Small businesses in emerging economies are notoriously underfinanced. Despite making up over 99.5% of the economy in Latin America, SMEs face a financing gap in the trillions of dollars. For example, up to 78% of small businesses in Argentina and 45% in Peru struggle to grow because of financial constraints. Numerous articles and institutional white papers point to the lack of trust between banks and SMEs as a major cause of this financing gap, even before the current COVID-19 crisis. Banks simply do not know how to accurately calculate small business risk, especially in volatile economies and times in Latin America, so they offer high-interest rates or pass on providing credit altogether.
Yet as Fintech startups and banks venture further into SME finance opportunities in Latin America, they are running into the inverse problem: building trust with small business owners.
While the millions of SMEs in the region present an enormous opportunity for B2B Fintechs who can solve their financing challenges, these small businesses tend to be traditional, non-technical, and disillusioned with financial institutions. On the other hand, organizations that can build trust with SMEs may find themselves with lifelong partners and customers; Latin American businesses tend to be loyal to service providers who treat them well.
Here is a look at how fintechs that wish to target SMEs in Latin America can build trust and improve services to this business sector.
Educate potential SME partners to build financial knowledge
Many SMEs have little to no knowledge of existing financing options outside of traditional banks, meaning that most businesses will not look beyond banking services, nor know how to compare alternatives.
An EU Report finds that SMEs are not likely to shop around for financing options; they prioritize time, convenience, and effort in choosing potential funding choices. To become a trusted partner to SMEs, fintechs need to focus on teaching these companies not only about financing alternatives, but also about blending these options to support their operations in the long term.
SMEs that understand and depend on more than one source of financing can be less vulnerable than their counterparts. Therefore, Fintech startups looking to finance small businesses must take the time not only to explain their own solution but also to mentor these business owners through all of their options. This mentorship can take the form of digital content, such as videos, infographics, or blogs, or hands-on consulting with each client. Outcomes for both financial institutions and SMEs will improve as these companies can make more informed decisions about their financing options.
Make pricing information standardized and transparent
One of the major challenges facing SME financing is the lack of transparency between businesses and banks, especially in Latin America. Small businesses often fear regulation and prefer to keep information private; meanwhile, Latin American banks appear to be a black box, with few clear details about costs and interest rates available to their customers. These barriers break down trust between SMEs and financial institutions and make it nearly impossible to cross-sell or add on services.
Fintechs looking to work with SMEs can break down those walls by providing fully-transparent pricing that can be understood by their partners. Explain in detail how interest rates are calculated and which factors are taken into account. This point is especially relevant in Latin America, where most credit is calculated based on negative factors – late payments or defaults – rather than positive behavior. If business owners can see how specific actions impact their finances, then they are more likely to trust a startup as a reliable and fair partner.
Provide services rapidly and consistently
SMEs frequently struggle to maintain the liquidity they need to stay afloat. Business owners do not have time now to wait three to five business days, or even up to two weeks in Latin America, to hear back from a potential lender. Bank loans can take over two weeks to process, and provide little information about the decision whether or not to grant the credit.
Fintech startups can build trust with SMEs by creating long-term financing relationships that are consistently available when these small businesses need it most. While it may not always be possible to provide an immediate yes to the companies in need, it is important to have software or systems in place that help customers get access to services quickly and regularly. This speed and reliability will help a startup gain credibility as a partner that cares about its customers, building trust with potential SME clients.
As a startup in Latin America, it can be challenging to build a relationship of trust with SME clients who have become disillusioned with the region’s financing options. However, through careful education and business transparency, fintech startups can become trusted service providers that offer new options. Trust is essential to financial relationships in any region; in Latin America, fintechs working with SMEs should focus on helping small businesses understand and access the services they need to guarantee a successful partnership.
Andrés Abumohor, Co-Founder and COO of OmniBnk, a neobank that provides financial services to small- and medium-sized businesses in Latin America.