Starting and running a business is never easy. None more so than in emerging markets where most SMEs (small and medium-sized enterprises) are constrained by sources of capital and limited cash flow. SMEs often have to tap into personal savings or reach out to family members.
Visit any micro retailer in Africa and you know that with limited capital, comes limiting purchasing power. They often stock a limited range of products and frequently run out of stock. Small retailers are often forced to make use of intermediaries, such as wholesalers or distributors, to break bulk for smaller and affordable quantities. These wholesalers and distributors provide a credit line when required, but often at higher prices.
In addition, SMEs have to deal with cash flow bottlenecks of late payments, particularly when working with government departments. Many SMEs avoid working with government all together, or substantially increase their prices so as to factor in cost of capital. Even in the corporate sector where 30, 60, 90 or 120 days payment terms exist on paper, in reality many organisations don’t adhere to these policies and some defer payment in order to manage cash flow.
The rise of FinTech
If cash flow is the blood of any business, financial technology companies might prove to be a blood bank for some SMEs. A financial technology company, also known as FinTech, is a company that is using software, often cloud based, to provide financial services. Like banks, FinTech acts as an intermediary or broker.
Fintech can deal with multiple banks to reduce the cost of capital, and can assist companies with short term loans and working capital, by facilitating the process to get paid. SMEs can select the time of payment, and as a result, the actual payment becomes far more predictable and transparent. Multinationals also benefit. They can increase the number of suppliers they do business with and extend their payment terms to suit their organisation.
FinTech can lower the barriers for SMEs to enter the market, bringing simplicity, streamlining processes and transparency to the financial process; often in the form of a user friendly app. M-Pesa is arguably Africa’s best known FinTech, however the range of services provided by FinTech is vast. This could include digital banking, mobile wallet, transaction authentication, cryptocurrency (e.g. Bitcoin), trading, loans, payable management, money transfer, cyber security and peer-to-peer lending.
For example, the South African startup RainFin’s peer-to-peer platform, taps into a community of lenders. The company assigns a unique score, by assessing the overall financial health, future cash flow and creditworthiness, prior to approval. For FinTech startups, the unbanked and underserved SME market is of particular interest. In South Africa, iKhokha provides a mobile app and card machine to more than 2,500 SMEs in the country. Another South African startup, Merchant Capital, focuses on SME working capital, while Cape Town based Zambian startup Zoona, targets Zambia and Malawi for money transfer.
Fintech’s purpose is to disrupt the incumbent financial system. However, some analysts argue that FinTech does not disrupt the traditional players in Africa, as financial institutions have a limited footprint and reach when dealing with SMEs, and often create a whole new infrastructure for the unbanked. Fintech companies are also expanding their range of services outside of traditional financial services, to procurement and supply chain management.
Fintech companies are increasingly forming partnerships with financial institutions, and Corporate Venture Capital (CVC) units are running incubators and investing in FinTech ventures. A good example is Barclays Africa Supply Chain Challenge and Rand Merchant Investment’s AlphaCode. Other financial institutions such as Goldman Sachs have launched their own FinTech services. According to KPMG, more than $19 billion was invested globally in 2015.
Fintech is in the early stages of development and riding the startup wave. There is plenty of excitement and experimentation, but lots of uncertainty remains. The FinFech landscape will likely look very different five years from now.