The Impact of Fintech on The Growth of Small And Medium-Scale Enterprises

It is widely known that Small and Medium Scale Enterprises are the backbone of any economy, contributing nearly 50% of the Gross Domestic Product (GDP) to the world GDP.

Despite their significance, these businesses have been plagued with several challenges that have stifled their growth, with a major challenge which is access to capital.

Several traditional lenders have been reluctant to offer credit facilities to small businesses due to perceived risks and high transaction costs. However, the emergence of fintech has created new opportunities for SMEs to access finance. 

With the emergence of Fintechs, these businesses now enjoy increased digital offerings in the form of customized products.

FinTech platforms have ensured that premium quality services are provided to MSMEs, at the most affordable cost. Very affordable rates and accessible mobile devices ensure that SMEs conduct their operations in a systematic and efficient process. 

Various payment and financing options like point of sales-based payment (PoS), QR code-based, near field communication (NFC) based payments, and embedded finance, have penetrated the SME market which has resulted in the growth of FinTech adoption among SMEs.

By alleviating financial frictions arising from collateral and borrowing constraints, Fintech has enabled small and medium-sized enterprises to easily access required capital, stimulate their productivity growth, and increase their financial performance.

It is understood that small businesses seek various modes of finance to meet various capital requirements. With the development of internet-based finance, credit availability has become easy for them.

This has seen many switch from traditional finance to Fintech-based ones. The traditional methods have been relegated to the back seat, and digital solutions have revolutionized the operations of small businesses

The switching behavior of small businesses from traditional finance to Fintech is mainly driven by the convenience it provides, which includes speed, flexibility, simplicity, and transparency.

Another reason for the adoption of Fintech by SMEs, is Alternate Credit Scoring, which makes use of various digital platforms to understand consumer behavior for credit risk assessment and terms eligible for credit. 

It focuses on creating potential strength by combining data from social media usage, bill payment history, and other avenues. With the data collected, FinTechs provide effective solutions to MSMEs to enhance their customer engagement and build an ecosystem that caters to the specific needs of each client.

Check Out Other Impacts of Fintechs on SMEs

• Enhanced Financial Management: Fintech tools provide cost-effective solutions for accounting, budgeting, and financial analysis, helping SMEs manage their finances more efficiently.
• Streamlined Payments: Digital payment solutions simplify transactions, reduce payment delays, and improve cash flow for SMEs.
• Cost Reduction: Automation and online banking services help SMEs reduce operational costs, increasing overall profitability.
• Market Expansion: E-commerce and digital marketing tools facilitated by fintech enable SMEs to reach a wider customer base and explore international markets.
• Risk Mitigation: Fintech offers risk assessment and insurance options to protect SMEs against financial and operational risks.
• Access to Advanced Tools: SMEs can access advanced technologies such as inventory management, sales analytics, and customer relationship management systems.

Currently, a significant amount of SMEs have incorporated digital tools into their business processes, payments, and online sales. 

The global adoption rate as of 2019 was 25%, which means that one out of every four SMEs globally has used services provided by Fintech services or products in all four categories which include; (banking and payments, financial management, financing, and insurance).

Notably, the adoption of Fintech has created a massive impact on the SME sector, which has led to operational improvements ranging from increased profitability, operational efficiency, better customer services, and higher customer engagement.

Conclusion

The emergence of fintech has positively impacted SMEs by providing them with tools and services that improve their financial health, competitiveness, and resilience in an ever-changing business environment.

As Fintechs continue to evolve with the introduction of future trends such as blockchain technology, Artificial Intelligence, open banking, digital currencies, and embedded finance, all these are set to transform the financial services industry which will greatly benefit SMEs.