[PYMNTS] Embedded Finance Narrows The Gap Between Brazil's Small Business And Capital
Underbanked small businesses around the globe have seen technology come to the rescue. FinTechs continue to step onto the scene to provide alternative financial services or digital-first ways of accessing traditional bank offerings. Coupled with the ubiquity of smartphones, small business owners in bank branch deserts are no longer left without access to vital financial services.
Yet the pervasiveness of underbanked businesses remains. In Brazil, 2020 research by Instituto Locomotiva discovered one in three individuals lacks access to a bank account. For the entrepreneurs operating small and medium-sized businesses (SMBs), that created barriers to accessing capital from sources other than friends and family.
According to Vinícius Cibim, co-founder and chief financial officer of Brazil-based embedded finance FinTech Dinie, the country has made significant progress in recent years to drive economic inclusion through FinServ innovation. Yet filling the void of small business finance will require more than building more bank branches.
In today’s digital-first world, he told PYMNTS, SMB financing must meet businesses where they are.
Payments Modernization Sets The Stage
As is the story with so many other markets across Latin America and around the globe, Brazil’s path towards FinTech innovation was largely accelerated by regulatory efforts, with an initial focus on payments digitization.
“From my perspective, that was very important to make way for other financial solutions coming after,” Cibim said of the central bank’s support for flexible financial services regulation. “For example, today in Brazil, it’s very common for you to have a digital wallet.”
That payments modernization push helped small businesses become more tech-savvy but did not directly impact their access to financing. Even as the payments landscape progressed, Cibim said traditional banks continue to rely on outdated and legacy workflows to underwrite and finance SMBs - a strategy, he said, that is not only harmful to businesses in the form of limited funding and more expensive contracts but also can harm the banks too through higher default rates.
Where payments modernization has had a meaningful impact on the SMB finance landscape, however, is in the concept of embedded services.
“In the future, financial solutions are going to be distributed instead of having physical branches where a company has to go in order to access solutions,” said Cibim, noting the parallels with payments innovation. “You no longer had to get out of a website in order to make a bank payment, like a long time ago. It’s exactly the same thing: you don't have to get out of your operation, your core business, in order to access credit.”
Meeting SMBs Where They Are
Embedded finance is a significant opportunity to meet small businesses on the strategic platforms they already use to run their business. For Dinie, the “sweet spot” is eCommerce portals and marketplaces, whether they be the portals through which small merchants sell their goods or the platforms upon which they procure goods themselves.
Other use cases for Dinie’s embedded SMB financing solution have emerged, however. Payment portals are a particularly strong focus, noted Cibim, who added that franchises have also surfaced as a surprisingly applicable use case for this business model.
But embedding access to finance for small businesses on the technology platforms they already use is only one piece of the puzzle to solving the SME funding gap.
Cibim highlighted the opportunity for embedded finance FinTechs and the third-party platforms they partner with to embrace a data-sharing model that can further lower barriers — not just to capital but to affordable and tailored financing products.
“What’s the credit risk? What’s the exact product that that specific company needs?” he said. “That’s very important, because if you don’t ... , if you offer a different product without ideal conditions for them, you end up not having the best outcome in the relationship."
Bank branch deserts have long been a headache for business owners across the globe. Yet as FinTech innovation accelerates — and as regulators introduce efforts to encourage that evolution — SMBs are finding that having more bank branches is not necessarily the solution to their capital challenges.
Rather, by leapfrogging from the bank branch to the eCommerce and other portals SMBs embrace today, small business funding can shorten the gap between capital and business.