SMEs are the next battlefront for financial inclusion in the Americas

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    Most markets have surpassed the first barrier of financial inclusion: access. Now it is time to focus on SMEs to enhance usage.

    SMEs are the next battlefront for financial inclusion
    Marina Gil

    Marina Gil

    Director – Brazil Lead

    Contact the author

    Financial inclusion is about bringing banking services to households and businesses traditionally excluded from the formal financial sector while improving the services for those already in the system. The fintech revolution of the past decade and the digitization boosted by the Covid-19 pandemic have come a long way in increasing bank account ownership in the Americas. More than 75% of region’s residents had a bank or fintech account in 2021, according to the latest Global Findex.

    Moreover, bank account ownership grew more in Latin America between 2011 and 2021 (by 34.1 percentage points) than in any other global region. Today, based on data from the World Bank and the GSMA, PCMI estimates that most of Latin America’s largest economies have seen banking penetration among adults rise to more than 90% — except for Mexico and Peru.

    The share of people over 15 who sent or received a digital payment also increased above the global average in LatAm, reaching 66% of the region’s population in 2021 against 64% worldwide, according to another study1 by Mastercard and Americas Market Intelligence (AMI), PCMI’s parent company, released last year. With more consumers relying on digital forms of payment, financial inclusion became a foundational pillar for growth across Latin America.

    Financial inclusion key stats in the Americas: bank account ownership (percentage of adults) and credit card holders (percentage of adults).

    If, for the population, being included in the banking system means having a way to organize expenses, access credit, and being better prepared to chase new sources of income, for the industry, bringing more people on board means being able to offer more products and services and monetize on increasingly larger and qualified customer bases.

    Most markets in the Americas have surpassed the first barrier to financial inclusion in the last few years: access to the system. The second barrier, that of turning newcomers into true users of the system, is the current challenge.

    Also, for the financial inclusion cycle to be complete it needs to include small and medium-sized companies, as they account for most of the job creation: nearly half of  job vacancies in the U.S. and 67% in Latin America and the Caribbean.

    SMEs are increasingly adopting low-cost fintech services, but they are doing so erratically. Small businesses tend to tap into free-of-charge transactions only when convenient, which means often using personal instead of business accounts. Or they accept digital payment alternatives only when their customers don’t have cash. These businesses end up not digitizing because they have not yet been convinced to pay for value-added services that offer anti-fraud protection or can be integrated with ERP or CRM tools. Medium-sized companies are also struggling to take the next step because neither traditional nor digital banks seem to offer the level of customization they need to scale their business.

    As we have already discussed in previous articles, this is still a big challenge for Latin America’s payment industry, mainly because it means having to cover a wide range of business clients with different revenue levels and operational structures across a customer base — something especially difficult for challenger banks that have gained big by focusing their growth on low-income individual customers.

    Brazil’s Nubank — possibly the world’s largest challenger bank in the West — debuted just over a decade ago as a zero-fee credit card managed by a mobile app. By taking advantage of Brazil’s Central Bank regulatory push to expand its portfolio into a full-service banking offering in the following years, the fintech reached over 90 million users across its three markets in October last year — nearly 85 million in Brazil, and 5.2 million in Mexico and Colombia.

    This growth occurred mainly by looking at low and medium-income individual customers, as Nubank only entered the business segment in 2019. In the first half of 2023, the latest data available, Nubank served 3.6 million micro and small businesses. However, 76% of them were Individual Microentrepreneurs (MEI, the acronym in Portuguese), operating under a special tax regime created to boost the formalization of single-person businesses in Brazil, which means that most of Nubank’s basic services for individuals most likely work for those entrepreneurs.

    In the first half of 2023, the latest data available, Nubank served 3.6 million micro and small businesses. 76% of them were microentrepreneurs

    Only recently, the fintech started to reformulate its business portfolio, with a tap-to-pay solution and a new billing feature for its business clients. Why is that? A survey carried out in May last year showed that Nubank has about 10 million MEIs2 in its base, most of them using its services as their personal account — for David Vélez’s fintech, this means a huge untapped market to be explored.

    And it’s not just Nubank. Most fintechs have already realized that their next growth phase depends on capturing spending and issuing credit from SMEs. Monitoring by Bank of America (BofA) recently indicated that the number of digital bank customers may have reached a point of saturation3 in Brazil. There are more than 180 million digital accounts (from banks and fintechs) open in the country, the equivalent of five accounts for every Brazilian adult

    Among businesses, however, the financial inclusion gap persists. According to Brazil’s Central Bank4, between 2018 and 2023, the number of legal entities with a bank account increased from 11.3 million to 19.6 million — the largest jump on record (dating back to 2005) of 73% and more significant than the 23% percent increase in the number of individuals with bank accounts (to 194.1 million) in the same period.

    Increasing digitization has also proven to be essential to reducing informality across the Americas. According to data from the Small Business Association (SBA), there have been 16 million5 new business applications in the U.S. since 2021, leading to 2.8 million established new businesses since the peak of the Covid-19 pandemic. Minority-owned businesses have contributed significantly to this rise — which also poses a new kind of challenge for the institutions in the region’s most developed economy.

    Business ownership among Black and Latino founders increased from 5% to 11% and from 7% to 10%, respectively, between 2019 and 2022. Moreover, between 2019 and 2023, the growth rate of women-owned businesses was 94% greater than their male counterparts. And they are increasingly relying on fintechs to grow. According to a McKinsey report, in 2022, 35% of SMEs in the United States considered using fintechs for lending, better pricing, and integration with their existing platforms.

    Fintechs and digital banks have indeed observed the business customer journey more carefully, forcing traditional institutions to follow suit. It’s common to see them talk about their desire to become the one-stop shop for all types of products and services SMEs may need – more specifically, combining robust relationship management and digital functionalities able to cover end-to-end cash flow needs6.

    Survey about what SMEs in the U.S. look for when selecting a primary banking service

    It turns out that this is harder said than done, as SMEs want all of this at lower costs, and this presents a challenge for fintechs and digital payment service providers who need to find the perfect balance between zero-fee products and revenue generation. It would be easier for the big banks to offer such a package, as they have vast amounts of deposits under custody to finance themselves, but SMEs are not getting it from them. In 2024, this dispute is expected to intensify. It remains to be seen who will come out on top.

    Next Steps

    As the competition between traditional institutions, challenger banks, and fintechs for SMEs increases, the opportunities for financial service providers only increase in the Americas as most players cannot develop all solutions in-house, nor do they even have the ideal infrastructure to do so. Contact us to learn more about how to tap into this new fintech dispute for SMEs.


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    Sources

    Marina Gil
    Marina Gil
    marina@paymentscmi.com

    Marina oversees payments sector research projects in Brazil. Based in São Paulo, she has more than a decade of experience in the banking industry. B.S. in Business from the University of São Paulo. MBA in International Business and Foreign Trade from the Fundacão Getulio Vargas.

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