Eurada News nº400 - May 2020

How can digital financial services help MSMEs?

Adapting to change is crucial for keeping Micro, Small, and Medium-sized Enterprises (MSMEs) relevant and able to grow. Although in the current climate of economic contraction, survival is perhaps a more appropriate aim than growth, moving with the times is still of great importance and will continue to be after economies have emerged from the tunnel. This article will consider digitalisation of financial services and how it can help smaller companies become more efficient, as well as easing stoppages in cash flow and relations with clients.

New kids on the block

Recent years have seen a rise of digital-only “challenger banks” and other financial service providers, often beginning humbly by offering one or two in-demand services to fill a gap in the market and then expanding relatively rapidly to incorporate other features. Having low overheads due to a lack of physical branches and employing younger tech talent willing to think outside the box, these companies have led to a surge in innovation. Stand-out examples of this for the general public include app-based bank accounts for children allowing parental oversight, “gambling block” features for adults struggling with gambling addiction, and instant bill-splitting capabilities. This in turn has led to incumbent banks implementing similar innovations themselves and redoubling their own efforts to innovate, even setting up their own digital-only offerings with largely independent management and development teams. In such a way, the banking sphere is reforming year by year to offer more customer-centred services and reduce reliance on slower legacy systems based on paper or decades-old computer systems.

A number of these “neo-banks”, both challengers and those founded by established banks, focus on providing services for MSMEs. So what are some of the innovations and improvements smaller companies can look to benefit from in future?

Money in, money out

Firstly, digital banks catering to small businesses often provide intuitive digital accounting tools in their apps/websites for keeping track of account balance and cash flow, enabling users to make smart financial decisions, often designed in a simple way with clear visualisations. For a newly established sole trader with limited or no experience of managing finances, such ease of being able to understand their finances may make the difference between them persevering with their business idea or instead choosing to give up. For small business owners operating on low margins, reducing the amount of time spent trying to decipher their finances whilst also not needing to hire accountant frees up two things: time, which they can then spend on running others aspects of their company, and money, to be reinvested in the business.

Furthermore, these digital MSME banks may offer tools for helping with taxes. These include tax calculators which analyse the account holder’s data to estimate tax owed, notifications to remind users of upcoming tax payment deadlines, and assistance in preparing tax returns. Some even allow submission of tax forms through their apps.

An offer they can’t refuse

Few things seem to frustrate small business owners more than late payment from clients, often making cash flow planning difficult. Having to send reminders to late payers also brings a whole interpersonal dimension of its own. Is the tone of the email right? Does it sound too direct? Would it be better to call? Maybe they are just busy; should I wait a few days more? In this regard, the ability to schedule automated payment reminders to clients removes potential social awkwardness between business and client, also saving time and stress.

Once again, clear visualisations of invoices and their status can make it easier to stay on top of the numbers. And when payment is received, “invoice-matching” can come in handy; where the system registers a payment into the company account, matches it up automatically with the relevant invoice which it is payment for, updates that invoice’s status to “paid”, and notifies the user.

Lastly, being locked into such services should not be a concern as these providers tend to allow financial records they hold to be easily exported, either into files in widely compatible formats or directly into external accounting software.

The C-word

How then will the current Covid-19 pandemic impact on digital financial solutions for the self-employed and smaller companies? On the one hand, in the short term it looks unlikely that such providers will see a surge of interest, as economic uncertainty tends to inspire caution in people and disincentivise account-switching. In the longer term, on the other hand, lingering concerns about visiting places in person will likely lead to start-ups increasingly choosing to sign up to business banking services online rather than in a physical branch, thus increasing the likelihood they will end up with a more innovative, digital, user-friendly provider.

While economic downturns have a tendency to hurt MSMEs more than their larger cousins with greater cash reserves, it looks unlikely that the digitalisation described above will be reversed. Firstly, consider the service providers. Some such digital MSME banks have indeed raised private funding in the middle of the pandemic, while their lack of physical branches and general digital edge make teleworking natural to them. Even those which do hit financial difficulties are likely to be bought out and “recycled” by incumbent banks to help with their own digitalisation efforts, rather than simply disappearing. Secondly, consider the users. MSMEs will always prioritise doing what they set out to do, regardless of whether that is IT, gardening, or tourism; managing their finances will always be a lower priority to them and as such they will always prefer to save time on it.

While movement around our physical surroundings remains restricted for the moment, movement towards digital solutions for MSMEs look like a certainty in the long run.

Written by Owen Brown, Intern at EURADA.