce history, better cial services that support their growth and financial literacy and consumer protection to to access specialized expertise on-demand assess credit risks, and provide financing to success. In addition, Tokopedia has part- ensure that innovative access to finance via without the overhead costs of hiring full- MSMEs that may lack traditional collateral nered with the government of Indonesia to e-commerce is conducted responsibly. time staff. Additionally, gig workers can be Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 28 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 29 more flexible than traditional employees, high onboarding and training costs, and Wise has a global presence, offering G-P foster financial inclusion for gig workers in which allows MSMEs to scale up or down scarce women-centric financial products a broad reach, to the benefit of MSMEs multiple markets. Unique issues around more easily in response to changes in and services.15 (See figure 3). and gig workers around the world. The worker protection for those operating in demand. integration of Wise’s transfer services into the gig economy are also important for An example of fintech collaboration the G-P Contractor platform expands the policy makers and regulators to consider. The gig economy can also help MSMEs supporting gig-enabled businesses and accessibility of cross-border payments for improve their access to financing. Digital MSMEs that employ gig economy workers is gig economy contractors and freelancers, platforms that facilitate gig work, such the recent partnership between the software 4.3 Digital MSME Business enabling them to work with MSMEs globally as Uber, Lyft, and Airbnb in the US, and as a service (SaaS) global employment without concerns about delayed, inefficient, Services Singapore-based Grab, are increasingly platform, Globalization Partners (G-P) and or insecure payment methods. Digital business management tools have offering financial products and services UK-based Wise,16 which recently teamed to their gig-enabled entrepreneurs and The gig economy is a global phenomenon, become increasingly popular among up to facilitate cross-border payments to workers, such as digital wallets and loans. and the need for efficient cross-border MSMEs due to their ability to streamline gig economy contractors and freelancers. These platforms use the data they collect payment solutions is essential.18 There is operations and improve efficiency. These With the growing need for gig workers, on their gig workers and their business the potential to replicate similar innovative tools can assist with various business many MSMEs are unable to facilitate timely ventures to make credit decisions that approaches in other countries, however processes, including accounting, payroll, payments to their freelancers, especially traditional financial institutions may not be an appropriate regulatory framework is inventory management, customer those working overseas. By partnering with able to make. By offering these financial also important19 to enable collaboration relationship management, and more. G-P, Wise overcomes the difficulty in paying products and services, these platforms between money transfer operators and gig By digitizing these processes, MSMEs gig workers, particularly those overseas. are helping to bridge the financing gap economy platforms in different countries can reduce costs, save time, and gain for MSMEs that use gig workers as well By improving the facilitation of cross- and to extend financial services to MSMEs greater control over their operations.20 as supporting gig-enabled businesses. border transactions, Wise has improved and gig workers. Replicating this model This improved efficiency can help MSMEs Additionally, by providing access to the efficiency and reliability of payments can enhance the growth and development demonstrate to lenders that they have solid financial products, the platforms are between MSMEs and their gig workers.17 of the gig economy, empower MSMEs, and business practices in place, increasing their helping gig workers and their business This partnership has enhanced the ventures improve their financial stability. ability of MSMEs to leverage gig workers While women-owned gig ventures are also for specialized expertise, while also expanding, it should be noted however that empowering MSMEs and their gig workers they face challenges including how they by providing them with a seamless and can enter the e-commerce ecosystem, convenient payment solution. Figure 3: Digitalization of the MSME Ecosystem Slow-scaling Scarce financial Slotted at entry workplace tools Gender norms dictate The high onboarding Few fintech innovations women must enter and training costs for designed for the gig specific parts of the platforms mediating economy focus on platform ecosystem. or women’s work mean they women-centric products, face hurdles in male- grow slowly and cannot so women don’t find dominated job sectors. support embedded many products that help them financial services. convert income into longer-term gains. ©World Bank Source: CGAP Blog On Gig Platforms, Women Workers Face Triple Barriers to Inclusion Innovations in SME Financial Services Innovations in SME Financial Services 30 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 31 ability to obtain financing.21 Some digital digital platform has enabled it to reach pricing determination and collection timing introduction of card payments for SMEs business management tools also offer SMEs across industries and geographies, identification, a credit collection mandate, and streamlines back-office operations. financial reporting and forecasting features, making financing more accessible to a electronic signatures, and activation of It incorporates prepaid wallets for high- which can help MSMEs prepare for and wide range of businesses. By leveraging legal services.23 value company card payments that exceed demonstrate their financial performance to technology and data analytics, Kabbage typical personal credit limits. It also offers MSMEs face difficulties in introducing potential lenders. The availability of such has streamlined its underwriting process online card issuance and control, allowing card payments as they are considered tools is democratizing access to financial to provide faster loan approvals, ensuring users to distribute cards to employees risky by card issuers under traditional card management and business intelligence that SMEs can access the funds they need and departments for transparent spend payment screening processes. In addition, which is improving access to financing quickly. Kabbage’s approach demonstrates management. MSMEs cannot easily manage their staff opportunities for MSMEs. a potential model that players in other making company credit card purchases Since its launch in August 2020, paild has markets can replicate. E-invoicing is also growing in popularity online, due to concerns about potential acquired over 3,000 SME users and over as it can streamline the invoicing process, Italy-based Invenium Legaltech is the first unauthorized or fraudulent payments by 10,000 employee users. Deregulating the reduce errors, and provide greater European legal tech innovative player employees. Cloud-based card services can payment industry can play a significant transparency and accountability. E-invoices focused on export credit, creating an provide real-time control over card usage, role in enabling startups to enter the also allow for faster payment processing, accessible app for MSMEs, to make faster, addressing these concerns and offering market. While regulation is important for which can help improve a company’s cash easier, and accessible international credit transparency in spend management. user protection, finding a balance between flow and reduce the need for external management to small exporters. The firm’s This is where Japanese cloud-based risk and societal gain is key for fostering financing. The data generated by e-invoicing app provides international risk analysis, corporate card service paild24 simplifies the innovative models such as paild. can also be used by lenders to assess a company’s creditworthiness, making it easier for MSMEs to access financing. With the increasing adoption of e-invoicing, it is expected that MSMEs will have better access to financing and improved financial management capabilities. US-based American Express subsidiary Kabbage,22 an online lending platform for small businesses, also provides a suite of digital business management tools designed to help SMEs manage their finances. Kabbage offers cash flow forecasting tools that allow SMEs to forecast their future cash flows, helping them to plan and avoid cash flow shortages. Kabbage also provides online invoicing tools, which enable businesses to create, send, and manage their invoices online, improving the efficiency of their invoicing. The platform’s payments processing services allow SMEs to accept payments from customers online, via credit card or Automated Clearing House ACH) and receive their funds within a few business days. Kabbage initiated lending in 2011 and ©World Bank has achieved outreach and scale, having provided over $14 billion in funding to more than 200,000 small businesses. Its Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 32 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 33 5 The Rise of Digitally- Enabled New Financial and Accounting Solutions for MSMEs ©IFC Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 34 G20 Global Partnership for Financial Inclusion D igital technologies, such as history can provide a full digital overview of transaction data and connectivity to small 5.2 Digital Credit Scoring/ digitized business processes, an MSME and transparency into its present businesses, Square Capital offers tailored digital credit scoring, digital and expected future cash flow. working capital loans to merchants based Credit Risk Assessment payments, and digital banking, on their payment history and business Digital credit scoring or credit risk Digitized accounting information can also are transforming financial services and performance. There are other payment assessment is the use of data and analytics be made available to potential lenders, creating new opportunities for MSMEs to providers offering working capital loans to evaluate a borrower’s creditworthiness. helping to provide a full overview of an access financing. This chapter describes either directly or in partnership with other This is typically done by financial institutions MSME’s income and expenses, financial these innovative financial service models, financial institutions, including Fawry in such as banks or credit card companies, strengths and weaknesses, growth including their impact, benefits and Egypt,28 which serves over 35 million fintech lenders or by third-party digital potential, creditworthiness, and business challenges, and how they are improving credit scoring providers to help financial risks, and making credit decisions customers and a growing base of MSMEs; financial inclusion for MSMEs, empowering institutions make informed decisions on immediate and more accurate. MSMEs M-Pesa’s M-Shwari, which serves over 32.8 them to grow and thrive in today’s digital whether to grant credit to an individual or worldwide are not fully harnessing this million customers including more than economy. business.31 potential and governments play a critical 90,000 Kenyans MSMEs; KCB M-Pesa role in encouraging and facilitating digital in Kenya; and NCBA M-Pawa which has Traditionally, credit scoring has relied on 5.1 Digitizing Business accounting by implementing supportive a client base of more than 7 million in standard metrics such as credit history, Processes policies, providing incentives, and creating Tanzania.29 This approach of partnering with income, employment status, and debt- an enabling environment for MSMEs to financial institutions has provided MSMEs to-income ratio. However, with the rise Digitizing business processes involves embrace digital transformation and access with access to necessary capital and has of alternative data sources and digital transforming traditional manual processes the associated financing opportunities. streamlined the lending process. The technologies, financial institutions are now into digital ones, such as accounting, scale achieved by Square Capital, Fawry, able to consider a wider range of data points, inventory management, procurement, Siapik,25 developed by Bank Indonesia and leading to more accurate assessments of invoicing, sales, delivery, tax compliance, the Indonesian Institute of Accountants (IAI), M-Shwari, KCB M-Pesa and NCBA M-Pawa creditworthiness. payroll, and customer management. It also is a mobile application and web-based tool highlights the potential for replicating involves developing customer portals and allows MSMEs to easily record their financial this model in other markets where similar Alternative data refers to non-traditional e-commerce applications to streamline transactions in a standardized report that payments processing platforms operate.30 data sources that can be used to assess online transactions. Maintaining reliable they can send to financial institutions. Since financial statements can be challenging its launch, Siapik has been adopted by over for MSMEs, making it difficult for potential 200,000 Indonesian MSMEs.26 By facilitating lenders to assess their creditworthiness. the direct submission of MSMEs’ financial Digitized business information can provide reports to financial institutions, Siapik has alternate and accurate sources of data for also enabled faster and more accurate lending purposes. Paper-based records credit assessments. The success of Siapik’s are difficult and time-consuming to sort outreach and its ability to streamline through, and the relatively low value of loans financial reporting processes make it a to MSMEs makes it largely unprofitable compelling model to replicate in other for lenders to spend a lot of time verifying markets with similar challenges. financial records. E-commerce platforms, accounting system By digitizing, MSMEs can provide reliable providers, and payment services providers digital records on sales, expenses, cash have rich data on business operations and flow, and inventory – information that can cash flows that can be leveraged to offer help lenders make informed and timely finance. For example, US-based Square decisions on loan applications. In addition, Capital uses information from its payments payment and collections information from processing and connectivity to small MSMEs’ clients can generate important merchants to offer working capital loans and data that can help MSMEs to obtain credit collect repayments.27 Through this innovative ©World Bank from financial institutions and fintech approach to MSME financing, Square Capital lenders. Data related to sales volumes, has extended over $10 billion in loans to performance, and patterns, and payment more than 300,000 SMEs. By leveraging Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 36 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 37 credit risk, such as utility bill payments, other lenders to make more informed Figure 5: Experian’s method for using alternate data to assess SME creditworthiness mobile phone usage, online purchasing, lending decisions and offer financing to sales, social media usage and ranking of MSMEs at more favorable terms. Inbonis Data Sources Experian SME Framework SME Product Suite MSMEs. By analyzing these data points has assessed the creditworthiness of over alongside traditional metrics, financial 10,000 MSMEs across various industries. institutions can gain a more complete Internal Data Altemate data SME network scores picture of a borrower’s financial situation Global traditional credit reporting company, and make more informed lending Experian, has also successfully utilized Data aggregation and enrichment decisions. alternative data to improve credit scoring Profiling scores for lead gen In Europe, Inbonis32 provides credit scoring for MSMEs across multiple markets. Decisioning on services focused on MSMEs. Inbonis has Experian operates in 44 countries and PowerCurve Financial Model/ Income Tax Return (ITR)/ Financial expanded its traditional credit scoring collects and aggregates data on over 1 billion Statement Analysis (FSA)/ platform to utilize alternative data sources Partnerships Balance Sheet (BS) customers including 25 million MSMEs in Machine Learning for MSMEs. The agency uses a proprietary the US alone.33 Experian has demonstrated (ML models) algorithm that analyzes a range of non- Internal Data Assets : Bureau Data - Commercial bureau Model how traditional credit reference providers traditional data sources such as social consumer & Commercial, SME BI media activity, online reviews, and other can effectively utilize alternative data sets Financial Statement - Financial Statement Ensemble models to expand information on MSMEs. This Accounts, ITR Submission Consumer bureau Model publicly available data to assess the GST and Bank Statement : Perfios, Govt creditworthiness of MSMEs. Inbonis’ credit alternative data includes transactional data Tax data ratings can provide valuable insights and on sales, turnover, deposit balances as well Data and Analytics Platform Commercial sector index can be used by financial institutions and as traditional repayment historical data. Source: Experian presentation for SME Finance Forum June 2020 Figure 4: Experian’s alternate data for assessing SME Other financial institutions and credit scoring real-time processing, reduced transaction Company registration Goods and Services Tax (GST) providers can adopt a similar approach to times, lower fraud risk, and lower costs.36 assess the creditworthiness of MSMEs. Digital payments also create a digital trail 1. Incorporation details 1. Sales/purchase/return 2. KYC details 2. Current Year/Previous Year Expanding both the range of players that that enables MSMEs to track financial 3. Business overview 3. Top Suppliers and Top can participate in credit reference bureaus, transactions, manage cash flow effectively, 4. Blacklist checks Customers details 4. Late Fee/Delays in Payment including both lenders and utility bill and build a credit history, which is critical to providers, can also improve credit scoring.34 be able to access digital financing.37 Company GST / By utilizing alternative data sources and E-wallets and transactional accounts are key registration accounting data data digital credit scoring, Inbonis, and other fi- components of digital payments. E-wallets nancial institutions and credit scoring agen- allow individuals and businesses to store Director/shareholder Banking Data cies can provide a more comprehensive funds and make electronic transactions 1. Balance-build up and evaluation of MSMEs’ creditworthiness, en- using mobile devices. They provide a 1. Ultimate Beneficial Owner Directors / 360 Bank movement abling lenders to make informed decisions (UBO) report convenient and secure way for MSMEs 2. KYC checks on company shareholders Customer statement 2. Transaction information data 3. Category wise transaction and offer financing options tailored to their to accept payments from customers and owners data View 3. Bureau checks 4. Debit/credit-count, amount needs. access their funds for business needs. 4. Blacklist checks Bank Transactional accounts are bank accounts 5.3 Digital Payments specifically designed for businesses to Credit manage their day-to-day financial trans- Financial Credit Bureau Bureau Financial Data Digital payments are a vital tool for Data actions, such as receiving payments, data MSMEs, particularly in emerging markets, 1. Payment performance 1. Trend-Profit/Sales/Net making payments to suppliers, and tracking delinquency worth Trend as they offer a more secure, efficient, and 2. Leverage, product holding 2. Liquidity/Coverage/ cash flow. cost-effective way to make and receive 3. Credit risk Information Leverage 3. Turnover/Profitability payments compared with traditional Digital payments surged during COVID-19 methods like cash or checks.35 By adopting and have continued increasing post- Source: Experian presentation for SME Finance Forum, June 2020 digital payments, MSMEs can benefit from pandemic. Countries in the Asia Pacific Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 38 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 39 region are expected to experience the most a range of features, including the ability of Indians. While early users of UPI were alternative way for businesses and growth, followed by the US and Canada, to make payments using QR codes, send smartphone users, UPI is now also available customers to complete transactions. The the UK and the EU. The increasing number money to friends and family, and pay for feature phone customers through Tap to Pay feature allows customers to of partnerships among payment service bills. Connected to FABePay is Electronic UPI123PAY.44 make payments by simply tapping their providers (PSPs) and the implementation of Invoicing and Payments Platform (EOIPP) Visa cards or mobile devices at the point of By enabling MSMEs to accept digital advanced technologies such as blockchain which is an electronic invoicing and sale, eliminating the need for physical cash payments through their phones, FABePay, and AI are also expected to drive market payments platform that allows businesses or manual card swipes. Bakong, and UPI have helped to streamline growth in the coming years.38 Uber, Lyft, to create, send, and receive invoices payment processes, reduce reliance on In 2021, Visa reported that more than 80 Airbnb and Grab are also partnering with electronically. The platform also enables cash transactions, and improve cash flow percent of its in-person transactions in digital payment fintechs or, in the case of businesses to track payments and generate management. FABePay’s features, such as Europe were contactless. In the United Grab, developing digital payment services real-time financial reports. QR code payments and electronic invoicing, States, Visa also witnessed a significant for their gig workers.39 provide MSME with convenient and secure increase in the use of contactless FABePay has gained relevance and made Digital payments are often facilitated with an impact in the UAE as a mobile wallet and ways to receive payments and track payments, with over 400 million Visa Quick Response (QR) codes— scannable payment platform for MSME and as a tool for their financial transactions. Additionally, contactless cards issued by banks. The codes that contain payment information. MSME to manage their payment transactions its integration with EOIPP, the electronic impact of contactless payment for SMEs is MSMEs can generate QR codes for more efficiently. Bakong Cambodia is another invoicing and payments platform, further substantial. By enabling small businesses customers to scan, making it easy for them to mobile payment platform that facilitates enhances MSME ability to create, send, and to accept contactless payments, payment initiate payments using their smartphones. payments and mobile financial services for receive invoices electronically, simplifying providers can help streamline their payment QR codes simplify the payment process, millions of customers.42 Bakong’s peer-to- their billing and payment processes. processes, reduce checkout times, and eliminate the need for physical cash, and peer interoperable fund transfer system enhance customer experiences. The ease Providing MSMEs with user-friendly and and speed of contactless payments has provide a seamless experience for both set up by the National Bank of Cambodia accessible digital payment solutions such helped to improve operational efficiency businesses and customers. currently offers free transfer services for as AFBePay, Bakong and UPI, can promote and customer satisfaction for SMEs, which retail businesses and has helped transform financial inclusion, improve operational Alibaba’s Alipay payment platform,40 is likely can further drive business growth.47 the digital payment market for MSMEs in the efficiency, and stimulate economic growth. the most well-known mobile wallet and country.43 The key to replicating mobile solutions is to payment platform. Outside of China, the creating an ecosystem that supports digital United Arab Emirates (UAE), has FABePay41 Another mobile based system is the Unified payments by establishing partnerships which allows users to pay for goods and Payments Interface (UPI) in India, which has with local financial institutions, technology services using their smartphones and has also facilitated financial services for millions providers, and regulatory bodies to ensure compliance. Adapting the platform to meet Figure 6: Current and projected global growth in digital payment users the specific needs and preferences of 2017-2027 MSMEs in each target market is essential for successful implementation and scalability. 6000 5,462.00 Italy-based PayDo is a B2B Fintech startup 5.193.00 4,930.00 that started operating in 2016, and has 5000 4,674.00 4,425.00 4,148.00 developed a suite of value-added services 3,829.00 4000 to innovate the payments experience. in million users 3,481.00 3,178.00 PayDo’s Innovations for SMEs are PickUp 3000 2,753.00 2,449.00 and Plickopen which allow users to easily 1,858.00 1,937.00 request money digitally by sending a link 2000 1,486.00 1,501.00 1,592.00 1,682.00 1,772.00 1,332.00 to debtors or payers via WhatsApp, SMS, 904.20 1000 632.20 or email. Using the link, debtors have several 299.40 6.40 7.75 9.34 11.06 12.79 14.39 15.82 17.04 17.98 18.56 payment options, including credit card, bank 5.33 0 transfer, or cash at an affiliated store.45 Total Digital Commerce Digital Remittances Mobile POS Payments As a contactless payment technology, ©World Bank Visa’s Tap to Pay solution46 offers an Source: Statista Market Insights, accessed April 2023 Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 40 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 41 5.4 Digital Banks Providing faster and more efficient onboarding Digital banks48 are playing an increasingly important role in efficiently onboarding Digital banks use technology to streamline MSMEs and expanding access to credit the onboarding process for MSMEs. By and financing. They can offer more using digital platforms, MSMEs can open innovative and customized services, bank accounts, apply for loans, and access leverage data analytics to assess credit financing more quickly and efficiently. worthiness, and increase the access to a This includes automated digital interfaces wider range of financing options.49 Data to support account opening, helping to shows that digital banks have significantly educate or offer tools, such as mobile reduced onboarding times for MSMEs, with applications, about the banks’ products and some achieving a 90 percent reduction in services, and banking procedures. From a onboarding time compared with traditional banks.50 Personalized and customized bank’s perspective, digital onboarding aids services are better at meeting MSMEs’ customer satisfaction and retention, cross- specific needs, resulting in increased selling banking products and services, customer satisfaction and loyalty.51 Data and as well as compliance with legal and analytics has enabled digital banks to regulatory requirements Figure 7. accurately assess creditworthiness and ©World Bank Figure 7 illustrates the significant reduction reduce default rates by up to 20 percent.52 Furthermore, digital banks have facilitated in onboarding time achieved by digital access to alternative financing options for banks compared to traditional banks. It MSMEs, with lending volumes on digital showcases the time saved and improved platforms growing by over 40 percent efficiency for SMEs in the onboarding Leveraging data analytics to Offering personalized and annually.53 process. assess creditworthiness customized services Like digital credit scoring, digital banks Digital banks can offer personalized and Figure 7: Reduction in Onboarding Time by Digital Banks for SME use data analytics to accurately assess the customized banking services to MSMEs creditworthiness of MSMEs. By analyzing based on their specific needs. For example, Best-in-class banks onboard a majority of their customers digitally, with a wide range of data sources, such as some digital banks offer tailored financing faster onboarding journeys. transaction history, social media activity, options, such as invoice financing or supply and other third-party data, digital banks chain financing, which are designed to Customer onboarding, by segment (in UK), % can better understand the financial health meet the unique needs of MSMEs. This Average time to onboard of MSMEs. This in turn helps digital banks helps MSMEs access the financing they Small business Midcorporate (business days) make more informed lending decisions and need to manage their cash flow and grow 1 6 offer financing options that are tailored to their businesses. End-to- 19 the needs of MSMEs. end digital Some examples include JUMO in Africa,54 Providing access to a wider range PagSeguro in Brazil,55 and Starling Bank of financing options in the UK.56 JUMO is a digital banking 93 Mixed 99 8 platform that provides financial services 94 channel’ or 81 Digital banks are partnering with fintech to underserved communities in Africa. The nondigital startups and other financial institutions to platform leverages data analytics to assess offer a wider range of financing options the creditworthiness of MSMEs and offer to MSMEs. For example, some digital 7 1 them tailored financing options. banks are partnering with peer-to-peer Average Top Average Top Without Best performer performer digital practice lending platforms to offer MSMEs access JUMO has served millions of MSMEs across onboarding to alternative forms of financing, such as Africa, and by leveraging its partnerships Source: McKinsey & Company crowdfunding or revenue-based financing. with other financial institutions, expands Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 42 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 43 the range of financing solutions available for other markets seeking to enhance MSME to MSMEs, including invoice financing access to innovative financial services. and asset financing. JUMO’s extensive Developing MSME friendly digital banks in reach demonstrates the potential of digital other markets would involve establishing banks to address the financial needs of partnerships with local financial institutions, underserved communities, especially in ensuring regulatory compliance, and emerging markets. leveraging technology to provide efficient onboarding, customized services, and PagSeguro operates a digital payment access to a wide range of financing options. platform to MSMEs in Brazil. The platform provides MSMEs with instant account opening, free point-of-sale (POS) terminals, 5.5 Open Banking/Open and access to credit facilities. PagSeguro Finance also offers a range of financial management Open Banking is a system where banks tools to help MSMEs manage their finances and other financial institutions allow third- effectively, such as invoicing and cash flow party providers (TPPs) to access customer management. PagSeguro has onboarded banking data, with the customer’s millions of MSMEs, its offerings have consent, through the use of application contributed to its popularity among MSMEs, programming interfaces (APIs). This data as they enable them to accept digital sharing enables TPPs to develop innovative payments and manage their finances more financial products and services, creating a efficiently. PagSeguro understands the more competitive and customer-centric needs of its local market and has developed financial ecosystem. a solution tailored to these needs – an approach other digital banks can adopt Countries treat Open Banking differently when considering similar initiatives. across different jurisdictions, with variations in their approaches and regulatory Starling Bank, a digital-only bank in the UK, frameworks. has gained recognition for its innovative approach to serving SMEs and individuals. 1. The EU and the UK have pioneered It offers a range of features and services Open Banking with the introduction of that make it particularly relevant to SMEs. the Payment Services Directive 2 (PSD2) One of Starling Bank’s innovations is its and the Open Banking Standard in the focus on providing a more integrated digital UK. Under PSD2, banks are required banking experience. It offers instant account to provide access to customer data to opening, allowing SMEs to quickly establish authorized TPPs through APIs, promoting a business account without the need for competition and innovation. lengthy paperwork or visits to a physical 2. Some countries, including Japan, branch. This streamlined onboarding Singapore, and South Korea, have process is especially beneficial for time- adopted a market-driven approach. constrained SMEs. Starling Bank also offers While they may not have formal or zero charges on transactions – a significant compulsory Open Banking regimes, they advantage for SMEs looking to minimize have implemented measures to promote operational costs, and it provides SMEs with data sharing frameworks in banking. access to credit facilities, allowing them to For example, Singapore’s Monetary secure financing when needed. Authority (MAS) and The Association of ©World Bank The early developments of digital bank Banks have published an API Playbook57 models that provide specific channels and to facilitate data exchange between services for MSMEs can serve as a model banks and FinTechs. Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 44 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 45 nancial ecosystem that benefits consumers Facilitate cross-border financing and encourages the development of new financial products and services. Open Banking and Open Finance can potentially help to facilitate cross-border Open Banking is now going beyond banks to financing for MSMEs by enabling the other financial service providers with Open sharing of financial data across borders. Finance initiatives62 and these can play an This can help MSMEs access financing important role in supporting MSMEs and from international lenders more easily and increasing their access to financing. They efficiently. enable data sharing, promote competition, improve credit assessments, and facilitate Overall, Open Banking and Open Finance cross-border financing. These new services play an important role in supporting MSMEs have the potential to significantly advance and increasing access to financing . They financial inclusion, however, to achieve that are also helping to create a more open and requires MSME owners to meaningfully interconnected financial ecosystem that understand them and how they can be can benefit MSMEs and other stakeholders in economies globally. ©World Bank applied to their businesses. Open Banking and Open Finance initiatives Enable data sharing are being implemented or explored in Sharing financial data between banks, various countries worldwide. Early countries financial institutions, and third-party to explore Open Banking were the UK 3. Hong Kong, Türkiye, 58 India and The concept of reciprocity is another providers has the potential to create a – Open Banking initiative – and the EU – Australia have opted for a regulatory- characteristic of Open Banking that varies more open and interconnected financial Payment Services Direction 2 (PSD2) – which driven approach. These countries have across countries. Reciprocity refers to the ecosystem, which can help MSMEs access enable consumers and businesses to share established frameworks and regulations requirement for accredited data recipients a wider range of financing options.63 For their banking data with authorized TPPs. mandating banks implement Open APIs (such as TPPs) to provide equivalent data in response to a direction from a consumer. example, MSMEs can use their financial and provide access to customer data In the UK, the Open Banking initiative has Australia’s CDR has introduced reciprocity data to apply for loans from multiple lenders to authorized TPPs. In Hong Kong, the been a pioneering force in promoting as a principle, aiming for a more vibrant and compare the terms and conditions of Monetary Authority issued an Open API data sharing and competition. As a result, and dynamic data sharing ecosystem. different financing options more easily. Framework,59 while Australia introduced fintech startups have emerged, offering the Consumer Data Right Act (CDR)60 However, defining equivalent data remains innovative financial services to SMEs. The a challenge in other countries. Promote competition impact of Open Banking is demonstrated to enable data sharing across sectors. India has approached Open Banking Data protection regulation plays a crucial Open Banking and Open Finance promote by the number of SMEs that have been able by enabling Account Aggregators role in Open Banking. The EU’s General Data competition in the financial services industry to access tailored financing options and (AA) as intermediaries which are Protection Regulation (GDPR) sets a high by enabling new entrants to compete with benefit from more competitive pricing and responsible for customers’ consent standard for data protection and privacy. established players. This can potentially improved credit assessments.64 In the UK management and provide financial While the GDPR includes the right to data lower the cost to do business and result alone, more than 75,000 SMEs are already information aggregation services to portability, its interpretation, and technical in more innovative and tailored financing using Open Banking, especially to import customers from one or more Financial standards for data transfer between options for MSMEs. transactional histories into their accounting Information Providers (FIP),61 based on organizations still pose challenges. In software as well as viewing multiple bank the explicit consent of the customer Australia data protection authorities have Improve credit assessments accounts at a time.65 The adoption of Open been actively involved in the development Banking APIs has allowed SMEs to connect to the Financial Information User (FIU). Open Banking and Open Finance can help of Open Banking frameworks. their financial data with authorized TPPs, The AA framework was issued by the to improve credit assessments for MSMEs leading to better financial outcomes. Reserve Bank of India (RBI) in 2016. The Open Banking initiatives are gaining traction by providing a more accurate picture of Reserve Bank Information Technology globally, with countries adopting their own their financial health. By accessing data Similarly, the EU’s Payment Services Private Limited (ReBIT), a wholly approaches to suit their market dynamics, from multiple sources, lenders can make Directive 2 (PSD2) has played a crucial role owned subsidiary of RBI has provided policy objectives, and regulatory frame- more informed lending decisions and offer in promoting data sharing and fostering standardized API specification to be works. The goal in most countries is to cre- more personalized and tailored financing competition across EU member states. This used by AA, FIP and FIU. ate a more competitive and innovative fi- options to MSMEs. directive has facilitated the development Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 46 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 47 of new financial services and products, the Central Bank of the Republic of Türkiye that benefits MSMEs and fosters innovation support and clear guidelines are crucial to that can benefit SMEs through increased issued API standards and regulations in the financial services sector. creating an enabling environment for data access to financing options and improved that require payment service providers to sharing and competition. Collaboration be- The impact of Open Banking and Open credit assessments. As in the UK, the PSD2 connect to the BKM (Interbank Card Center) tween regulators, banks, fintech compa- Finance can be measured by the number has resulted in a growing number of fintech API Gateway to provide payment initiation nies, and other stakeholders is vital to drive of MSMEs and individuals reached with companies in the EU, which are providing services and account information services; the adoption of Open Banking frameworks. innovative financial services and the tailored financial solutions, and driving the Reserve Bank of India began its Additionally, the development of secure adoption of these frameworks by banks and innovation in SME financing.66 approach to Open Banking by introducting and standardized APIs that facilitate data financial institutions. Open Banking Limited a regulatory framework for Account sharing is essential. Building trust among Other examples include the Australian (OBL) has reported that 7 million consumers Aggregators (AA) in September 2016;67 and MSMEs and consumers and ensuring data government’s Consumer Data Rights (CDR) and SMEs in the UK using open banking Canada, New Zealand, Malaysia, Thailand, privacy and security are paramount for legislation which enables consumers and products.68 While specific numbers vary Brazil, Nigeria and the Philippines are also widespread adoption. businesses to share their banking data across countries, the large-scale adoption exploring or implementing Open Banking of Open Banking and Open Finance have with authorized third-party providers; or Open Finance frameworks to increase facilitated access to financial services for 5.6 Insurance the Monetary Authority of Singapore competition and provide SMEs with better Open Banking API initiative, the Mexican access to financial services. This global large numbers of MSMEs globally.69 Technologies (Insurtech) government’s Open Banking initiative; the movement towards Open Banking and To develop Open Banking and Open Fi- Insurtech, which refers to the use of South African Open Banking initiative to Open Finance will create a more inclusive nance frameworks in other markets re- technology to transform the insurance in- enable data sharing and promote innovation; and interconnected financial ecosystem quires several key factors. Regulatory dustry, is playing an increasingly important role in helping MSMEs become more creditworthy. These include providing access to affordable insurance, using data analytics to assess risk, streamlining the processing of insurance, and providing alternative forms of collateral. Providing access to affordable insurance A typical challenge for MSMEs is the cost of insurance and insurtech startups are overcoming this, using technology to create more affordable and customized insurance products for MSMEs.70 Insurance helps MSMEs protect their assets and manage risk, which can make them more creditworthy. Using data analytics to assess risk Insurtech startups are leveraging data analytics to analyze a wide range of data sources, including mobile data, Internet of Things (IoT) sensors, and other third-party sources, to accurately assess risk.71 By using this data, insurers can offer personalized and tailored insurance products that better meet ©World Bank the needs of MSMEs, helping to reduce their risk profile. Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 48 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 49 calamities. The company also provides risk their provision of insurance coverage to Seguro Para Mujeres caters specifically to management services to help businesses contribute to the resilience of MSMEs. women entrepreneurs in Argentina. The identify potential hazards and minimize company offers insurance products that Market studies and careful consideration their exposure to risk. address the unique needs of women- of coverage, features, price, and ease of led businesses, including coverage for MicroBiz Protect Jr provides valuable enrollment are essential when designing business interruption, theft, and liability. lessons in the development and distribution Climate and Disaster Risk Insurance (CDRI) By leveraging data analytics, Seguro of insurance products for MSMEs. They products for MSMEs. Balancing these Para Mujeres assesses risk accurately contribute to understanding the relevance factors ensures that CDRI products are and impact of MicroBiz Protect Jr, as well attractive to MSMEs and meet their specific and provides customized insurance as its potential for replication in other needs. MicroBiz Protect Jr’s emphasis solutions. This approach enables women markets. on market research and product design entrepreneurs to protect their businesses highlights the importance of customization effectively, reduce their risk profiles, and One key lesson is the importance of enhance their creditworthiness. With and affordability in promoting the adoption partnerships with governments and local affordable insurance coverage and a focus of insurance among MSMEs. stakeholders. By collaborating with Local on risk mitigation, Seguro Para Mujeres Government Units (LGUs) that offer training To replicate the success of MicroBiz empowers women entrepreneurs to access or other financial services, such as start- Protect Jr, insurtechs in other markets financing and grow their businesses. up capital for low-income entrepreneurs, should collaborate with local stakeholders, MicroBiz Protect Jr has been able to reach integrate of financial literacy efforts, Both of these insurtech startups provide a wider audience and attract more MSME incentivize insurers, conduct market an example of how technology can ©World Bank customers. This partnership approach studies for product design, establish dis- transform the insurance industry and make demonstrates the significance of engaging tribution channels as touchpoints, and insurance more accessible to MSMEs. local stakeholders and leveraging existing foster strong public-private partnerships. By By providing affordable insurance, using support systems to promote the adoption incorporating these lessons, other markets data analytics to assess risk, streamlining of insurance among MSMEs. can enhance the relevance, outreach, and claims processing, and providing forms of Streamlining claims processing impact of insurance products for MSMEs, risk mitigation, they are helping MSMEs Financial literacy also played a crucial Insurtech startups are using technology to ultimately contributing to their financial manage risk, protect their assets, and role in MicroBiz Protect Jr’s success. streamline claims process.72 This means resilience and growth. become more creditworthy. MSMEs found insurance against climate MSMEs can receive payouts more quickly, and disaster risk more relevant when it reducing the financial impact of a loss, and was presented alongside other related helping them maintain their cash flow and activities, such as capacity development, financial stability. disaster mitigation and access to loans. This integrated approach highlights the Providing forms of risk mitigation importance of providing comprehensive Insurtech startups are also targeting knowledge and training to MSMEs to business with insurance that protects enhance their understanding of insurance them against risks. Some financial service and its benefits. By aligning financial literacy providers are taking insurance policies into efforts with other initiatives, MicroBiz Protect account when looking at potential risks Jr addressed the needs of MSMEs and including climate-related risks, enabling increased their willingness to participate in MSMEs to access financing.73 the insurance program. MicroBiz Protect Jr in the Philippines The example of MicroBiz Protect Jr and Seguro Para Mujeres in Argentina also reveals the need for insurers in the are two examples of insurtech startups Philippines to receive greater incentives to that are helping MSMEs become more enter the climate and disaster risk insurance ©World Bank creditworthy. MicroBiz Protect Jr offers market. Disasters and climate-related affordable insurance products to MSMEs risks have a significant impact on insurers’ covering risks such as fire, theft, and natural portfolios, making it crucial to incentivize Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 50 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 51 6 Digital Innovation and Alternative Financing Products and Services ©World Bank Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 52 G20 Global Partnership for Financial Inclusion I nnovative non-traditional financing New advances in financial technologies Another innovative example of facilitating methods play a crucial role in supporting can automate the credit process for factoring is the Receivables Recording MSMEs by providing them with access underwriting, collections, and determining Center (RRC) in Türkiye, a system that to much-needed financing. These credit-risk, allowing for an automated records assigned receivables being used financing methods leverage technology, risk-management model, including fraud in MSME factoring and credit transactions data analytics, and alternative collateral detection and prevention. Factoring plat- to prevent the same receivable from being to overcome traditional barriers and forms also monitor collections and deposits used in more than one financing transaction. increase creditworthiness. This chapter in real-time, verifying that invoices or The system was initiated in 2015 and has explores various financing approaches, accounts receivable are paid at maturity been utilized by more than 820,000 buyers including factoring, reverse factoring, and that deposits are made pursuant to and 350,000 sellers. The RRC has also had a secured revolving lines of credit, merchant- payment notification and instructions given positive impact on the use of e-documents receivables financing, peer-to-peer lending, to the payer. such as e-invoices and e-archives. The use equity crowdfunding, embedded finance, of e-invoices has increased from 23 percent Japanese FinTech, OLTA provides low- blockchain finance via tokenized assets, to 95 percent within seven years.75 value, high volume online factoring services and public approaches to support MSME to SMEs and is favored by many SMEs and Other markets with a secured transactions finance. By examining these methods freelancers for its short-term, small-lot, framework can adopt similar approaches and their implications, policy makers and online factoring that can be used regardless to OLTA and RCC. To be successful, they regulators can gain insights into the evolving of company size or balance sheet credit. will need to collaborate with banks and landscape of MSME financing worldwide. In addition to factoring services, OLTA leverage existing financial infrastructure, also works on the social implementation such as collateral registries, which can help 6.1 Factoring of factoring through partnerships with facilitate the implementation and scalability Factoring allows a financial institution to local banks. Seventeen regional banks of factoring platforms. By adopting similar provide funding to an MSME supplier by have entered the cloud-based factoring technological solutions and promoting legal ©World Bank purchasing its accounts receivable or business through a partnership with OLTA certainty, other markets can offer more invoices. The MSME supplier is the client and are helping SMEs by providing working efficient and accessible factoring services of the financial institution in factoring capital in Japan. In a financial system that is for MSMEs. transactions. In developing countries, traditionally loan-oriented, these Japanese factoring is typically limited to high-dollar regional banks are supporting SMEs by A factoring platform must provide legal accounts receivable from creditworthy adding factoring to their product offerings and economic certainty that the accounts potential for reduced profit margins through buyers, creating a low-volume, high-value and are growing the local alternative receivable financed by one financial discounting, the risk of non-payment by business model. However, with automated financing market. institution have not been previously taken debtors, and dependency on a reliable pool processing, verification, monitoring, and in pledge or discounted by another. A of debtors. Furthermore, MSMEs may have OLTA’s online factoring services highlight the collection of receivables, fintech providers secured transactions system registers all difficulty negotiating favorable factoring importance of legal and economic certainty can introduce low-value, high-volume encumbrances over accounts receivable terms and addressing the reputational risk in the factoring process. A robust secured business models for factoring.74 in a collateral registry. First-in-time associated with involving third parties in transactions system and collateral registry registration provides legal priority for a their financial transactions.77 New fintech models can increase MSMEs’ are crucial for ensuring that accounts financial institution to register its interest access to finance by making it efficient to receivable financed by financial institutions factor low-value invoices, which would have not been previously pledged or ahead of others and provide notice to 6.2 Reverse Factoring subsequent parties that the assets have otherwise be excluded as collateral in discounted elsewhere. OLTA’s factoring Reverse factoring is a financing solution been encumbered. Factoring platforms traditional credit. Traditional factoring platform uses a secured transactions where a financial institution can provide establish real-time interoperability with allows an MSME to directly finance its system and real-time interoperability immediate liquidity to MSMEs by discounting collateral registries to determine the receivables without a buyer’s confirmation with collateral registries to determine its accounts payable with a large buyer. eligibility for financing of invoices and of the payment obligation or willingness the eligibility of invoices and accounts In this type of transaction, the buyer is the accounts receivables, and fintech systems to participate in a supply-chain financing receivable for financing. By automating client of the financial institution, not the can facilitate real-time registration of scheme. Effective collateral and credit-risk the registration of factoring transactions in MSME. Reverse factoring helps to increase factoring transactions in a collateral.76 measurement and monitoring are essential collateral registries, OLTA’s fintech system MSMEs’ access to finance by providing a for the success of factoring and reverse ensures transparency, legal priority, and Factoring presents several risks and way to quickly turn their accounts payable factoring for MSME financing. notice to subsequent parties. challenges to MSMEs, including the into cash.78 Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 54 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 55 To participate the MSME’s buyer must many MSME suppliers and fostering strong the platform for their numerous MSME and improved cash flow. These fintechs actively and willingly take part in a reverse supply chain relationships. suppliers. Once uploaded and verified, employ advanced technologies, such factoring or supply-chain financing financiers, including banks and non-banking as automation, data analytics, and real- In Mexico NAFIN’s development bank program. Buyers can be hesitant to financial companies, bid on the invoices time monitoring, to streamline the reverse system operates an online reverse factoring participate in such programs because they and provide immediate financing to the factoring process, enhance risk assessment, platform through partnerships with large must carry the financing on their ledger, MSME suppliers. TReDS has revolutionized and ensure prompt payment to MSME corporate buyers to support MSMEs. even though it is their supplier who receives supply chain finance in India by improving suppliers. Their innovative solutions provide By discounting the accounts payable the financing. However, digitization and transparency, efficiency, and liquidity. The faster access to working capital, improve of corporate buyers, NAFIN provides fintech solutions have made it easier to platform has reached a wide network of cash flow management, and demonstrate immediate liquidity to its MSME suppliers. incentivize buyer participation in reverse MSME suppliers, enabling them to access a successful model for other markets to This program has enabled MSMEs to factoring programs. For example, fintech quick and affordable working capital by replicate. access financing at more favorable rates reverse factoring platforms often improve leveraging their invoices as collateral. and terms, leveraging the creditworthiness Reverse factoring comes with challenges. payment conditions and extend payment of the large buyers. The scale and impact Collaboration between financial insti- In additional to convincing buyers to terms for buyers without causing supply of NAFIN’s program can be seen in the tutions, large buyers, and technology participate in reverse factoring programs, chain disruptions. Globally, the reverse significant number of MSME suppliers it has platforms are crucial for implementing the digitization and fintech solutions factoring market was $536.4 billion in 2022 supported, strengthening their cash flow, effective reverse factoring solutions such needed to incentivize buyer participation and is expected to grow at a compound and enabling business growth. as those in India and Mexico. By using digital may require substantial investments in annual growth rate (CAGR) of 11.4 percent platforms and ensuring buyer participation technology infrastructure. MSMEs also from 2023 to 2030.79 In India, the Trade Receivables Discounting through improved payment conditions and face the risk of becoming overly reliant on System (TReDS) is a platform that connects extended terms, reverse factoring programs reverse factoring as a financing solution, Two successful examples of reverse MSME suppliers, corporate and other can be replicated in other markets. The potentially limiting their access to other factoring are the Nacional Financiera buyers, including Government Departments key lessons learned from these examples forms of financing. (NAFIN)80 reverse factoring program and public sector enterprises and financiers. include the importance of building in Mexico and the Trade Receivables MSME suppliers upload their invoices on Discounting System (TReDS)81 in India. the platform, and buyers verify and accept strong partnerships, using technology to 6.3 Secured Revolving streamline processes, improving cash flow These programs have demonstrated those invoices. As of February 2023, there for MSMEs, and fostering an ecosystem Lines of Credit significant scale and outreach, benefitting were 3,559 cumulative buyers utilizing that benefits all stakeholders. Asset-based lending (ABL) is a financing product designed to provide working capital Reverse factoring also serves as the to mature or sophisticated MSMEs. This Figure 8: Global reverse factoring by industry - 2022 linchpin for other supply chain financing type of lending uses account receivables components, such as purchase order and and inventory as collateral. MSMEs require distributor financing. These additional credit to finance their entire production functionalities are staples of fintech or business cycle, but without collateral, reverse factoring platforms, including those pre-sale activities including inventory provided by Demica, and eFactor Network.82 acquisition, manufacturing, harvesting, and Demica83 offers a comprehensive supply delivery of services are more challenging to Global Reverse chain finance platform that integrates finance. Post-sale activities, such as sale of Factoring Market reverse factoring as a core component. inventory and collection of receivables, are Share, by End-use, Through its platform, MSME suppliers can easier to finance with traditional or reverse 2022 (%) upload their invoices and receive early factoring products. Pre-sale financing is payment options, while corporate buyers rare in developing economies, which leaves benefit from extended payment terms. MSMEs needing to finance their large eFactor Network84 is another notable buyers during the most capital-intensive fintech player that focuses on providing phase of their commercial activities. reverse factoring services to MSMEs. Its However, the reduced value assigned to Manufacturing Transport & Logistics Information Technology platform connects suppliers with a network pre-sale collateral due to risks associated of financial institutions and investors, with conversion, sale, and payment creates ⚫Healthcare Construction Others allowing for timely financing of invoices an imbalance between pre- and post-sale Source: Grandview research, Reverse Factoring Global Report 2023 Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 56 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 57 financing. Lenders face additional risks in sophisticated MSMEs, the API can also CIMB Bank in Malaysia offers the BizFlexi medium-sized retailers’ acceptance of pre-sale financing, including conversion be used to connect to the borrower’s Financing product, which provides MSMEs payment card transactions as collateral. and sale risks. accounting software, providing a complete a secured revolving line of credit. MSMEs This allows MSMEs to finance their data profile of the MSME and its collateral can utilize their accounts receivable, operations and growth with previously Digitized secured lines of credit, enabled by to facilitate lending.86 inventory, or property as collateral to access unavailable collateral. Payments of credit, credit infrastructure and fintech solutions, financing throughout their business cycle. debit card or e-money (including mobile can greatly reduce pre-sale risks and make Banco do Brasil in Brazil has made strides The flexibility in borrowing and repayment money) receivables are deposited into a financing available for the entire MSME in providing innovative asset-based lending provided by CIMB Bank enhances the controlled account which is provided as business cycle. Lenders take a security solutions to SMEs. Its Conta Garantida financial agility of MSMEs, enabling them to collateral, and the amortized portion of the interest in the original collateral, which (Secured Account) product offers a effectively manage their operations.89 loan is paid directly from this account via automatically extends to the proceeds revolving line of credit secured by collateral a daily percentage of credit card deposits. of the transformation of that collateral in such as accounts receivable, inventory, Similarly, Kasikornbank in Thailand offers Fintech systems measure the historical the MSMEs’ course of business. Fintech or property. This enables SMEs to access Biz Cash which is a secured revolving line of performance of an MSME’s payment systems simplify the process for revolving working capital and manage their cash credit to SMEs which can leverage collateral receivables and monitor daily collections. lines of credit by ensuring that borrowing flow effectively, supporting their pre-sale such as accounts receivable, inventory, or They also provide alert mechanisms in case requests made by an MSME are supported activities.87 property to access working capital. This of discrepancies between expected and by existing collateral at the time of financing solution caters to both pre-sale Stanbic Bank in Nigeria has established actual electronic sales, allowing a lender disbursement.85 and post-sale activities, providing SMEs itself as a leading provider of secured to adjust advances, fees, and retention of Distributed Ledger Technology (DLT) can be revolving lines of credit through its Business with the necessary funds to operate and funds based on an MSME’s actual cash used to verify the existence of receivables Revolving Credit facility. This offering grow their businesses.90 flow.91 and to monitor prompt payment and deposit allows SMEs to access working capital These secured line of credit examples into a secured account. In economies with by leveraging their accounts receivable Digital technologies are crucial in creating showcase the innovative nature of asset- reliable and effective data for merchant electronic invoicing, this process can also and inventory as collateral. By providing based lending solutions and their relevance receivables financing. For lenders that take place by direct interoperability with financing for both pre-sale and post-sale for MSMEs. They demonstrate the provide POS devices to MSMEs, information the tax authority via an API connected activities, Stanbic Bank empowers SMEs to importance of providing collateral-based collection can be automated throughout to the lender’s core banking system. For finance their entire business cycle.88 financing especially for larger and more the loan cycle: from measuring the historical established MSMEs, flexibility in borrowing performance of the POS device to the daily and repayment terms, and how leveraging monitoring of POS collections and deposits technology can simplify processes and in a lockbox account. A similar approach is enhance risk management. also used by e-money (including mobile There are challenges to secured, revolving money) operators in countries where lines of credit particularly in assessing the e-money payments are common. value and volatility of collateral, as well as Merchant advances have two distinct monitoring changes in collateral value over advantages that reduce the risks and time. Financial institutions must establish costs of lending to MSMEs. First, lenders robust risk management systems to have access to continuous and real-time mitigate potential losses due to collateral information on the business activities depreciation or default. MSMEs also face and income of the MSME via the POS the risk of overleveraging and the need or other electronic/mobile payment to balance credit usage with repayment system, allowing it to adjust advances capabilities. and collections in real-time, depending on sales performance. Second, lenders 6.4 Merchant-Receivables take the receivables from credit and debit cards or e-money transactions as collateral, Financing as well as the cash proceeds deposited ©World Bank Merchant receivables financing, also known into the controlled account. The lender as merchant cash advances (MCAs), is also establishes a contractual direct right short-term financing that uses small and of collection of the outstanding amount Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 58 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 59 or amortized portion of the loan from for efficient and accessible financing. This that account. The technological platform approach can be replicated in other markets developed for the merchant advance wherever e-money services are used. product allows for adjustments in advances These examples demonstrate the innovative and collections to be made automatically nature of merchant cash advances and based on real-time credit-risk assessment, payment card receivables financing, as well collection amounts, and the performance as their relevance for MSMEs. The scale and of payment card receivables. outreach achieved by Banco Davivienda, Payment card receivable financing has Banco Caja Social, Wing, and other e-money traditionally been more prevalent in major providers highlight the effectiveness of financial centers. However its popularity these financing solutions in reaching is growing in emerging economies with MSMEs. The lessons learned from their reformed secured transactions systems, experiences emphasize the importance for example, Colombia, Guatemala, and of technology-enabled platforms, real- Mexico have taken steps to introduce time monitoring, and adjustments based payment card receivables financing as a on business performance. Other markets financing option for MSMEs. can learn from these companies by implementing secured transaction reforms, ©World Bank Banco Davivienda92 and Banco Caja Social in Colombia93 have leveraged reforms in fostering partnerships between financial secured transactions, to develop innovative institutions and payment providers, and approaches to providing technology- leveraging digital infrastructure to support enabled secured merchant cash advances merchant cash advances. credit-risk assessment and underwriting to MSMEs due to its flexibility, speed, to support MSMEs in the retail and service Merchant-receivables financing risks process.94 This provides lenders with access convenience of access, and more accurate sectors. These advances were initially include reliance on card, mobile, or to large, complex datasets about borrowers underwriting, which reduces adverse designed to assist MSMEs during COVID-19 e-money transactions, which may fluctuate or the ability to use the platform to assess selection. While P2P lending for MSMEs has and are still popular post-pandemic. and impact cash flow, and the potential borrowers by purchasing different asset been concentrated in China, the UK, and In Kenya, Tanzania, Ghana, and Cambodia, for high interest rates or fees associated classes. the US, they have been gaining traction in e-money providers have partnered with with cash advances. Additionally, MSMEs emerging markets especially in Southeast must carefully consider the impact of daily Unlike traditional banks which rely solely financial institutions or have obtained Asia and Eastern Europe. Companies such repayments on their working capital needs. on credit scores, P2P and marketplace their own bank licenses to offer MCAs to as Investree, KoinWorks, Amartha, Modalku platforms use a range of data points, MSMEs accepting e-money payments. This and Mintos offer digital financial products including education, academic transcripts, approach leverages the growing popularity 6.5 Peer-to-Peer (P2P) labor profiles, bill-payment histories, tax and expand investment opportunities and accessibility of mobile money services. and Marketplace Lending returns, historical bank statements, and beyond Europe.95 For example, Wing in Cambodia has employment history, to make underwriting Investree96 and KoinWorks97 are two P2P obtained its own bank license to provide P2P and marketplace lending are online decisions. By linking their accounting lending platforms operating in Indonesia MCAs to SMEs. By utilizing e-money platforms that match borrowers and software or business bank account directly that have introduced technology-driven platforms, SMEs can receive financing based lenders. P2P platforms typically target to the platform, MSMEs can also increase solutions to facilitate lending between on their electronic payment transactions, individual investors and marketplace the accessibility of data, and the efficiency investors and MSMEs, offering a streamlined providing them with a valuable source of lending platforms target institutional of risk assessments and loan application working capital. The potential outreach of investors. Both types of platform use loan application process and quick processes. these platforms to SMEs is significant, as alternative data sources, including mobile access to funds. Their scale and outreach they can tap into the large and growing phone data, social media rankings, Automating lending processes leads to are significant, and the platforms have number of businesses accepting e-money payments data, and psychometric testing more efficient operations for a P2P lending contributed to expanding MSME financial payments. These e-money providers have to evaluate the creditworthiness of MSME platform by lowering operating costs, and inclusion, growth and development in been successful as they have collaborated borrowers. P2P platforms have also started providing a better service for both the Indonesia. The models employed by with financial institutions, and have used to integrate AI and ML to speed up the investors or lenders and borrowers. This Investree and KoinWorks showcase the existing electronic payment infrastructure decision-making process and enhance the type of finance is particularly appealing power of leveraging technology and Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 60 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 61 marketplace lending by connecting SMEs borrowers and the need for robust risk with a global network of investors. assessment and underwriting models. The platforms must also address con- Change Capital in Italy offers solutions cerns about transparency, borrower to help professionals and businesses verification, and investor protection. Re- maximize their potential by leveraging the gulatory frameworks need to strike a digital ecosystem of integrated financial balance between promoting innovation services. Through its platform, the company and ensuring investor and borrower safe- provides corporate finance services for guards.105 Consumer protection issues, the credit access, invoice trading, reverse especially from unlicensed P2P and factoring, facilitated finance, and digital marketplace lenders, including mobile services, providing clients with real-time lenders which are often facilitated by solutions for alternative finance, subsidized mobile app marketplaces are increasing.106 finance, and insurance. Change Capital developed a proprietary algorithm that enables SMEs to use only their VAT number 6.6 Equity Crowdfunding to investigate the amount of liquidity they Equity crowdfunding enables individuals can obtain from over 100 financial solutions and small businesses to raise small amounts offered by partners on the Change Capital of equity capital from numerous retail ©World Bank platform. In addition, the platform CC Suite investors by issuing shares, usually through uses AI to predict the liquidity SMEs might an online platform. Crowdfunding reduces need to keep up with competitors, and it the cost of issuing shares to the public and can use an SME’s balance sheet to calculate increases the promotion potential of offers whether a company is eligible for a financial by leveraging technology and regulatory alternative data sources for efficient credit Modalku,100 operating in Indonesia, Malaysia, product, also providing probability that it exemptions. Equity crowdfunding offers assessment and underwriting, and faster and Singapore, is a P2P lending platform could receive finance.103 Another Italian MSMEs and startups new opportunities to and more accurate loan decisions. They also that provides financing options to MSMEs. marketplace provider is Step4Business access the finance they need to grow by highlight the importance of technological The platform leverages technology to which offers instant lending, facilitates enabling them to reach out to many potential integration, streamlined processes, and simplify the lending process and connect working capital, and facilitates Foreign investors through online marketplaces.107 investor-MSME matching. borrowers with individual and institutional Exchange (FX) risk management for SMEs.104 Their reliance on social media and online investors. Modalku’s approach highlights platforms provides an efficient way to for Amartha98 is another notable P2P lending These innovative P2P lending platforms the importance of building a robust an MSME to disseminate information about platform in Indonesia that focuses on showcase how technology, alternative ecosystem that brings together diverse business plans and financial conditions. providing financing to women-owned data sources, and marketplace models sources of funding to support MSMEs. Moreover, regulatory requirements for MSMEs. This platform uses social and can enhance access to financing for Modalku is the largest MSME-focused due diligence by crowdfunding platforms economic data to assess creditworthiness MSMEs and provide valuable examples P2P lending platform in Southeast Asia on MSME issuers reduce information and has made a significant impact on for other markets. The key takeaways providing more than $3 billion in loans to asymmetry between investors and issuers, empowering women entrepreneurs. from their experiences include the role more than 100,000 MSMEs.101 The success leading to better-informed investment Amartha’s unique approach to supporting of an appropriate regulatory environment of Modalku’s model rests on a policy and decisions. women-led businesses demonstrates that can encourage local providers to regulatory environment that supports P2P the relevance and effectiveness of adopt, adapt or develop partnerships with In emerging markets, equity crowdfunding lending and that creates an inclusive and targeted lending solutions. The platform’s can be a source of finance for MSMEs and collaborative environment to connect international P2P players, the importance of scale and outreach are reflected by the startups, where traditional sources of equity MSMEs with a wide range of investors. technological integration, alternative credit number of women-owned businesses investments such as family and friends, angel assessment methods, targeted lending that have accessed financing to expand Mintos102 is a marketplace lending platform and VC/PE funds are limited or not readily solutions, collaboration between investors their operations and it demonstrates based in Latvia, offering a marketplace for available. The flexibility of crowdfunding and MSMEs, and the creation of inclusive the potential of specialized lending investors to diversify their portfolios and regulations is a critical precondition to its and diverse financing ecosystems. platforms that cater to specific segments SMEs to access funding from a wide range development as an alternative source of or demographics to foster inclusivity and of lenders, even those from other countries. The risks of P2P and marketplace lending equity. Traditional capital markets regimes economic empowerment.99 Mintos demonstrates the potential of platform include potential defaults by typically require MSMEs to comply with Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 62 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 63 numerous regulatory requirements to issue M-Changa’s approach combines crowd- and offer securities to the public, including funding with the widespread use of publishing a prospectus, acquiring mobile technology in Kenya, facilitating necessary authorizations, regulatory easy and accessible fundraising for social reporting, and meeting corporate projects. It has a substantial reach, with governance requirements, leading to high over 73,000 individuals and organizations compliance costs. However, crowdfunding benefiting from the funds raised through regulations usually have exemptions that M-Changa. Mobile technology is the key significantly lower compliance costs for to M-Changa’s success, making its model MSMEs. This, coupled with the efficiency well-suited to markets with high mobile and low cost of internet platforms, can make penetration. raising equity capital through crowdfunding Crowdo’s approach demonstrates the a realistic option for MSMEs.108 versatility of crowdfunding to support SMEs’ Examples of equity crowdfunding financing needs across different types platforms that are actively operating in of funding instruments. Lessons learned emerging markets include Seedrs109 in the from Crowdo’s model include fostering an UK, which has facilitated over £1 billion in ecosystem that supports multiple forms investments across 1,400 deals, including of crowdfunding, and allowing SMEs to several in Africa, India, and Southeast Asia. choose the most suitable funding option for Another example is M-Changa,110 a Kenyan their requirements from a diverse range of crowdfunding platform that focuses on sources. social causes and enables individuals and EqSeed’s approach taps into the organizations to raise funds through mobile entrepreneurial spirit and innovation-driven devices. In Indonesia, there is Crowdo,111 a nature of startups, enabling retail investors platform that focuses on crowdfunding for to participate in their early stages. Unlike in SMEs, providing a range of funding solutions, the EU or the US, where angel investors are including equity, debt, and revenue- more common, the investor pool is shallow sharing agreements. Brazil has EqSeed,112 in Brazil. EqSeed helps fill an important a crowdfunding platform focused on gap in funding for startup enterprises by equity investments in innovative startups, connecting them online to thousands providing investors access to a diversified of investors. From an investor’s point of portfolio of high-potential companies. view, EqSeed’s platform helps to facilitate investments in startups in a transparent, Seedrs, global approach to providing equity efficient and secure manner. crowdfunding opportunities expands the platform’s outreach and impact. Seedrs’ In Türkiye, crowdfunding has been success highlights the potential of equity regulated within the securities legislation crowdfunding to bridge the funding gap for since 2019. Although the system allows SMEs and startups, particularly in emerging for both equity- and debt-based crowd- markets where traditional sources of equity funding, crowdfunding financing to date investments are limited. Policymakers and has been equity-based. The Capital Markets regulators can replicate Seedrs’ model Board, as the regulatory authority, licenses by implementing flexible crowdfunding and supervises crowdfunding platforms (of regulations that lower compliance costs which there are 11 as of May 2023), based for SMEs, encouraging the growth of equity on requirements and conditions defined ©World Bank crowdfunding platforms, and supporting in regulation. Venture capital companies the development of local entrepreneurial engaged in technology and/or production ecosystems. activities with potential for high value Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 64 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 65 add, competitiveness, and employment Gozem,114 a ride-hailing technology platform are eligible for financing through equity in West Africa that has more than a million crowdfunding. The procedure involves an users, is an embedded finance provider eligible company applying to a platform, that has developed a vehicle financing where the investment committee evaluates program for its drivers. By integrating projects that will be funded. Once the financial services into its ride-hailing committee decides, the projects are platform, Gozem addresses the specific published, and investors can deposit their needs of its driver partners, providing them funds. Transparency is achieved through with a pathway to vehicle ownership and information forms and use of proceeds economic empowerment. The innovative reports prepared by the company seeking aspect of Gozem’s approach lies in its ability financing, which are published on the to leverage transaction data and business relevant crowdfunding platform. All intelligence to offer tailored financial transactions are carried out through the services that are directly linked to the drivers’ central securities depository and when income-generating activities. This model financing reaches a predesignated amount, demonstrates the potential for embedded company shares are allocated to investors finance to extend financial access and on a dematerialized basis over the central support income-generating opportunities securities depository. As of May 2023, the in the gig economy. Gozem’s approach system has facilitated the financing of demonstrates the effectiveness of allowing ©World Bank 73 equity-based crowdfunding initiatives and supporting the integration of financial totaling 80 million Turkish lira. services into non-financial platforms, fostering partnerships between technology Practice management software also serves others form partnerships with financial Equity crowdfunding risks include the companies and financial institutions, and as an entry point, enabling loan underwriting institutions. As technology advances, more potential for inexperienced investors to tailoring financial products to the specific through the MSME data collected by non-financial companies are expected to make uninformed investment decisions needs of gig workers and MSMEs. software companies. adopt EmFi, facilitating expanded access and the challenges for businesses with managing a large number of shareholders. Other examples of non-financial companies to finance for millions of small businesses. According to Accenture, the global EmFi embracing EmFi include Growsari in the EmFi reduces the cost-to-serve barrier industry is projected to reach a value of Another main challenge for equity in SMEs to financial inclusion and overcomes Philippines, Singapore-based Moglix, and over US$7 trillion within the next decade, is the exit mechanism and governance challenges such as lack of information Egyptian-based MaxAb. These companies with estimates that MSME banking structure around minority shareholder and collateral. By bundling finance with operate in sectors such as supply chain, revenue from EmFi solutions could reach rights protection. other businesses, EmFi providers can e-commerce, and manufacturing. The up to US$92 billion by 2025.115 EmFi innovative aspect of their approach lies in creates efficiency and convenience by take more risk, offer better pricing, and 6.7 Embedded Finance their ability to leverage transaction data and unlocking credit based on transaction data, serve inclusive finance segments.116 The their business relationships to offer financial leveraging existing customer onboarding regulatory environment plays an important Embedded Finance (EmFi) involves services tailored to the needs of MSMEs mechanisms, and tailoring offerings using role in determining the structure of EmFi integrating financial services within non- and other stakeholders in their respective customer data. By embedding financial offerings, and considerations such as financial platforms or applications, to industries. services, EmFi providers enhance the licensing, convenience, data privacy, and expand access to financial products economics of financial services, increase market conditions influence the approach and services for MSMEs.113 Embedded Many EmFi providers initially focus on access to credit, and substitute collateral taken. The rationale for EmFi often arises finance providers, which include real digital commerce or payments facilitation with the broader business relationship. from the lack of alternatives in the market, sector companies, leverage digitization and later expand into lending. For instance, This includes a broader reliance on the prompting non-financial companies to offer to integrate financial services into their e-logistics companies offer owner-drivers relative strength of the ultimate buyer financial services to meet customer needs. existing offerings. EmFi providers include vehicle finance or insurance, while AgTech along a value chain rather than relying on companies from the mobility, agriculture, and e-commerce platforms provide Embedded finance risks include the the collateral or lengthy credit histories of manufacturing, services, supply chain, and e-money wallets and working capital loans need for robust data privacy and security individual MSMEs. e-commerce sectors, allowing transaction to farmers and merchants. Point of sale measures to protect user information as data-driven business intelligence to offer payments service providers offer loans to EmFi models vary, with some providers well as credit information reporting to avoid financial services. merchants based on transaction volumes. internalizing financial services while over-indebtedness. Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 66 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 67 6.8 Distributed Ledger Technology and Blockchain Finance via Tokenized Assets Distributed Ledger Technology (DLT) and blockchain-supported finance for MSMEs involve the use of blockchain based ledgers or digital tokens that represent tangible or intangible assets on a blockchain network, to enable trading, discounting, or financing. Tokenization is the process of creating a digital representation of an asset on a blockchain. This approach can take advantage of the decentralized and secure nature of DLT to increase asset liquidity and capitalize on value. For instance, by tokenizing warehouse receipts that re- present agricultural commodities stored in authorized warehouses, buyers or financial institutions can purchase or take a security interest in the token to finance MSME producers. The token holder then has the right of possession of the physical goods stored in the warehouse. Tokenization can also enable lenders to finance pre- warehousing and pre-tokenization agri- ©World Bank cultural processes. They can take a security interest in the original crop inputs and their proceeds, including harvested crops, warehouse receipts, tokens, and the proceeds of token sale or financing collateral for loans, providing them with BanQu and SWB facilitate supply chain These examples demonstrate the potential on a blockchain. This provides a potential access to financing that may have been traceability with a focus on farmers and of blockchain technology in transforming innovative and secure way to finance MSME challenging to obtain through traditional SME agri value chain providers.120 SWB is traditional financing processes and production and business activities. There channels. a decentralized fintech platform for agri- enhancing access to finance for MSMEs. are a few fintech companies that have been food products created by more than 30 However, it should be noted that there using blockchain technology to create Neurored’s platform119 focuses on supply are several risks and challenges facing financing solutions for MSMEs by digitizing chain management and trade finance, Sicilian farmers. It puts farmers and food the use of tokenization of assets and and tokenizing physical assets including using blockchain technology to digitize processors in direct contact, by tokenizing DLT that need to be addressed for this to firms such as Swiss-based Jibrel, Neurored, and tokenize physical assets such as agri-food products, resulting in more be a more widely accepted and secure based in Spain and the US,117 US-based commodities and warehouse receipts. transparent price formation and more means of supporting MSME finance. These BanQu, and Italy-based Sicilian Wheat Bank even profit distribution. In the future, SWB By representing these assets as digital challenges include scalability, settlement (SWB). tokens, Neurored facilitates their trading plans to use tokenized products that will finality, interoperability, network stability, Jibrel offers tokenization and trading 118 and allows them to be used as collateral be exchanged on a DLT marketplace and cybersecurity risks, governance risks, AML/ solutions for traditional assets, such as for financing. The platform also provides used to pay for goods and services, and to CFT risks, digital identity challenges and currencies, commodities, and securities to real-time tracking and management of guarantee loans.121 data privacy and protection risks.122 enable faster settlement of transactions. physical assets, enhancing transparency SMEs can then use these tokens as and efficiency in supply chain operations. Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 68 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 69 7 Public Sector/ Policy Approaches to Support MSME Finance ©IFC Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 70 G20 Global Partnership for Financial Inclusion G overnments and development • The British Business Bank in the UK the private sector can help to ensure In Colombia, an innovative MSME finance agencies around the world operates the Enterprise Finance that programs do not provide the wrong guarantee scheme is the Fondo Nacional are using various public policy Guarantee (EFG) scheme, which provides incentives and are cost-effective. de Garantías (FNG), which operates in approaches to support expanded loan guarantees to MSMEs that may partnership with private sector financial access to financing for MSMEs including not have sufficient collateral to secure 7.2 Risk-Sharing and institutions. The FNG provides partial loan various incentives, guarantee mechanisms, traditional bank loans. The scheme guarantees to lenders, reducing their risk risk sharing approaches, data sharing enables MSMEs to access financing by Guarantee Schemes exposure and encouraging them to extend initiatives, government lending programs, reducing the risk for lenders, encouraging Risk-sharing facilities are financial financing to MSMEs. The guaranteed and the securitization of MSME portfolios. them to lend to viable but higher-risk instruments used by governments to coverage is between 60 percent and 70 businesses.124 provide loans to MSMEs by sharing the risk percent of the loan amount, depending on the characteristics of the MSME and 7.1 Incentives • The German government has established of default with financial institutions. Under these facilities, the government guarantees the program. By sharing the risk, the FNG Some of the common incentives to support the Kreditanstalt für Wiederaufbau promotes access to finance for MSMEs a portion of the loans provided by financial MSME financing include: (KfW), a state-owned development bank without distorting the financial market institutions, thereby reducing the credit that offers a wide range of financing risk faced by the lenders. This allows the or relying heavily on subsidies. The FNG • Tax incentives: Governments can provide programs for MSMEs and innovative tech lenders to provide financing to MSMEs that has been successful in facilitating MSME tax incentives to encourage investors to startups. These programs include low- they would otherwise consider too risky. financing and has supported thousands invest in MSMEs, for example, tax credits interest loans, equity investments, and of businesses across various sectors in or deductions for investments made in guarantees to support MSMEs across Risk-sharing facilities can take various Colombia.127 MSMEs. various sectors. KfW plays a crucial role forms, such as partial loan guarantees, loan portfolio guarantees, or equity In Egypt, the digitized Credit Guarantee • Blended Finance: Governments can in providing sustainable and accessible investments. The government (or other Company (CGC) operates as a joint- facilitate equity investments in MSMEs, financing options to promote MSME players such as domestic or international stock company with participation from providing them with the capital they need growth and innovation.125 DFIs) may provide a guarantee on a public and private shareholders, including to grow their businesses. • The Kenyan government offers a certain percentage of the loan amount. financial institutions. It provides partial loan • Grant programs: Governments can offer Youth Enterprise Development Fund, The guarantee may be structured to cover guarantees to banks and other lenders to grant programs to provide funding for which provides grants and loans to only a portion of the default risk or the full support MSME financing. The guaranteed MSMEs, which can be used for a variety young entrepreneurs to start or expand amount of the loan. coverage ranges from 70 percent to 85 of purposes, such as research and their businesses. The fund also offers development, marketing, or hiring new mentorship and training programs to employees. support the development of entre- preneurial skills among the youth. This • Business incubation programs: Govern- holistic approach helps to create a ments can provide business incubation supportive ecosystem for MSMEs and programs to support the growth of encourages youth entrepreneurship.126 MSMEs. These programs typically provide mentoring, training, and other resources These examples demonstrate different to help MSMEs grow and become more approaches to incentivize MSME successful. financing. By combining financial support, mentorship, and training, they address Some of the examples of public incentives some of the unique needs of MSMEs and to support MSME financing follow: contribute to their growth. Policymakers • The Singapore government has and regulators in other countries can implemented the Early-Stage Venture also design tailored incentives that suit Fund (ESVF) scheme, which provides their local context, foster collaboration funding to venture capital firms that invest between public and private sectors, in local startups. Under this scheme, the and create an enabling environment for ©World Bank government matches the capital raised by MSMEs to thrive. Overall, government these firms, encouraging them to invest in incentives can play a role in expanding early-stage MSMEs and startups.123 access to financing for MSMEs. Involving Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 72 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 73 commercial transactions. By 2023, more than oriented industries. However, the risks scalability, and market impact, it is important 545,000 individual MSMEs had received associated with targeted, directed credit to note that the suitability and replicability guarantees from KGF.129 and associated costs, especially those of these programs depends on a country’s programs initiated during the pandemic context. Implementing successful govern- These examples demonstrate how MSME need to be carefully considered.131 ment lending programs requires careful finance guarantee schemes successfully consideration of a country’s local market operated with private sector support, Examples of digitized government lending conditions, regulatory frameworks, and the commerciality, and minimal market programs for MSMEs include KfW in needs of its MSMEs. distortions by mitigating lenders’ credit Germany, the Small Business Administration risks, and incentivizing them to provide (SBA) Loan Programs in the US, and the To design sustainable and cost-effective financing to MSMEs. Small Industries Development Bank of India government lending programs, several (SIDBI). factors should be considered: 7.3 Data Sharing KfW’s MSME financing programs have • Market distortion: It is crucial to ensure Initiatives been widely recognized for their success that government lending programs in supporting MSMEs without distorting the do not distort the financial market by Governments worldwide are recognizing market. KfW offers a range of loan programs, crowding out private lenders or creating the power of data sharing initiatives including investment loans, online working unfair competition. Balancing the role ©World Bank to support MSME finance and are capital loans, and environmental loans, with of the government as a lender with a implementing strategies to facilitate access favorable interest rates and long repayment healthy private sector is essential for to critical information. In India, the Goods periods. The programs have been evaluated market sustainability. and Services Tax (GST) system has enabled for their impact on MSME growth, job • Cost effectiveness: Government the government to collect valuable data creation, and economic development, and lending programs should be cost- percent of the loan amount, depending on on MSME transactions, providing financial have been deemed effective in reaching a effective and efficiently-managed to the size and sector of the MSME. The CGC institutions with insights into their business large number of MSMEs.132 minimize the burden on public finances. aims to promote sustainable access to operations and cash flows. This data sharing In the US, the SBA’s loan programs, Digitalized platforms can increase finance for MSMEs by sharing the risk with has facilitated faster and more informed particularly the 7(a) program,133 have outreach and improve efficiency. Proper lenders. This platform has already served lending decisions, enhancing access to undergone rigorous evaluation and by using risk assessment, loan monitoring over 200,000 MSMEs in Egypt.128 finance for Indian MSMEs. Data sharing online platforms, have demonstrated their mechanisms, and sound governance initiatives by governments highlight their The Credit Guarantee Fund (KGF) is an ability to effectively reach MSMEs while structures are crucial to ensure commitment to leveraging technology and innovative joint-stock guarantee institution minimizing market distortion. The programs responsible lending and to minimize data to foster MSME growth and promote in Türkiye with both public and private provide loan guarantees to reduce the default risks. shareholders, including banks. It facilitates financial inclusion.130 risk for lenders, enabling them to provide • Targeting and reach: Government bank lending to MSMEs based on a risk affordable financing to MSMEs. Evaluations sharing principle. Treasury-backed KGF 7.4 Government Lending have shown positive outcomes in terms lending programs should be designed to target underserved sectors or segments programs, are also offered during economic Programs for MSMEs of increased access to capital, business of the MSME market and align with downturns, to facilitate domestic credit, growth, and job creation.134 Digitized government lending programs national development priorities. They improve debt repayment capacity, and for MSMEs are initiatives implemented by SIDBI’s lending programs include direct should also have mechanisms in place to support MSMEs. Türkiye expanded its initial governments to provide direct financing loans, refinancing, venture capital reach a significant number of MSMEs and KGF program in 2017 to mitigate the negative to small and medium-sized enterprises. assistance, and specialized digitalized support their growth and sustainability. effects of increased uncertainty on the These programs aim to bridge the schemes targeting specific sectors and Both online and mobile-based platform financial outreach of MSMEs and to stimulate financing gap faced by MSMEs by offering stages of business growth. Evaluations of interfaces should be explored. the economy. In 2020, when COVID-19 affordable loans with favorable terms and their impact highlight the effectiveness of led to a partial halt across many economic While best practices and lessons learned conditions. Digitized government lending SIDBI’s programs in reaching a large number segments, particularly the services sector, from successful programs can be applied, programs can take various forms, including of MSMEs, promoting entrepreneurship, Treasury support for KGF guaranteed loans careful consideration must be given to direct loans, subsidized interest rates, and contributing to economic growth.135 was increased. The loan packages helped adapting programs to meet the needs, MSMEs to maintain employment, finance and specialized loan facilities and often While these programs have been evaluated regulations, and market conditions of a business expenses, such as taxes and fixed prioritize sectors with high growth potential, positively in terms of their effectiveness, country. costs, and pay checks written for billable such as technology, innovation, and export- Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 74 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 75 loans. This framework is designed to assist 7.5 Securitization of financial institutions in risk diversification MSME portfolios and portfolio churning, potentially building Digitized securitization of SME and MSME lending capacity to productive sectors like portfolios involves packaging MSME loans SMEs and MSMEs. into tradable securities that can be sold to The European Investment Fund (EIF) investors. This enables financial institutions Securitization Initiative collaborates to transfer the credit risk associated with with financial institutions to support MSME loans off their balance sheets and securitization transactions aimed at raise funds for further lending. Securitization providing additional funding to SMEs. These can enhance liquidity in the MSME lending initiatives enable financial institutions to market and attract a broader range of transfer credit risk to investors, promoting investors. SME lending. The online EIF’s securitization Examples of digitized securitization of initiatives serve as a viable and replicable MSME portfolios include Poland’s SME model for enhancing SME financing. Loan Securitization Program, China’s Asset- While all these examples involve the Backed Securities (ABS) Market, India’s securitization of SME and MSME portfolios, Securitisation Market, and the European they differ in terms of their target segments, Investment Fund (EIF) Securitization objectives, and approaches. Poland focuses Initiatives. on diversifying funding sources, China has The Polish government launched an a well-established ABS market, and the EIF innovative program to securitize SME collaborates with financial institutions. These loans originated by banks. The securitized differences make each example unique portfolios are sold to institutional investors, and highlight the various ways in which improving liquidity in the SME loan market, securitization can support SME and MSME diversifying funding sources for banks, financing. It is important to note that the and enhancing the availability of financing success and replicability of such programs for SMEs. China has developed a robust depend on various factors, including the market for securitization, including the regulatory environment, market conditions, securitization of MSME loans. Financial blended finance, and the willingness of institutions package MSME loans into ABS investors to participate. Governments and sell them to investors, facilitating the and financial institutions should carefully flow of capital into the MSME sector. The EIF, consider these factors when designing and in collaboration with financial institutions, implementing securitization programs to supports securitization transactions aimed ensure their effectiveness, cost-efficiency, at providing additional funding to SMEs. and sustainability.136 These initiatives enable financial institutions Governments and financial institutions to transfer the credit risk associated with should carefully consider the factors SME portfolios, promoting SME lending. The of servicing capacity, average loan success of China’s securitization market tenor, and structures around true sales demonstrates its viability and potential for versus assignments when designing and replication in other markets. implementing securitization programs.137 India has also framed an enabling These factors have implications on cost securitization framework, in alignment with structure, which can have a significant ©World Bank global standards, for the securitization of impact on the effectiveness, cost-efficiency, standard assets, including eligible MSME and sustainability of the program. Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 76 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 77 8 Risks and Challenges ©World Bank Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 78 G20 Global Partnership for Financial Inclusion W hile the innovative financing and digital wallets. They need to strike a need to establish frameworks to identify and practices can hinder financial inclusion. models in this report could balance between promoting innovation and mitigate these risks effectively. They should Many MSMEs still rely on feature phones bring significant benefits to protecting consumers and investors. encourage fintech firms to implement and platforms that promote digital financial MSMEs, it is important to robust risk management practices, services on basic mobile phones, like UPI, Strengthening financial consumer recognize their risks and challenges. This including cybersecurity measures, identity should be explored. Policymakers should protection: As MSME financial services chapter highlights the general risks and verification protocols, and anti-money strive to create an enabling environment become more digitized and accessible, challenges of non-traditional financing laundering procedures. that encourages the participation of both ensuring robust consumer protection traditional financial institutions and fintech methods and examines the specific risks measures becomes crucial. Regulations Enforcing cross-border regulations: With firms to meet MSMEs’ needs. This may of each method. By understanding and should address issues such as the the borderless nature of digital platforms, involve promoting Open Banking initiatives, addressing these risks, policymakers, potential for over indebtedness, data policymakers face challenges in enforcing fostering competition, and developing regulators, and stakeholders can foster privacy, transparency (especially rates regulations across jurisdictions. Harmo- supportive infrastructure, such as reliable a more resilient and sustainable MSME and fees), terms and conditions disclosure nizing regulatory frameworks, enhancing digital identity systems. financing ecosystem. requirements, and dispute resolution international cooperation, and promoting General challenges include: mechanisms. Additionally, safeguards information sharing among regulators are Some of the specific risks and challenges should be in place to prevent fraudulent essential to effectively oversee cross-bor- associated with innovative MSME Improving regulatory frameworks: financing models including factoring, activities and protect vulnerable MSMEs der fintech activities and protect MSMEs Policymakers and regulators need to keep reverse factoring, revolving lines of credit, from predatory lending practices. operating in multiple markets. pace with the rapidly changing landscape of merchant-receivables financing, P2P and fintech innovations. This involves assessing Enhancing risk management: Fintech Focusing on financial inclusion: While marketplace lending platforms, equity existing regulations and frameworks to innovations may introduce new risks to the fintech innovations have the potential to crowdfunding, embedded finance, and the determine their applicability to new business financial system, including cyber threats, improve access to finance for underserved tokenization of assets on the blockchain, models, such as P2P lending, crowdfunding, money laundering, and fraud. Regulators MSMEs, regulatory barriers and exclusionary have been briefly described in this report. ©World Bank Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 80 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 81 9 Policy, Regulatory and Supervisory Considerations ©World Bank Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 82 G20 Global Partnership for Financial Inclusion I n light of the challenges and risks of The GPFI report on Advancing Women’s • Establish regulatory sandboxes,142 accommodating technological advance- non-traditional MSME finance, there Digital Financial Inclusion139 and the or innovation hubs, to collaborate ments and evolving business models. are several policy, regulatory, and recommendations under the Call to with industry stakeholders and adapt • Establish licensing requirements, stan- supervisory recommendations to be Action for Reaching Financial Equality for regulations to evolving market dynamics. considered. It should be noted that these Women140 should be a priority. dards, and codes of conduct for fintech In civil law jurisdictions, this may require recommendations reflect emerging good firms to ensure consumer protection, data a change in the legal framework of Governments • can support the privacy, and cybersecurity. practices. In line with G20 practices, adopting financial regulations to allow regulatory development of efficient and widely these policy recommendations is voluntary. and supervisory flexibility. • Implement periodic assessments of accessible digital-payment systems that They should be read in conjunction with facilitate digital transactions, making it • Facilitate knowledge sharing and inter- regulations to ensure their relevance the G20 Higher Level Principles for Digital easier for MSMEs to conduct business and national cooperation to harmonize regu- and effectiveness in the rapidly changing Financial Inclusion which call for a holistic access finance. This includes the need to lations and facilitate cross-border fintech fintech landscape. approach to foster digital financial inclusion, develop a digital payment ecosystem activities. and with the established standards and • Review AML/CFT regulations to where MSMEs receiving digital payments good practices for the individual Digital • Foster dialogue and collaboration ensure that appropriate AML/CFT can also spend or transfer funds digitally. Public Infrastructure types as established between regulatory bodies, policymakers, measures are in place, in line with FATF by standard-setting bodies (SSBs). The • Develop modern secured transactions and industry stakeholders to understand recommendations to mitigate for any policy recommendations in this report are frameworks to support the introduction the potential implications of new potential risks that new innovative MSME intended to complement and not replace of fintech asset-based lending products financing models may introduce. technologies and business models. existing standards issued by SSBs and other for MSMEs. Governments can adopt international bodies. a modern factoring law and collateral • Foster tiered electronic Know Your 9.1.2 Regulatory considerations registry, move toward the development Customer (e-KYC) especially for smaller 9.1 Improving Policy, of electronic invoicing, and update bank • Develop clear and flexible regulatory businesses with limited access to formal regulation to recognize the assignment frameworks that provide guidance while identification documentation.143 Regulatory and of receivables. This will help prioritize in Supervisory Frameworks favor of the first lender to register a loan or factoring transaction, provide notice of 9.1.1 Policy considerations previously recorded liens to interested third parties, and facilitate the adoption • Conduct comprehensive reviews of of supply chain financing solutions for existing regulations and frameworks to MSMEs. assess their applicability to emerging fintech business models. • Support the growth and development of debt and equity capital platforms to • Improve the availability of MSME improve MSME access to finance through information and expand credit information regulatory frameworks that balance sharing to reduce information asymmetry innovation with investor and consumer and make it easier for lenders to assess protection. Governments can consider the credit risk of MSMEs. establishing regulatory frameworks that • Work with Credit Reference Service enable the use of electronic invoices Providers (CRSPs) to better facilitate for trading or collateral, allowing for the enhancements to improve credit effective use of supply chain financing information infrastructure, expand the solutions for MSMEs. By doing so, MSMEs range of players that participate in bureau can gain access to alternative sources reporting such as alternative lenders and of finance, enabling them to grow and including MSME credit reporting which contribute to economic development.141 can all improve systemic risks and the • Foster a fintech industry sandbox environ- ©World Bank potential for over-indebtedness.138 ment to encourage experimentation and • Women continue to face challenges that innovation while ensuring adequate con- policymakers need to carefully consider. sumer protection and risk management. Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 84 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 85 • Collaborate with international regulatory policymakers can enhance transparency, bodies to develop cross-border regula- reduce fraud, and facilitate accurate tory frameworks that support innovation identification of MSMEs in cross-border and protect MSMEs. financial activities. This can contribute to a more secure and efficient financial 9.1.3 Supervisory considerations ecosystem, enabling MSMEs to access a broader range of financial services and • Strengthen supervisory capacity to opportunities. effectively monitor and assess risks associated with innovative financing • Develop clear and transparent rules models. on data privacy, security, and consent to ensure the protection of MSMEs’ • Develop robust supervisory frameworks and consumers’ personal and financial that focus on risk management, cyber- information. security, and consumer protection. • Promote financial literacy and education • Promote regular engagement and programs to enhance the awareness of communication between supervisors MSMEs and consumers about the risks and fintech firms to foster understanding and benefits of innovative financing and address regulatory compliance methods. concerns. • Establish dispute resolution mecha- • Establish mechanisms for information nisms that are accessible, efficient, and sharing and collaboration among super- independent to address potential con- visory authorities to facilitate cross- flicts between MSMEs and fintech pro- border oversight of fintech activities. viders. • Encourage the development of industry- 9.2 Consumer Protection wide standards and best practices for Issues ©World Bank transparency, disclosure, and the fair treatment of MSMEs and consumers. 9.2.1 Policy considerations • Collaborate with industry stakeholders • Establishing reliable and interoperable to develop self-regulatory frameworks digital identity systems is crucial for im- that complement existing regulatory proving consumer protection and mitigat- requirements and enhance consumer access to clear information on fees, compliance with consumer protection ing identity-related risks. Governments protection. interest rates, and repayment terms. regulations. can develop frameworks and standards • Establish mechanisms to monitor and • Promote the adoption of best practices for digital identity verification,144 enabling 9.2.2 Regulatory Considerations encourage compliance with consumer and standards for data security, privacy, MSMEs and individuals to access finan- • Implement comprehensive data protec- protection regulations, including appro- and the fair treatment of MSMEs and cial services seamlessly while minimizing tion regulations and guidelines that safe- priate penalties for non-compliance. consumers. the risk of identity fraud. guard MSMEs’ and consumers’ personal • Encourage fintech firms to implement • Collaborate with industry associations and • For MSMEs, an appropriate identification and financial information. adequate systems and controls to self-regulatory organizations or industry system could also include the adoption • Require fintech firms to adopt robust detect and prevent fraudulent activities, monitoring committees to develop and of the global legal entity identifier (LEI) cybersecurity measures, conduct regular including anti-money laundering and enforce codes of conduct for fintech firms. system. The LEI is a unique identifier security audits, and establish incident KYC procedures. assigned to legal entities participating • Establish mechanisms for MSMEs and response plans to mitigate the risk of in financial transactions, providing consumers to lodge complaints and data breaches and cyber threats. 9.2.3 Supervisory considerations standardized and globally recognized seek redress for disputes and facilitate identification. By integrating the LEI • Enforce transparent and fair pricing • Conduct regular inspections and as- the prompt and fair resolution of these system into the regulatory framework, practices, ensuring that MSMEs have sessments of fintech firms to ensure complaints. Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 86 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 87 associated with innovative financing requirements, data protection, and models, including credit risk, operational cybersecurity. risk, and cyber risk. • Facilitate the exchange of information • Conduct regular audits and examinations and regulatory cooperation between of fintech firms to evaluate their risk jurisdictions to detect and mitigate management frameworks, systems, and potential risks associated with cross- controls. border fintech activities. • Collaborate with industry stakeholders to • Establish mechanisms for coordinated share best practices in risk management supervisory actions and crisis manage- and enhance the overall resilience of the ment in the event of disruptions or MSME financing ecosystem. failures of cross-border fintech firms. • Provide guidance and support to fintech firms implementing robust risk 9.4.3 Supervisory Considerations management frameworks and practices. • Strengthen supervisory coordination and collaboration with foreign counterparts 9.4 Cross-Border to ensure effective oversight of cross- Coordination border fintech activities. ©World Bank • Share supervisory insights and best 9.4.1 Policy considerations practices with international regulatory • Promote international cooperation and bodies to enhance the resilience of the information sharing among regulatory global MSME financing ecosystem. bodies to enhance cross-border oversight • Provide guidance and support to fin- 9.3.2 Regulatory considerations • Conduct regular assessments of the of fintech activities. tech firms implementing robust risk regulatory compliance of cross-border • Establish minimum standards for risk • Establish bilateral or multilateral fintech firms and monitor potential risks management and consumer protection management frameworks and practices agreements to facilitate the recognition arising from their activities in multiple frameworks. for fintech lending platforms, including of regulatory frameworks across juris- jurisdictions. criteria for borrower assessment, loan dictions and enable smoother cross- 9.3 Improving Risk pricing, and risk diversification. border operations. These considerations provide a Management • Require regular reporting and disclosure • Encourage the development of comprehensive framework for policy- makers, regulators, and supervisory of risk metrics, loan performance data, global standards and principles for 9.3.1 Policy considerations authorities to use to address the risks and and stress testing results by fintech fintech regulation to ensure consistent challenges associated with innovative • Develop guidelines and standards for firms to enhance transparency and risk regulatory approaches and to protect non-traditional financing methods. By risk management in fintech lending, monitoring. MSMEs operating in multiple markets. implementing appropriate policies, re- including credit risk assessment, loan • Implement regulatory requirements for gulations, and supervisory practices, underwriting, and collection practices. adequate capital and liquidity buffers for 9.4.2 Regulatory Considerations governments can promote a resilient and • Promote the adoption of sound risk fintech firms engaged in lending activities • Collaborate with international regulatory sustainable MSME financing ecosystem management practices, including stress to mitigate systemic risks. bodies to develop harmonized frame- that supports the growth and development testing, portfolio monitoring, and risk works and standards for cross-border of MSMEs and by extension their country’s • Promote the use of advanced analytics mitigation strategies. fintech activities, including licensing economy. and AI for effective risk assessment and credit decision-making. • Encourage collaboration between fintech firms and traditional financial institutions to leverage their risk management 9.3.3 Supervisory considerations expertise and ensure best practices are Strengthen • supervisory capabilities adopted. in assessing and monitoring risks Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 88 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 89 Annex Link to Case DataBase https://www.g20smecasestudies.org/case-studies ©IFC Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 90 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 91 Endnotes Report in South-South Cooperation, https://www.unsouthsouth.org/wp-content/ uploads/2021/05/Final-Report.pdf “What’s in Store for Embedded Finance?” November 2022, in Inclusive Finance 11 Frontiers, produced by the CGAP podcast production committee and CGAP’s production partner, Volubility Podcasting, https://www.cgap.org/research/podcast/ whats-in-store-for-embedded-finance 12 Statista “Retail e-commerce sales compound annual growth rate (CAGR) from 2023 to 2027, by country” accessed August 28, 2023 https://www.statista.com/ forecasts/220177/b2c-e-commerce-sales-cagr-forecast-for-selected-countries 13 KrASIA, (December 16, 2019). Ovo introduces SME-focused financing platform DanaTara, https://kr-asia.com/ovo-introduces-smes-focused-financing-platform- danatara 1 Implementing Partners are: Alliance for Financial Inclusion (AFI), The Better Than 14 Suparman, Sheena, “Women-owned MSMEs take center stage online”, Jakarta Post, Cash Alliance (BTCA), The Consultative Group to Assist the Poor (CGAP), International March 8, 2023 https://www.thejakartapost.com/business/2023/03/08/women- Finance Corporation (IFC), International Fund for Agricultural Development (IFAD), owned-msmes-take-center-stage-online.html Organization for Economic Co-operation and Development (OECD), The World Bank. 15 Nisha Singh and Gayatri Murthy “On Gig Platforms, Women Workers Face Triple 2 GPFI (October 2020). G20 2020 Financial Inclusion Action Plan, https://www.gpfi. Barriers to Inclusion”, CGAP Blog, June 21, 2023, https://cgap.org/blog/on-gig- org/sites/gpfi/files/sites/default/files/G20%202020%20Financial%20Inclusion%20 platforms-women-workers-face-triple-barriers-to-inclusion Action%20Plan.pdf 16 Globalization Partners, (February 22, 2023). Wise and G-P Launch Integrations to 3 Klapper, L., (April 2023). How digital payments can benefit entrepreneurs. IZA World Power Faster, Lower Cost Global Contractor Payments, https:/ /www.globalization- of Labor 2023: 396 doi: 10.15185/izawol.396.v2 https://wol.iza.org/articles/how- partners.com/news/wise-and-g-p-launch-integration/#gref digital-payments-can-benefit-entrepreneurs/long 17 Diaz De Teran, Connie, “G-P and Wise Team Up on Faster Payments for Gig Workers”, 4 IFC, (July 2019). How Insurtech Can Close the Protection Gap in Emerging Markets, Payments Journal, March 29, 2023 https://www.paymentsjournal.com/g-p-and- https://www.the-digital-insurer.com/wp-content/uploads/2019/09/1581- wise-team-up-on-faster-payments-for-gig-workers/ EMCompass-Note-70-InsurTech.pdf 18 Note that to better enable cross-border payment solutions, it could be useful to 5 Mastropietro, Filippo and Bliini, Lara, (July 2022). Why digital lending is the future for combine them with artificial intelligence systems (essentially digital identification banks and SMEs, https:/ /www.ey.com/en_gl/financial-services-emeia/why-digital- tools) that enable secure payments. See Financial Stability Board, (February 2023). lending-is-the-future-for-banks-and-smes G20 Roadmap for Enhancing Cross-border Payments https:/ /www.fsb.org/wp- 6 Chandana, Asif, et al., (July 2021). Financial services unchained: The ongoing rise of open content/uploads/P230223.pdf financial data, https://www.mckinsey.com/industries/financial-services/our-insights/ 19 Replicating initiatives in the gig economy must go hand in hand not only with proper financial-services-unchained-the-ongoing-rise-of-open-financial-data regulation of payment systems but also with regulation at the level of worker protection. Regulatory support and clear guidelines also in this field could be crucial 7 Bank for International Settlements, (July 2021). BIS Papers No 117 Fintech and the in creating an enabling environment for fair financial inclusion for gig workers. digital transformation of financial services: implications for market structure and public policy https://www.bis.org/publ/bppdf/bispap117.pdf 20 McKinsey Digital, (May 2014). Accelerating the digitization of business processes, https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/ 8 International Monetary Fund, (Oct 2021). IMF Departmental Paper, Powering the accelerating-the-digitization-of-business-processes Digital Economy: Opportunities and Risks of Artificial Intelligence in Finance, file:///C:/Users/pshadforth/Downloads/PDEORAIFEA.pdf 21 McKinsey & Company, (October 2022). A digital approach to SME banking, https:// www.mckinsey.com/industries/financial-services/our-insights/a-digital-approach- 9 OECD, (2015). New Approaches to SME and Entrepreneurship Financing: Broadening to-sme-banking the Range of Instruments, https://www.oecd.org/cfe/smes/New-Approaches-SME- full-report.pdf 22 See https://www.americanexpress.com/en-us/business/blueprint/ and https:// en.wikipedia.org/wiki/Kabbage 10 United Nations Office for South-South Cooperation and the Finance Centre for South- South Cooperation, (2018). South-South Cooperation in a Digital World, 2018 Annual 23 Invenium Legaltech, https://www.invenium-legaltech.com/ Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 92 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 93 24 G20 Indonesia 2022, (2023) G20 Database: Digital and Innovative Financial Products 41 G20 Indonesia 2022, (2023) G20 Database: Digital and Innovative Financial Products and Services for MSME Beyond Credit https://www.g20smecasestudies.org/case- and Services for MSME Beyond Credit, https://www.g20smecasestudies.org/case- study/87 study/84 25 G20 Indonesia 2022, (2023) G20 Database: Digital and Innovative Financial Products 42 Bakong https://bakong.nbc.gov.kh/en/ and Services for MSME Beyond Credit, https://www.g20smecasestudies.org/case- 43 Ibid. study/92 44 Maiti, Meghna, ”Make UPI Payments Using Your Feature Phone: A Convenient 26 G20 Indonesia 2022, (2023) G20 Database: Digital and Innovative Financial Products Solution”, Outlook India. May 24, 2023. https://www.outlookindia.com/business/ and Services for MSME Beyond Credit, https://www.g20smecasestudies.org/case- make-upi-payments-using-your-feature-phone-a-convenient-solution-news-288899 study/91 45 Plick https://plick.eu/ 27 World Bank; International Finance Corporation. 2022. Fintech and SME Finance: Expanding Responsible Access. http:/ /hdl.handle.net/10986/37355 46 G20 Indonesia 2022, (2023) G20 Database: Digital and Innovative Financial Products and Services for MSME Beyond Credit, https://www.g20smecasestudies.org/case- 28 Fawry https://www.fawry.com/ study/118 29 M-Pesa. https://www.vodafone.com/about-vodafone/what-we-do/consumer- products-and-services/m-pesa#key-services 47 McKinsey & Company, (October 2022). The 2022 McKinsey Global Payments Report, https://www.mckinsey.com/~/media/mckinsey/industries/financial%20services/ 30 Ibid. our%20insights/the%202022%20mckinsey%20global%20payments%20report/the-2022- Bank for International Settlements, (September 2022). BIS Working Papers No 1041 The 31 mckinsey-global-payments-report.pdf impact of fintech lending on credit access for US small businesses, https://www.bis. 48 A digital bank is a bank that operates primarily or exclusively online. It does not have any org/publ/work1041.pdf physical branches, and it offers its customers a range of banking services through its 32 Inbonis, https://inbonis.com website and mobile app.” ; 33 Experian, https://www.experian.com/ CGAP (February 2020), Digital Bank - How can they deepen financial inclusion?, https:// www.cgap.org/sites/default/files/publications/slidedeck/2020_02_Slidedeck_Digital_ 34 Global Partnership for Financial Inclusion, (June 2018). 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Accessed August 29, 2023, https://www.kfw.de/ for managing the credit risk associated with the loans. inlandsfoerderung/Companies/Innovation/ These factors can have a significant impact on the cost structure of a securitization 126 Youth Enterprise Development Fund http://www.youthfund.go.ke program. For example, a program with a longer average loan tenor and a true 127 “National Guarantee Fund” Colombian Government, gov.co, Accessed August 29, sale structure will typically have lower servicing costs than a program with a 2023 https://www.fng.gov.co shorter average loan tenor and an assignment structure. Governments and financial institutions should carefully consider these factors when designing and 128 CGC https://cgcegypt.com implementing securitization programs in order to ensure that the program is 129 “Credit Guarantee Fund.” https://www.cbfo.gov.tr/en/licensing-organization/credit- effective, cost-efficient, and sustainable. guarantee-fund Here are some specific examples of how these factors can impact the cost 130 OECD, (2015). New Approaches to SME and Entrepreneurship Financing: Broadening structure of a securitization program: (i) Servicing capacity: If a servicer does not the Range of Instruments, https://www.oecd.org/cfe/smes/New-Approaches-SME- have the capacity to manage the cash flows associated with the underlying loans, full-report.pdf it may need to hire additional staff or outsource some of the servicing tasks. This can increase the cost of the securitization program. (ii) Average loan tenor: Longer Hong, Gee Hee, and Deborah Lucas. “Evaluating the Costs of Government Credit 131 loan tenors typically result in higher servicing costs, as the servicer will need to Support Programs during COVID-19: International Evidence”, IMF Working Papers manage the cash flows associated with the loans for a longer period of time. This is 2023, 016 (2023), A001. Accessed August 29, 2023 https://www.elibrary.imf.org/view/ because the servicer will need to maintain a system for tracking payments, servicing journals/001/2023/016/article-A001-en.xml and Lanto Gilberto, et al. (undated). delinquencies, and foreclosing on defaulted loans for a longer period of time. (iii) Directed Credit Programs: Issues and Framework for Reform, https://pdf.usaid.gov/ True sale vs assignments: True sales typically result in lower servicing costs, as pdf_docs/pnadi976.pdf the servicer is no longer responsible for managing the credit risk associated with 132 “SME Promotion,” KFW. Accessed August 29, 2023, https://www.kfw.de/About- the loans. This is because the servicer is no longer responsible for foreclosing on KfW/Förderauftrag-und-Geschichte/Geschichte-der-KfW/KfW-Themen/ defaulted loans or otherwise bearing the losses associated with defaults. Mittelstandsförderung/ 138 Global Partnership for Financial Inclusion, (June 2018). Use of Alternative Data 133 “Types of 7(a) loans.” SBA. Accessed August 29, 2023, https://www.sba.gov/ to Enhance Credit Reporting to Enable Access to Digital Financial Services by partners/lenders/7a-loan-program/types-7a-loans Individuals and SMEs operating in the Informal Economy https:/ /www.gpfi.org/ 134 “Loans.” SBA. Accessed August 29, 2023, https://www.sba.gov/funding-programs/loans sites/gpfi/files/documents/Use_of_Alternative_Data_to_Enhance_Credit_Reporting_ to_Enable_Access_to_Digital_Financial_Services_ICCR.pdf 135 “Small and Medium Enterprises (SMEs) Finance.” The World Bank. Accessed August 29, 2023, https://www.worldbank.org/en/topic/smefinance 139 Global Partnership for Financial Inclusion, (July 2020). Advancing Women’s Digital Financial Inclusion, https://www.gpfi.org/publications/advancing-women-s-digital- 136 Guggenheim Investments, (April 2023). The ABCs of Asset-Backed Securities (ABS), financial-inclusion https://www.guggenheiminvestments.com/perspectives/portfolio-strategy/asset- backed-securities-abs 140 Better Than Cash Alliance, (2021), Reaching Financial Equality for Women, https:// www.betterthancash.org/explore-resources/reaching-financial-equality-for- 137 Servicing capacity refers to the ability of the servicer to manage the cash flows women associated with the underlying loans. This includes tasks such as collecting payments from borrowers, servicing delinquencies, and foreclosing on defaulted 141 World Bank; International Finance Corporation. (2022). Fintech and SME Finance: loans. The servicing capacity of the servicer will have a direct impact on the cost Expanding Responsible Access. © World Bank, Washington, DC. http:/ /hdl.handle. structure of the securitization program. net/10986/37355 Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 100 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 101 142 The Reserve Bank of India has selected ‘MSME Lending’ as the theme of the third cohort on regulatory sandbox is aimed at addressing the issue of financing needs of MSMEs. Under the cohort the shortlisted entities have completed their testing of products which, among others, include end-to-end straight through processing for digital lending to MSMEs, use of proprietary business finance variables to underwrite real time cash flow-based credit for MSMEs and straight through process journey for MSME Mudra loan from lead to disbursal. Some of the innovations out of this cohort on MSME lending is expected to spur innovations that can help to fill the credit gap for MSMEs through the use of technology and data analytics. AFI, (March 2019). KYC Innovations for Financial Inclusion Integrity in Selected 143 AFI Member Countries, https:/ /www.afi-global.org/sites/default/files/ publications/2019-03/KYC-Innovations-Financial-Inclusion-Integrity-Selected-AFI- Member-Countries.pdf 144 One example is India which has embraced the use of Video-KYCs (Know Your Customer) as an alternate method for customer onboarding, complementing existing digital modes. Video-KYC allows to complete the KYC process through video call with authorized personnel. It offers convenience and accessibility, enabling individuals (including individual customers, proprietors in case of proprietorship firms, and authorized signatories and beneficial owners in case of legal entities) to establish their identity (by providing equivalent e-documents of identity proofs in case of individuals, and activity proofs in case of proprietorship firms) and access financial services from the comfort of their own homes. Video-KYC, along with digital identification systems, is seen as an important area for governments to invest in and establish public infrastructure. These advancements not only enhance the efficiency of customer onboarding but also contribute to financial inclusion by enabling individuals staying in remote areas who may have limited physical access to Financial Institutions to participate in the formal economy. Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises Innovations in Financial Services for Micro, Small and Medium-Sized Enterprises 102 G20 Global Partnership for Financial Inclusion G20 Global Partnership for Financial Inclusion 103