Amy Stewart

Andrea Horak

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Iain Brougham

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Kathleen Yaworsky

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Scott Stefanski

Victoria White

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East Asia and Pacific

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Financial Health

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Toolkits and Guides

In Ecuador, more than 1 million people work for micro, small, and medium enterprises (MSMEs). These businesses play a critical role in the overall economy, contributing to over 25 percent of the nation’s GDP.

In recent weeks, Ecuador has emerged as the epicenter for the COVID-19 pandemic in Latin America, with over <a href="https://www.worldometers.info/coronavirus/country/ecuador/" target="_blank" rel="noopener noreferrer">29,509 reported cases as of May 11th</a>. The situation has quickly overwhelmed the country’s medical resources and brought the economy to a halt. MSMEs have been particularly hard hit — these businesses have limited cash reserves, and many may not be able to survive the reduced demand, disrupted supply chains, and liquidity shock.

As of 2018, <a href="https://globalfindex.worldbank.org/sites/globalfindex/files/countrybook/Ecuador.pdf" target="_blank" rel="noopener noreferrer">5.7 million Ecuadorians, nearly half of the adult population, did not have access to savings, loans, and other formal financial services</a>. Digital financial services can address this gap and provide more businesses and individuals have the tools they need. In recent years, improving infrastructure and lower-cost smartphones have brought more and more Ecuadorians online. However, while <a href="https://globalfindex.worldbank.org/archdownload/chapter/11" target="_blank" rel="noopener noreferrer">77 percent</a> of Ecuadorians have a mobile phone, <a href="https://globalfindex.worldbank.org/sites/globalfindex/files/countrybook/Ecuador.pdf" target="_blank" rel="noopener noreferrer">only 32 percent are using their phone to make or receive digital payments, and only 69 percent are using a mobile phone to access accounts</a>.

Banco Pichincha, the largest private bank in Ecuador, is addressing these challenges with a recommitment to continue promoting an ambitious financial inclusion strategy to support small businesses with the use of innovative financial services designed to meet their needs. Founded in 1906, Banco Pichincha currently reaches 3.5 million customers in Ecuador, with more than 250 branches and 8 thousand non-bank correspondents across the country.

Accion has partnered with Banco Pichincha for more than 20 years, working closely with the team to build their microfinance methodology, develop a variety of financial products, and optimize their digital channels.

Helping small businesses build resilience in Ecuador

Banco Pichincha

Mastercard

Financial Inclusion Practitioner

Financial Service Provider

Institutional Funder

Accion Global Advisory Solutions

The coronavirus pandemic is changing business as we know it and sending a domino effect rippling through every aspect of our lives. And, as always during global crisis, the world’s most vulnerable will suffer the greatest consequences. As many as <a href="https://www.bbc.com/news/business-52211206" target="_blank" rel="noopener noreferrer">400-600 million people</a> worldwide could be forced back into poverty as a result of this pandemic. Because global supply chains connect millions of organizations of all sizes around the world, the fate of the most vulnerable is inextricably linked to the fate of larger businesses.

<a href="/small-businesses-need-help-supply-chain-finance">Small and microbusinesses</a> can constitute up to half of revenues for the largest consumer goods companies. To maintain business continuity, these manufacturers must extend stability out to the furthest edges of their supply chains to the end-merchants who are essential to their communities. However, COVID-19 pandemic-related lockdowns and disruptions in inventory delivery have led to sporadic sales, which severely harm these microbusinesses. They are facing a severe liquidity crunch that threatens to shutter their doors and are in immediate need of funds to stabilize their inventory and keep their lights on.

Supply chains offer one of the most realistic means of extending funds in the short-term. Getting funds to the microbusinesses that need them most requires a <a href="/how-banks-fintechs-and-corporations-can-expand-supply-chain-finance">collaboration of unlikely partners</a>: financial service providers (FSPs) that serve micro and small businesses and major brand manufacturers. These manufacturers possess sales history data that is relevant to risk modeling and supply chain relationships, and that allows them to build awareness and onboard users of supply chain finance products.
<h2>Action plan for lenders to initiate liquidity lending to micro and small enterprises</h2>
Lenders to micro and small enterprises in emerging markets already operate on thin liquidity margins and depend heavily on timely repayments and deposits. As more microenterprises are unable to repay loans during this time, lenders are feeling additional pressure on liquidity and are being forced to rationalize funds. One way to do this is for lenders to establish an explicit <a href="/the-supply-chain-finance-opportunity">supply chain financing practice</a> designed to channel funds to the moving of supplies and goods. Financial service providers who want to start offering a supply chain finance product to micro and small businesses should consider the following:
<h4>What supply chains do your current customers belong to?</h4>
Conduct a quick segment analysis of the businesses you serve by grouping customers by industry and region. You can supplement existing customer data with additional information gathered through phone calls and texts. Potential segments may include merchants of consumer goods, pharmaceuticals, agriculture production and processing, and more.

Our partner <a href="/five-crucial-insights-from-china-for-facing-the-pandemic">CD Finance</a> in China did a quick analysis of their customer base and found that while their clients in the service industry were forced to shut down during the lockdown, those in the crop-planting business— which provides essential products— were able to continue operating. When considering a supply chain product, FSPs should prioritize segments that work within supply chains that provide the most essential goods to communities.
<h4>What relationships can you leverage to form supply chain partnerships?</h4>
Suppliers with important purchase data that can be used to assess risk are critical partners for supply chain finance solutions. As a next step, conduct research to determine your customers’ top suppliers. Small merchants often have a dozen or more supply sources. Look for commonalities and propose partnerships with three to five of the most common suppliers to get short-term financing out to merchants using the suppliers’ historical purchase data. The supplier will benefit from such an arrangement through greater sales and turnover stabilization. CD Finance collaborated with a national agricultural inputs supplier to form a partnership and was able to negotiate a group price and secure a quality guarantee and support services for farmers.

Lenders should determine if they are serving any of the top suppliers within their own clientele. For example, a financial institution may have one part of the lending operation focused on smallholder farmers and a separate part of the business serving an agribusiness. By bridging these two groups, an organization can expedite the introduction of a cross-customer solution like supply chain finance.
<h4>How do you model risk?</h4>
<a href="https://finreglab.org/the-use-of-cash-flow-data-in-underwriting-credit-small-business-spotlight" target="_blank" rel="noopener noreferrer">Cash flow-based risk models</a> examine merchant purchasing and sales history patterns to discern their ability to acquire stock. To develop an effective cash flow-based risk model, FSPs should work with suppliers to isolate key products that can serve as proxies for determining overall turnover. This will provide an initial risk assessment that can then be calibrated. Once they have begun lending and refined the risk model, lenders can expand their scope to serve clients in other segments.
<h4>Are you preparing for long-term solutions?</h4>
When addressing the immediate need of getting liquidity to merchants now, it’s important to keep in mind this won’t be the last major disruption. Natural disasters, climate change, and the potential for future pandemics mean that practices put in place now can mitigate the profound challenges of the future. Digitizing supply networks and supporting the flows of information and funds they require will provide the transparency manufacturers need to better manage risk and create more adaptable supply chains. In better times, it will also bolster greater efficiencies and revenue growth. Opening data flows to lenders will further increase supply chain stability and growth.

Accion is working with manufacturers and lenders to build business models that extend supply chain finance to the last-mile merchant by structuring key partnerships, fully mapping supply chains, leveraging data flows to ensure robust risk assessment, designing solutions that meet the immediate needs of microentrepreneurs, and building client engagement. This approach ensures that the businesses at the end of the supply chain will have what they need to manage the ebbs and flows of consumer demand and can continue providing the essential goods their communities need.

How supply chain finance can help microentrepreneurs during a global pandemic

CD Finance

COVID-19: Economic response and resilience

Supply chain finance

China’s economy has experienced tremendous growth in recent years, with a booming micro, small, and medium enterprise (MSME) market. There are over 50 million MSMEs in China that collectively account for over 60% of China’s GDP and over 50% of the government’s tax income. These businesses create 80% of total employment in China’s urban areas.

Despite China’s overall economic growth, the need to foster full financial inclusion is still imperative. In 2010, 38 million MSMEs lacked access to formal financial services, forcing them to borrow informally from friends, family, and moneylenders.

As the global coronavirus pandemic threatens the livelihoods of millions around the world, our mission to give people the financial tools they need is more urgent than ever. The populations we serve are particularly vulnerable right now, without access to affordable healthcare, savings, or loans to stay solvent in a crisis. As the whole world faces this challenge, we have an opportunity to learn from each other and improve how we offer inclusive financial services to those who need them. We’re committed to sharing the knowledge we have to help our global community remain resilient.

While we aggregate and <a href="https://www.accion.org/responding-to-the-pandemic-guidance-for-financial-service-providers">share resources</a> across the globe, we’ve been working closely with two of our partners in China, <a href="http://grassfin.com/#/" target="_blank" rel="noopener noreferrer">Grassland Finance Limited</a> and <a href="https://www.cdfinance.com.cn/en/index" target="_blank" rel="noopener noreferrer">CD Finance</a>, and learning from their experience. Before the coronavirus pandemic spread across the globe, it hit China, devastating some areas and creating challenges for small businesses everywhere. After a two-month nationwide lockdown to contain the virus, businesses have reopened across China. Though China is very unique in many aspects, as other nations are facing this same contagion, we can learn from China’s experience.

We recently hosted a webinar for our partners with Ms. Hooi Koon Seah, COO of Grassland Finance Limited, and Mr. Dongwen Liu, CEO of CD Finance, and they shared their top lessons learned from navigating this crisis:
<h2>Protect the wellbeing of staff and clients</h2>
Above all else, prioritize the safety of employees and clients. By taking the virus seriously and taking immediate action, organizations can protect both their business and their clients. Institutions must comply with all official quarantine requirements and health protocols to protect employees and customers. Grassland and CD Finance adjusted their budgets as needed to increase the number of protective masks and cleaning supplies available to staff in regions that were hit harder by the virus. “Most of all, we want our staff to know that they belong and that the company holds their wellbeing as the highest priority,” said Ms. Seah.
<h2>Communication is critical</h2>
While in-person contact is restricted, maintaining a close connection with employees through other communication channels ensures that they feel secure and supported. Good communication channels should be in place for both employees and clients to stay connected while working remotely. In China, the top digital communication platforms were already widely adopted and became critical for both employees and clients to stay in touch. Our partners in China found that using these existing platforms helped them stay connected to clients. Mr. Liu notes, “It’s really important for our clients to recover their business in the coming days. What we can do is to have a close connection with them and ask what kind of support we can give to them and help them to recover their abilities gradually.”
<h2>Develop and execute emergency plans immediately</h2>
Companies need to identify possible worst-case situations and determine how they will respond. Now is the time for the financial services industry to take this crisis seriously and make every effort to support their staff and clients. The crisis moves fast, and its effects are far-reaching. By being prepared in advance and unafraid to act quickly and boldly, financial service providers can help their customers stay afloat through an unprecedented challenge.
<h2>Evaluate risk by sector and develop segment-specific response plans</h2>
Due to dramatically reduced cash flow during and after the lockdown, overdue loan payments increased greatly. Grassland learned in an impact assessment conducted with support from Accion that the crisis hit certain sectors harder than others and required a differentiated strategy for each. Depending on the sector and market, Grassland Finance prolonged the payment period, granted additional loans, or deferred loan repayments.

The agricultural sector faced unique challenges during the lockdown, which occurred during the planting season. Farmers faced challenges in securing the agricultural inputs they needed, like fertilizers. CD Finance was able to disburse $5 million USD in loans for farmers to buy fertilizers through a partnership with an agricultural inputs company.
<h2>Focus on building digital capacity</h2>
As this crisis unfolded, China had several factors working in its favor for business to continue. Digital payment and e-commerce platforms like WeChat Pay and Alipay are widely adopted, reducing the need for cash. With good infrastructure in place, including electricity, telecommunications networks, and internet access, many employees were already equipped to work remotely.

During the national lockdown, loan officers were unable to visit clients, and clients were unable to visit banks. Mobile communications and digital payment options were critical. Educating customers about digital payment platforms reduces dependence on cash. CD Finance relied on their existing digital platform to manage payments. Based on previous loan history and credit assessments, they were able to make quick determinations on whether or not to offer credit and loan extensions through this digital channel.

Every market will face unique difficulties and China has some aspects that enable it to act faster and more effectively than other countries. Yet, these insights can help as financial service providers guide their clients through this hard time. As we continue to face daunting challenges, know that there will be a time for recovery. “Although the disaster remains a serious challenge for both financial institutions and small businesses, we should stay remain optimistic. We believe that things are slowly getting better in China, and it will be in the rest of the world as well. This can be an opportunity where we show our worth and commitment to our mission,” says Ms. Seah. We know that Accion’s mission is more urgent than ever, and we will continue to share as many resources as we can to help underserved populations to endure the pandemic.

<a href="https://www.accion.org/responding-to-the-pandemic-guidance-for-financial-service-providers"><em>View</em><em> Accion's recommendations for financial service providers on protecting customers, employees, and business operations during the COVID-19 pandemic.</em></a>

&nbsp;

Five crucial insights from China for facing the pandemic

Grassland

The majority of Kenyans have mobile money accounts; their activity demonstrates digital financial services’ potential. Accion helps Kenyan innovators harness emerging technologies to create new financial services.

Though Nigeria’s government has set ambitious goals for financial inclusion, the majority of its people lack a formal bank account. Accion has worked in the country since 2007 to expand access to financial services.

<span style="font-weight: 400;">Micro, small, and medium enterprises (MSMEs) are the heartbeat of most African nations — the principal economic force behind growth and employment. However, these businesses face tremendous challenges keeping inventory stocked, managing logistics, and securing funding to grow. These challenges don’t just affect the business owners — they also impact the communities that rely on local shops and clinics for the goods and services that they need to live healthy and productive lives. This is where </span><a href="https://fieldintelligence.co/"><span style="font-weight: 400;">Field Intelligence</span></a><span style="font-weight: 400;"> comes in. </span>

<span style="font-weight: 400;">Field Intelligence, which operates in both Nigeria and Kenya, is focused on strengthening health systems in emerging markets. The startup uses data-driven supply chain management software and a highly efficient distribution service to help pharmacies operate more efficiently. In addition to distributing the products pharmacies need, Field Intelligence’s new product, Shelf Life,  also gives clients inventory management, delivery, and financing services for an affordable, weekly subscription fee. This model replaces conventional financing options, which don’t match the cash flows and inventory management cycles of pharmacies. Field Intelligence is our first </span><a href="https://www.forbes.com/sites/vikasraj/2019/11/20/platform-fintechs-are-cominghow-should-startups-respond/"><span style="font-weight: 400;">platform fintech (PlatFin)</span></a><span style="font-weight: 400;"> investment. It leverages proprietary Field Supply technology as the base to successfully launch Shelf Life. At its core, Shelf Life is a subscription service that fuses financing, digital supply chain management, and advanced analytics to allow retailers to offload their inventory planning, management, and ordering. It also lets users access preferred prices and pay for their inventory as they sell it. With this process, pharmacies have fewer missed sales, more cash on hand, lower operating costs, access to more stable pricing, less waste, and effective quality assurance. Shelf Life is currently available in four major cities, including Lagos, Abuja, Nairobi, and Mombasa, and the company is now looking to scale Shelf Life across Africa’s pharmaceutical market.</span>

<span style="font-weight: 400;">Field Intelligence is one of the most robust businesses that we have seen in market, with deep understanding and experience in the health space. We’re excited to invest in the company because they are:</span>

<b>Providing alternative and affordable financing options for MSME pharmacies: </b><span style="font-weight: 400;">By operating in both Nigeria and Kenya, Field Intelligence is tapping into two of the most vibrant economies in Africa. Combined, these two countries are home to around 240 million people. Pharmacies in these markets have traditionally relied on supplier-based financing to help fund their inventory needs. Many times, this financing is inflexible, unreliable, and requires pharmacies to purchase more inventory than needed, resulting in expired stock. Shelf Life turns a very expensive and complicated process into a manageable subscription service that pharmacies can use to decrease the cost of financing while reaping the benefits of not having to pay for inventory upfront. This helps to free up cash for pharmacies while simultaneously bringing the financing cost down. As a result, pharmacies can ensure that they have the necessary supply to meet customer demand, reinvest in their businesses, and expand their operations.</span>

<b>Establishing a PlatFin that can leverage data and efficiencies in new areas: </b><span style="font-weight: 400;">Field Intelligence has been able to build confidence with clients, access difficult-to-obtain data on their operations, and engage with them in a mutually beneficial way. This has helped the company build a comprehensive offering spanning financing, inventory management, and logistics. We’re excited about how Field Intelligence can use its platform to distribute additional products and services and how the company can leverage the infrastructure they built in other countries, regions, or verticals. The Field Intelligence team sees the opportunity to further provide efficiencies in financing through alternative data and has the skills to do so. </span>

<b>Using alternative data and business processes to better underwrite and manage risk:</b><span style="font-weight: 400;"> Field Intelligence has begun to design an underwriting process that considers many data points before onboarding a client.</span> <span style="font-weight: 400;">Over time, the team has driven down defaults while increasing client retention. By gaining deeper insights into the pharmaceutical space, Field Intelligence is  making data a competitive advantage. We’re excited by Field Intelligence’s ownership and use of data, both to create value for pharmacies and to enable robust relationships with their supplier partners. In the future, we believe their data science capabilities will make them more deeply entrenched in the markets where they operate and provide increased value to their customers and partners.</span>

<b>Communities gain access to safe, reliable, and consistent health inputs: </b><span style="font-weight: 400;">The fastest-growing parts of the world rely on some of the weakest health systems. In Africa specifically, small, private pharmacies and drug shops provide the majority of frontline care for 1.2 billion people. Due to a lack of financing and inventory mismanagement, 60 percent of retailers regularly run out of essential products, and 10 percent of inventory expires before it’s used, according to Field Intelligence’s customer research. These inefficiencies make it more expensive for patients to get the care they need. Through data, delivery, and financing, Field Intelligence helps to ensure the right products make it to the right shelves at the right time, increasing access to healthcare and products to those who need it most.</span>

<span style="font-weight: 400;">We’re extremely excited to have <a href="https://www.accion.org/investors-back-field-intelligence-on-transforming-healthcare-supply-chain">Field Intelligence in our portfolio</a> and look forward to supporting the team not only in Nigeria and Kenya but as they grow to other markets as well. </span>

This company is making healthcare more accessible in emerging markets

Field Intelligence

Investors

Accion Venture Lab

Small businesses are crucial for unlocking job growth and sustainable development, but they can’t succeed if they aren’t able to keep their shelves stocked. Micro, small, and medium enterprises (MSMEs) face a $5.2 trillion funding gap, according to <a href="https://www.ifc.org/wps/wcm/connect/03522e90-a13d-4a02-87cd-9ee9a297b311/121264-WP-PUBLIC-MSMEReportFINAL.pdf?MOD=AJPERES&amp;CVID=m5SwAQA">IFC analysis.</a> This gap means business owners struggle to stock the supplies they need, which makes it impossible to serve more customers and grow a business. In developing countries alone, there are <a href="http://documents.worldbank.org/curated/en/653831510568517947/pdf/121264-WP-PUBLIC-MSMEReportFINAL.pdf">141 million</a> MSMEs. If they had the opportunity to grow, imagine what that would mean for families, for communities, for economies around the world.

It turns out there is a solution that could unlock more inclusive growth.  Until recently, <a href="https://www.accion.org/series/supply-chain-finance">supply chain finance (SCF)</a> has been used only by the largest firms and their primary buyers and suppliers. Establishing <a href="https://www.accion.org/the-supply-chain-finance-opportunity">collaborative partnerships that leverage digital data</a> can bring the benefits of this solution to smaller businesses. Many firms, including members of the <a href="https://iccwbo.org/publication/standard-definitions-techniques-supply-chain-finance/">International Chamber of Commerce</a> and a partnership between <a href="https://btca-prod.s3.amazonaws.com/documents/332/english_attachments/Driving_sales_through_digital_working_capital_loans_for_small_merchants.pdf?1528522098">Mastercard, Kenya Commercial Bank, and Unilever</a>, are already pursuing the supply chain finance opportunity. The excitement is palpable from banks, fintechs, and corporations alike, and it is clear that the time and environment are ripe for this solution.

Through SCF, small merchants that tend to be underserved by traditional lenders can access high-quality, low-risk financing. This gives them the flexibility to order supplies as needed and take advantage of opportunities to grow. But everyone else in the supply chain also benefits from the merchants’ success: fast-moving consumer goods companies (FMCGs), agribusinesses, distributors, and retailers along the chain could see higher sales, faster turnover, and increased net profit through greater efficiency and lower costs of credit. And financial service providers (FSPs) have a low-risk way to build relationships with untapped micro and small business market segments.
<h2>Why hasn’t supply chain finance reached MSMEs?</h2>
Despite the benefits for all parties, no one along the supply chain has had a straightforward path for helping MSMEs benefit from supply chain finance. Fast-moving consumer goods companies don’t interact with end merchants directly, so they aren’t well-positioned to extend financing to MSMEs. Corporate efforts to work through their banks to provide funding are complicated because banks that serve the large corporations do not usually serve small businesses. Financial institutions that do typically work with MSMEs face difficulties in lending because credit histories and collateral are scarce. While these institutions could benefit from supply chain data to assess credit risk, they don’t always have relationships with large corporates to facilitate supply chain financing. Distributors face challenges in the collection and reconciliation of cash. Suppliers sometimes resort to offering credit to merchants, but this subjects suppliers to risks associated with collecting cash from merchants and managing delinquency.

For a solution to work, it will need to remove the barriers of working in silos to make the process run smoothly and unlock the knowledge to provide supply chain financing. A collaborative — and digital — approach will make SCF beneficial to all.
<h2>Eight key areas to enable supply chain finance</h2>
Bringing supply chain finance to small and micro businesses will require a holistic approach. It demands a robust business model and strong partnerships, which address a range of interdependent activities, as illustrated below:

<img class="wp-image-19901 size-full alignnone" src="http://content.accion.org/wp-content/uploads/2019/10/scf_graphic.png" alt="Supply chain finance model" width="974" height="704" />
<ul>
 	<li><strong>Data &amp; Risk Analytics: </strong>SCF leverages trade flow data among merchants, suppliers, and end customers. This data includes inventory purchases, goods sold, and payments made. It can be leveraged by FSPs to evaluate the creditworthiness of small businesses, which often lack credit histories.</li>
 	<li><strong>Lending: </strong>By working closely with merchants, distributors, and suppliers, financial service providers gain increased visibility into stock and turnover so they can provide the right amount of working capital. Suppliers will no longer need to extend credit to the merchants they work with, which frees up funds in the supply chain.</li>
 	<li><strong>Education of Chain Participants: </strong>MSMEs have limited exposure to SCF and require dedicated education programs to explain the value proposition, learn how it works, and, most importantly, build trust in a new solution.</li>
 	<li><strong>Merchant/Distributor Acquisition and On-boarding: </strong>A successful SCF solution needs to have a lot of merchants and distributors on board. Suppliers can leverage their existing distribution networks, and FMCGs can actively engage with merchants who demonstrate the potential for achieving the highest sales. Innovative business models should leverage existing networks and automation to achieve scale.</li>
 	<li><strong>Payments: </strong>SCF solutions need to facilitate easier payments for supply chains to operate smoothly. Payment solutions need to expedite the flow of payments among buyers and sellers while easing the disbursal of loans and their repayment through multiple channels. Digitizing these payments unlocks data for critical loan analytics.</li>
 	<li><strong>Account and Collections Management: </strong>Underlying SCF is a need for an account to facilitate distributions and repayments with MSMEs. Managing this account and the collections process requires digital methods to achieve the level of scale needed<strong>.</strong></li>
 	<li><strong>Orders and Invoicing: </strong>Accurate and valid orders and invoices create high-quality data that makes SCF possible. Mobile applications are simplifying this process and expanding accessibility to the smallest firms.</li>
 	<li><strong>Stock and Distribution Management:</strong> The logging of stock and inventory has cascading positive effects on FMCGs, distributors, and suppliers who can orient their operations to cater to the needs of merchants and the demand of end consumers. It’s also crucial for extending SCF to those with no credit history.</li>
</ul>
Digital innovation allows this comprehensive approach to work. Digital platforms facilitate coordinated decision-making among multiple stakeholders, record movements of goods in real-time, and reduce the risks associated with cash. <a href="https://sokowatch.com/">Sokowatch</a> and <a href="https://ke.kcbgroup.com/jaza-duka">Jaza Duka</a> in East Africa are promising examples of digital partnership-based models. The business case for these models is clear, as merchants that have access to SCF experience a <a href="https://www.ifc.org/wps/wcm/connect/45f62b14-ef6b-4c89-9403-511dd2291d39/Credit+to+Merchants.pdf?MOD=AJPERES&amp;CVID=mCrv7gV">15-25 percent increase in inventory turnover</a> — which translates to higher sales for corporations. Based on our analysis, a corporation that sells 20 percent of its products to MSMEs would see a 2-3 percent increase in overall revenue for the region, assuming only half of the merchants they serve have access to SCF.

At Accion, we’ve been researching, investing in, and advising on supply chain finance for the last few years. We’re eager to ensure this solution reaches its potential for driving financial inclusion among small businesses. Whether you are an FMCG, FSP, distributor, wholesaler, or supplier, if you’re interested in working with MSMEs in emerging markets, <a href="mailto:glassupport@accion.org">reach out to us</a>.

Stay tuned for our ongoing <a href="https://www.accion.org/series/supply-chain-finance">insights on supply chain finance</a>.

<em>Arisha Salman also contributed to this article.</em>

How banks, fintechs, and corporations can expand supply chain finance

Business Leader

<h3><em>Executive Summary</em></h3>
<em>Supply chain finance (SCF) offers high-quality, low-risk financing to the small merchants that tend to be underserved by traditional lenders. These microentrepreneurs often lack the credit data traditional lenders need and are seen as too costly to serve at scale. SCF leverages data generated by businesses when they buy from suppliers and sell to customers, using this information to evaluate the creditworthiness of small merchants. It is a useful tool to expand financial inclusion for the 141 million microenterprises in developing countries and to promote inclusive economic growth globally.  </em>

<em>SCF benefits merchants with timely access to credit; it also benefits merchants, suppliers, and fast-moving consumer goods companies (FMCGs) with higher sales, faster turnover, and more efficient operations. Lenders benefit as well: SCF reduces risk and costs, allowing financial service providers (FSPs) to cater to new markets.</em>

<em>We believe that platform-based models, those that consolidate data produced by the movement of money and goods in the supply chain, are best suited to deliver SCF. Platform-based SCF models can satisfy the interdependent needs of multiple stakeholders simultaneously and facilitate coordinated decision-making. FSPs and FMCGs are well positioned to develop SCF platforms. </em>

<em>This brief discusses how SCF platforms can help small merchants, FMCGs, suppliers, and FSPs realize their economic potential. For institutions interested in developing an SCF solution, access our recent in-depth guide and playbook, <a href="https://www.accion.org/how-digitized-supply-chain-finance-can-help-small-merchants-grow/"><strong>How digitized supply chain finance can help small merchants grow.</strong></a></em>

&nbsp;

Small merchants such as grocery shops, corner stores, and other micro-retailers employ <a href="https://www.smefinanceforum.org/sites/default/files/analysis%20note.pdf">more than half</a> of the world’s labor force and contribute significantly to global GDP. These merchants rely on personal savings, family and friends, and sometimes personal credit to meet cash flow needs, but collectively these businesses face an <a href="https://www.smefinanceforum.org/sites/default/files/Data%20Sites%20downloads/MSME%20Report.pdf">$8.1 trillion credit gap</a>, creating a significant barrier to inclusive growth.  This global credit gap is almost entirely a supply-side problem, as micro, small, and medium entrepreneurs’ (MSMEs’) demand for financing is significant. Serving this market is challenging for lenders. Small merchants have little to no business documentation, are often unable to provide high-quality collateral, operate primarily in cash, and require loan sizes that are not always worth the operational cost of serving them, making it difficult to assess credit risk and sustainably offer products that meet small merchants’ needs.

By addressing this problem and helping MSMEs obtain the financing they need when they need it, we help microentrepreneurs restock their shelves, expand operations, and hire more employees. By addressing this credit gap, we can help more people around the world realize their economic potential.

The supply chain finance opportunity

Citi Foundation

<em>This guide is for institutions interested in developing a supply chain finance solution. For those interested in better understanding how supply chain finance can help small merchants, fast moving consumer goods companies (FMCGs), suppliers, and financial service providers (FSPs) realize their economic potential, access our report, the  <a href="https://www.accion.org/the-supply-chain-finance-opportunity">Supply Chain Finance Opportunity.</a></em>
<h3>Executive Summary</h3>
Supply chain finance (SCF) is the use of financing mechanisms that can optimize the management of liquidity tied up in supply chain processes. SCF solutions have long been offered by big banks to large corporations, such as fast moving consumer goods (FMCG) companies and manufacturers, to support trade.

However, today SCF techniques are being transformed by technology, expanding the addressable market to include micro, small, and medium size enterprises. Improved connectivity, increasingly available customer data, and new technologies lower the cost and make it possible to extend digital SCF solutions to the small merchants at the end of global supply chains.

By tying credit to the flow of goods, SCF facilitates more efficient business operations and cash flow management for all actors along the chain – resulting in higher sales, faster turnover – and ultimately, increased profitability and growth.

A platform-based model that satisfies the interdependent needs of multiple stakeholders simultaneously using digital innovations is well suited to provide SCF solutions. Platform models consolidate digitized data produced by the flows of goods and money throughout the supply chain, building trust and facilitating coordinated decision-making. The net effect is to provide deeper insights into merchant and consumer behavior.

We believe independent third-party technology providers are best positioned to mediate between multiple stakeholders and take the lead in operating a flexible and scalable SCF solution. We also see a major opportunity, particularly for FSPs and FMCGs, to lay the groundwork for such a platform approach to succeed.  A digitized SCF solution will not only help merchants to grow their business but will drive meaningful financial inclusion for the millions left un- or underserved by the status quo. With nearly 141 million microenterprises in developing countries, digitized supply chain finance represents a scalable solution to drive greater sales through the supply chain, which will propel inclusive growth.

<img class="aligncenter" src="http://content.accion.org/wp-content/uploads/2018/09/Citi-Foundation.png" width="240" height="162" />

<em>Accion would like to thank the Citi Foundation for supporting this report. The Citi Foundation works to promote economic progress and improve the lives of people in low-income communities around the world. The Citi Foundation invests in efforts that increase financial inclusion, catalyze job opportunities for youth, and reimagine approaches to building economically vibrant cities.</em>

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How digitized supply chain finance can help small merchants grow

Tienda Pago

<p class="graf graf--p">In emerging markets, small merchants often struggle to keep their shelves stocked. Since many of these merchants aren’t being served well by the traditional banking sector, they can’t use credit to stock up on enough inventory to meet demand. The challenges small businesses face are a massive global problem — nearly 300 million micro and small enterprises worldwide face a <a class="markup--anchor markup--p-anchor" href="http://www.worldbank.org/en/topic/smefinance" target="_blank" rel="noopener noreferrer">combined $5.2 trillion credit gap</a>. We recently explored the idea of <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/small-businesses-play-a-huge-role-in-communities-but-they-need-help-31665eac1ef1" target="_blank" rel="noopener noreferrer">supply chain finance (SCF) as a tool to drive financial inclusion</a> for these businesses.</p>
<p class="graf graf--p">Emerging technology platforms that allow substantial data collection in the supply chain make supply chain finance solutions possible. This data can enable small merchants to manage their cash flows and business inventory better, and it can unlock funding for them, even if they don’t have a robust formal financial history. Just-in-time credit, which is a line of credit offered to small merchants when they place orders with their suppliers, can have benefits throughout the supply chain. For example, Heineken Mexico distributes half of its volume through small merchants across the country. They currently have financing agreements with their larger wholesalers, such as Walmart, which allow for payment to be received in 60–90 days from delivery, whereas most of their small merchants are obliged to pay the same day in cash. If Heineken could partner with a financial service provider to offer just-in-time finance to these small merchants, they might be able to ensure better sales as they would no longer be competing for whatever cash the shop has on hand that day.</p>
<p id="e678" class="graf graf--p graf-after--p">Supply chain finance involving the last mile distributor and a small merchant is classified as downstream finance. The graphic below illustrates how downstream supply chain finance works. Since many small merchants lack a formal credit profile, a financial service provider reviews the merchant’s supply chain transactions, such as order and payment history, and then agrees to pay the supplier on behalf of the merchant. The merchant will repay the provider the invoice amount and any finance charges over the term per the agreement. In this scenario, the financial institution mitigates risk by ensuring that the funds are used to purchase the specific inventory items.</p>
<p class="graf graf--p graf-after--p"><img class="progressiveMedia-image js-progressiveMedia-image" src="https://cdn-images-1.medium.com/max/1440/1*6lVnLOKEEQR84PkaFb0h4w.png" /></p>
<p id="3087" class="graf graf--p graf-after--figure">Increasing penetration of smartphones and strong data networks in emerging markets make it easier than ever for businesses to place orders, access financial services, and make payments. Improvements in technology and connectivity also mean that the downstream supply chain finance model is now within reach, even for small merchants. While financial service providers have a valuable opportunity to serve this market, their model needs to be data-enabled and technology-driven to scale sufficiently and make a meaningful dent in the massive funding gap for small businesses. An enabling ecosystem for developing downstream supply chain finance products should include:</p>

<ul class="postList">
 	<li class="graf graf--li">Digital payments from merchant to supplier for inventory delivered.</li>
 	<li class="graf graf--li">Digital invoice management by suppliers and merchants.</li>
 	<li class="graf graf--li">Digital inventory management systems, allowing transparency of downstream inventory levels to the supplier.</li>
 	<li class="graf graf--li">The ability for the supplier or merchant to quickly and easily apply for credit against its receivables or invoices due.</li>
</ul>
<p class="graf graf--p">It’s also critical that the solutions are developed with the right actors in mind. Based on the size of the suppliers, distributors, and merchants, different types of financial service providers may be involved. Microfinance entities would be most familiar with micro and small merchants, whereas larger commercial banks will have relationships with large fast-moving consumer goods (FMCG) suppliers and distributors. The graphic below lists the ecosystem actors necessary for downstream supply chain finance to work and depicts the flows of goods and financing across the supply chain.</p>
<p id="28c0" class="graf graf--p graf-after--p">Each actor will have their role to play and accrue benefits from a data-driven, micro-enterprise supply chain finance model for financial inclusion.</p>
<p class="graf graf--p graf-after--p"><img class="progressiveMedia-image js-progressiveMedia-image" src="https://cdn-images-1.medium.com/max/1440/1*DKsH9TiwvSsuNbnjoTOiUw.png" /></p>
<p id="44f0" class="graf graf--p graf-after--figure">Just-in-time financing could help small merchants manage their businesses better and improve their lives. Smart solutions will take into account the interests of the involved stakeholders so that the benefits outweigh the risks for all. Our next piece in this supply chain finance series will dive deeper into the business case for an integrated solution that delivers value to each of these actors.</p>

How supply chain data can unlock credit for small businesses

<p class="graf graf--p">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 <a class="markup--anchor markup--p-anchor" href="https://www.ifc.org/wps/wcm/connect/9ae1dd80495860d6a482b519583b6d16/MSME-CI-AnalysisNote.pdf?MOD=AJPERES" target="_blank" rel="noopener noreferrer">more than a third</a> of the world’s labor force.</p>
<p class="graf graf--p">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 <a class="markup--anchor markup--p-anchor" href="http://www.worldbank.org/en/topic/smefinance" target="_blank" rel="noopener noreferrer">70 percent of the 365–445 million micro, small, and medium enterprises (MSMEs</a>) in emerging markets lack access to credit, resulting in a financing gap <a class="markup--anchor markup--p-anchor" href="https://www.smefinanceforum.org/sites/default/files/Data%20Sites%20downloads/MSME%20Report.pdf" target="_blank" rel="noopener noreferrer">of $5.2 trillion</a>.</p>
<p class="graf graf--p">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.</p>

<h4 class="graf graf--h4"><strong class="markup--strong markup--h4-strong">Time to scale up supply chain finance solutions for small merchants</strong></h4>
<p class="graf graf--p">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.</p>
<p class="graf graf--p"><a class="markup--anchor markup--p-anchor" href="http://www.accaglobal.com/ab111" target="_blank" rel="noopener noreferrer">Supply chain finance</a> (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.</p>

<h4 class="graf graf--h4"><strong class="markup--strong markup--h4-strong">Merchant-centric services can alleviate critical pain points for merchants and ecosystem</strong></h4>
<p class="graf graf--p">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.</p>
<p class="graf graf--p">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 ‘<a class="markup--anchor markup--p-anchor" href="https://www.youtube.com/watch?v=yhdTyqjUMEI&amp;feature=youtu.be" target="_blank" rel="noopener noreferrer">footprint</a>’ to show their creditworthiness. Organizations such as <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/dan-cohen-of-tienda-pago-d57c77c53fe8" target="_blank" rel="noopener noreferrer">Tienda Pago in Mexico and Peru</a> and <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/using-fintech-to-support-small-businesses-in-nigeria-f7dff3d6ff23" target="_blank" rel="noopener noreferrer">Lydia in Nigeria</a> 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.</p>

<h4 class="graf graf--h4"><strong class="markup--strong markup--h4-strong">How can we help merchants buy better, sell better, and run better?</strong></h4>
<p class="graf graf--p">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.<img class="graf-image" src="https://cdn-images-1.medium.com/max/1080/1*ek-ocLutQGYiy673lPDCMw.png" /></p>
<p class="graf graf--p">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.</p>

Small businesses play a huge role in communities, but they need help

Lidya