Lack of digital financial records limit SMEs’ access to credit

A digital payment platform.

Photo credit: File I Nation Media Group

Digital payments still account for a smaller percentage of the total payments transacted by micro small and medium enterprises(MSMEs) compared to cash, a new report shows, locking out many of these businesses from efficient transactions and digital loans.

A study by the Common Market for Eastern and Southern Africa (Comesa), Business Council on digital financial inclusion for MSMEs, said that though there have been significant strides in the migration from cash to digital transactions owing to the Covid-19 pandemic, many SMEs and their customers still opt for cash settlements.

The main reason behind this is the high costs related to digital settlements, which when incurred while making low value payments do not make financial sense to the customers.

“The impact of transaction costs related to the payment systems is usually significant in relation to the relatively small-size of transactions in which low-income households and MSMEs are engaged,” notes the report.

The study further notes that digital payments are only cheaper and attractive to customers when they are paying for goods and services that are in distant locations, and not so much when they are paying for goods and services that are in close proximity, where cash remains a better option.

Viewed from the SME’s perspective, the high cost of digital transactions comes in withdrawing the money received in their digital wallets, which, according to them, eats into their profits.

In remote and rural areas, physical access to payments’ infrastructure is also a big issue for the SMEs as there is limited footprint of payments service providers or mobile money agents.

In addition to this, the study notes that the current mobile money systems lack the manageability and reconciliation tools that most businesses need.

“Very few businesses have re-engineered their business to be cash-free in an effort to exploit the fact that practically all their customers, employees, suppliers and business partners are connected to mobile money networks,” notes the study.

Digital wallets

Because these businesses do not receive most payments through their digital wallets to create a pay slip that is solid enough to attract investors, the study highlights that they therefore find it difficult to access much-needed credit for growth.

“A majority of the people have a natural preference for making cash payments. Most transactions start and end in cash. This limits the potential of creating pay slips which banks and investors can use to assess credit worthiness,” notes the study.

The digital revolution and rise in FinTech have created opportunities for SMEs and start-ups to access larger sums of money from investors to enable them expand their businesses and reach more customers.

Digital financial providers have leveraged on digital innovations to reach out to micro retailers and offer mobile based loans whose credit score ratings depend on number and amount of transactions.

To enable SMEs benefit from this digital revolution, the study recommends addressing the high cost of digital payments. Lowering prices across board would help speed up transition to a cash-lite environment.

“Retail payments are a volume business. With the explosive growth in mobile money transactions that have been witnessed over the years, one could have wished to see the per-transaction costs reduce at a faster pace,” notes the report.

The study also recommends establishing additional basic consumer protection rules and practices around digital financial services, so as to make them more credible and trustworthy.

“Although service reliability and uptime have improved over the past few years, they are still a major sticking point for customers who depend on mobile money for their businesses and lives. Some basic trust issues still need to be resolved to improve perceptions around the safety of mobile money platforms, especially if they have hurt a substantial number of customers before,” notes the report.

Policies and actions

The study also recommends introducing policies and actions aimed at creating more awareness around the benefits of digital financial services.

A recent study by financial services firm Technoserve shows that 90 percent of SMEs have not undergone some form of training on digitising their financial operations.

“Payments are aimed at facilitating the transfer of value between individuals and enterprises for economic resilience and growth. The flow of money both cheaply and seamlessly through the payments’ infrastructure should be a fundamental policy priority,” notes the report.


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