SME enterprise solutions: A fintech investor’s perspective

Liping Li, an SME small business owner, sells her wares in Songshan district, Chifeng, Inner Mongolia.

Over the past few months, we’ve seen the emergence of an exciting new class of enterprise solutions aimed specifically at small and medium enterprises (SMEs). Put simply, SME enterprise solutions set out to digitize a merchant’s pen-and-paper business processes in a simple, user-friendly manner. We’ve seen a number of interesting models across the world, including Bamba POS, Caytree, Frogtek, Kiwi, Gyaan Tel, Numida, SMEasy, and others.

These Enterprise Resource Planning (ERP)-like platforms come in many different forms — they can be cloud-based or mobile-based software, or hardware leveraging low-cost POS devices or tablets. The core use of the offering is typically around sales tracking and/or payment processing, the data from which can then be used to drive a number of other functionalities, including inventory management, purchasing decisions, and customer analysis.

A happy byproduct of this, and one that we are very interested in at Venture Lab, is that the accumulation of sales, inventory, transaction, and customer data can inform underwriting. This can potentially enable SMEs, which have traditionally struggled to obtain financing in most developing markets, to access the loans they need for working capital and growth.

We like a number of aspects of these platforms:

Creation of valuable proprietary data for the ERP provider

This is powerful not only for enabling credit scoring for loans but also for compiling data on business models, consumer habits, etc. for sectors of developing economies that have never really been measured before.

Digitization of smaller businesses, even with little or no digital transaction history

The online SME lending models we’ve seen overseas to date have largely been limited to working with small businesses with some digital footprint already, for example, tax records, existing point of sale machines, or e-commerce transaction history. SME ERP offerings allow smaller, largely offline merchants to create a track record of data around their business. Critically, such data can enable access to loans that were previously out-of-reach, given the reluctance of financial institutions to lend “blind” to SMEs without data around the borrower’s risk profile.

Self-driven credit scoring and data ownership

We’re fans of business models that allow consumers to drive their own financial footprint and credit history, and thus their own ability to access capital (we call it the “Credit Bureau of One”). We like that these models empower offline merchants to build (and continue to own) a data history on their own terms.

Other monitoring and decision-making benefits

Besides letting merchants understand their businesses and make optimized purchasing decisions, the data and analytics from these solutions enable a number of other benefits, from easier theft monitoring to convenient supplier ordering, employee performance tracking, and inventory management.

There is a clear value proposition to merchants here, and we believe there is also strong potential for a profitable, scalable business model on the ERP provider side. But there are also some challenges that, in our view, have yet to have been definitively overcome.

Challenges of SME Enterprise Solutions

Quality of self-reported data

Most data points for current solutions will be self-reported, which may mean data is not valid enough to enable a credit underwriting model. Will startups be able to validate self-reported data via machine learning algorithms, supply chain finance, or other models? Can this verification happen in a cost-effective way?

Customer acquisition

Direct acquisition of SMEs (especially the smallest merchants) can be costly and difficult to scale for a range of reasons, including geographic dispersion, lack of tech savviness, cost of software/hardware, and high barrier to behavior change. How will these models cost-effectively scale?

Monetization / unit economics

What would SMEs be willing to pay for this kind of solution, if anything? Are there other paths to profitability besides subscription fees from merchants? For example, lending based on transaction data or charging percentage fees for transactions facilitated.

User experience and behavior change

What functionality and user experience will be required to ensure that users remain active? Will better resource management and accounting (and associated incentive to receive financial access) be enough to change merchant behavior?

Driving SME success stories

As the above challenges help illustrate, there are many potentially viable directions that SME ERP providers may take. We would love to see multiple success stories in the space, and we would like to help drive those success stories ourselves by investing in the most promising companies. Our top-of-mind success factors that we want to see in such companies include proven data validation to enable an underwriting/lending focus, as well as a proven customer acquisition model that can profitably acquire even small merchants (those with less than 10 employees).

Harnessing the power of sales digitization and data analytics for smaller enterprise (which, up until now, has been rare in the developing world) can serve as a powerful engine for driving financial inclusion and general economic prosperity. This is a goal worth pursuing, and we are excited to see how the space evolves.

Will Rayner co-authored this post.

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