Small merchants, such as “mom-and-pop” retailers, restaurants, and micro-grocers, are an important part of society — bringing life’s essentials within easy access for families and employing more than a third of the world’s labor force.
However, these merchants can’t currently realize their full potential to support themselves and their communities. This is because they often lack access to the core resources or services they need to buy stock, sell goods, and run their businesses effectively. A lack of access to credit for buying stock is a key example of this. According to the IFC, approximately 70 percent of the 365–445 million micro, small, and medium enterprises (MSMEs) in emerging markets lack access to credit, resulting in a financing gap of $5.2 trillion.
The need for credit is difficult for merchants to predict and often requires funding to be available at the point of purchase. Historically, this type of lending, known as “just-in-time” credit, has been difficult for formal financial service providers to offer due to the lack of accessible data that can be used to assess creditworthiness quickly. This dearth of data is primarily driven by merchants’ reliance on manual operational processes and cash-based transactions, which are often not recorded and difficult to verify.
Time to scale up supply chain finance solutions for small merchants
Supply chain finance is not new — big banks have long offered it to large corporations to support cross-border trade, and informal mechanisms have existed for centuries. However, as markets evolve, the variety of available technologies capable of digitizing business operations today mean that now more than ever this type of financing can benefit small merchants.
Supply chain finance (SCF) is the use of financial mechanisms and technologies for optimizing the management of liquidity tied up in supply chain processes. It enables merchants and other supply chain participants to apply and gain approval for credit to fund purchases at the point of sale. Merchants can purchase goods as needed, as opposed to only when they have cash.
Merchant-centric services can alleviate critical pain points for merchants and ecosystem
The lack of credit for small businesses has an impact on the merchant themselves, the local communities where they operate, and nationwide trade and fast moving consumer goods (FMCG) distributors, such as Unilever and Coca-Cola. For merchants, the lack of credit means their ability to restock is limited by the amount of cash they have on hand, which has been generated from previous sales. This lessens their efficiency and ability to scale. As a result, communities miss the chance to have the job growth and convenience that thriving local businesses bring. FMCG distributors have to deal with a lack of consistent demand and low visibility in a supply chain where they are trying to operate as efficiently as possible.
As merchants buy and sell, this creates transaction and behavior patterns that can be used to provide finance. Traditionally, financial service providers’ (FSP) ability to leverage those patterns and behaviors was limited by the lack of a digital footprint. Today, as with innovations in consumer credit, new technologies can also help small merchants develop a digital data ‘footprint’ to show their creditworthiness. Organizations such as Tienda Pago in Mexico and Peru and Lydia in Nigeria have already begun tapping into the data streams of small merchants by offering them business services that encourage digital transactions. One way Lydia helps businesses build a digital footprint is through enabling access to invoice management tools. These provide a more convenient and efficient method for merchants to track debtors and allows for the capture of invoice data to be used to assess creditworthiness. But innovations in supply chain finance have not yet reached small merchants at scale.
How can we help merchants buy better, sell better, and run better?
Enabling merchants to buy better, sell better, and run better through the use of technology is the first step to implementing a merchant-centric supply chain finance solution at scale. These solutions could include access to marketplaces for better pricing on purchases, the use of digital channels to drive customer engagement, and digital means of tracking and managing inventory, payables, and receivables to allow greater visibility of cash flows.
We at Accion believe supply chain finance can be a useful tool to drive significant adoption and usage of financial services and therefore meaningful financial inclusion, but to implement successfully at scale, we first need to understand the market thoroughly, to ‘get the equation right’ between the merchant and others along the supply chain. Each merchant has unique needs within their market context, and comprehending these needs is essential for the design, launch, and optimization of merchant-centric services. A full understanding of each market can reveal where pain points are and help identify which digital mechanisms will be most conducive to driving change. With a growing focus on digital payments and merchant acceptance, the time to develop scalable merchant-centric solutions is now.