Small businesses turn to fintechs to bridge funding gap in Latin America

Joint study by University of Cambridge and Inter-American Development Bank shows that firms accessing fintech credit became more resilient, maintaining or increasing jobs, income and sales.

Fintechs in Latin America are playing a critical role in reducing the funding gap for micro, small and medium-sized enterprises (MSMEs), helping these companies build resilience and weather some of the worst economic impacts of the global pandemic, according to the study ‘The SME Access to Digital Finance Study’, jointly published today by the Cambridge Centre for Alternative Finance (CCAF) at the University of Cambridge Judge Business School and the Inter-American Development Bank (IDB).

The study provides a deep dive into the Latin American fintech ecosystem with specific focus on access to funding for MSMEs. It draws on empirical data from the survey responses of 540 MSME customers of 34 fintech platforms in Brazil, Mexico, Colombia, Peru, Argentina and Chile. The findings show that 75% of responding firms were micro enterprises, supporting the hypothesis that fintechs are a critical enabler in the smaller business funding cycle. Overall, the median amount borrowed or raised was below $4,000, showing the importance of microenterprises in the region, although for 75% of the sample the amounts ranged up to $20,000.

Further, the study highlights that prior to successfully receiving funding from a fintech platform, MSMEs had attempted to raise funds through different sources, including banks or family and friends. Although many MSMEs had sought funding from banks, only approximately one-half had received and accepted an offer. Indeed, MSMEs using a Peer-to-Peer (P2P)/Marketplace lending platform revealed that they had been unable to secure funding from any other source except a fintech firm.

Additionally, MSMEs reported that the decision to raise funds through a fintech platform was largely influenced by being able to receive the funds faster and with a higher standard of customer service. According to half of the responding MSMEs, the choice of fintech funding was also heavily influenced by the availability of better interest rates than traditional or other funding options.

“The findings of this study illustrate the potential of fintechs in narrowing the MSME funding gap and driving MSME growth across the LATAM region,” says Bryan Zhang, Executive Director and Co-founder at the CCAF. “Especially for micro enterprises, fintech credit is proving to deliver much needed support for them to sustain, grow and expand.”

Overall, the main impact on businesses receiving funding was a reported increase in productivity, with 43% of firms using a P2P lending platform recording greater productivity. Additional benefits included a third of MSMEs that used a digital lending or invoice trading platform reporting reductions in costs.

“Funds secured via fintechs enabled Latin American MSMEs to purchase assets and refinance or expand their business. More importantly, they enabled 92% of respondents to maintain or increase employees, 86% to maintain or increase income and 84% to maintain or increase turnover,” says Juan Antonio Ketterer, Division Chief of the Connectivity, Markets and Finance at IDB. “Thanks to the availability of credit, fintech-financed firms became more resilient, even in the face of the unprecedented trading conditions associated with the global pandemic. These results might be a call for action to our policymakers to help this industry grow.”

Finally, the report also summarises the current regulatory situation of the six countries covered by the study, acknowledging the importance of policymakers and regulators in the region in facilitating MSMEs to access digital finance, supporting development of the fintech industry and adopting innovative and enabling regulatory frameworks.

This summary draws on the data and insights created in the IDB’s FinTechLAC Latin America and the Caribbean Fintech Regulation Map (FintechRegMap). In recent years, as part of Vision 2025, the IDB’s blueprint for achieving economic and social development in the region, the Bank has developed an agenda to increase the levels of financial inclusion in Latin America and the Caribbean through digital finance and fintech.

The IDB has been supporting governments in the region to develop public policies, improve institutional capacity, and increase access to financing for individuals and firms in countries including Brazil, Chile, Colombia, and Mexico. Moreover, the Bank has supported create innovation hubs in Costa Rica, Dominican Republic, El Salvador, and the Pacific Alliance as well as invested on an ambitious knowledge agenda to inform policymaking, which includes this latest study in partnership with the University of Cambridge.