Fintechs are helping to bridge the MSME financing gap to drive growth in LATAM

Fintechs in Latin America are playing a crucial role in supporting micro, small and medium-sized enterprises (MSMEs) to become more resilient, while increasing jobs, income and sales, a new report claims.

The study – SME Access to Digital Finance Study – jointly published by Cambridge Center for Alternative Finance (CCAF) on University of Cambridge Judge Business School and Inter-American Development Bank (IDB) delves into the Latin American fintech ecosystem with a specific focus on access to finance for MSMEs.

After surveying 540 MSME customers on 34 fintech platforms in Brazil, Mexico, Colombia, Peru, Argentina and Chile, the study reveals that 75 percent of businesses were micro-enterprises. It also showed that the median amount borrowed or collected was under $4,000, although the amounts for 75 percent of the sample ranged up to $20,000.

Before successfully receiving funding from a fintech platform, MSMEs had tried to raise money through various sources, including banks or family and friends. Only half had received and accepted an offer from a bank.

The report also found that MSMEs using a peer-to-peer (P2P)/marketplace lending platform had not been able to secure funding from any other source apart from a fintech firm.

In addition, 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. Half of the black MSMEs chose fintech financing because of more favorable interest rates.

The effect

Bryan ZhangCEO and co-founder of research center CCAF, says: “The findings of this study illustrate the potential of fintechs in reducing the MSME financing gap and driving MSME growth across the LATAM region. For micro-enterprises in particular, fintech credit has proven to deliver much-needed support for them to sustain, grow and expand.”

Businesses that received funding reported an increase in productivity, with 43 percent of businesses using a P2P lending platform recording higher productivity. A third MSME using a digital lending or invoice trading platform also reported cost reductions.

Juan Antonio Ketterer, Divisional Head of Connectivity, Markets and Finance at the IDB, said: “Thanks to the availability of credit, fintech-funded firms became more resilient, even in the face of the unprecedented trading conditions associated with the global pandemic. These results can be a call to action for our policymakers to help this industry grow.”

Future focus

The IDB was established in 1959 and is a leading source of long-term financing for economic, social and institutional development in Latin America and the Caribbean. According to the IDB, it has supported governments in the region to develop public policies, improve institutional capacity and increase access to finance for individuals and firms in countries including Brazil, Chile, Colombia and Mexico.

In addition, the Bank has supported the creation of innovation hubs in Costa Rica, the Dominican Republic, El Salvador and the Pacific Alliance, as well as investing in a knowledge agenda to inform policy-making, which includes this latest study in collaboration with the University of Cambridge.