March 29, 2023 l  By Ravi Aurora

In the post-COVID world, we are seeing a sharp divergence in the road to recovery, both within and across nations. Wealthier nations and well-endowed institutions are back to business as usual, while nations under stress find themselves less able to manage and recover from crises. This correlates to the challenges happening at the local level, where small businesses and lower-income communities across the world still struggle to find their footing.

Today, nearly 70% of adults, or 3.8 billion people worldwide, now have access to a bank or mobile money account. However, access has not always translated into better financial health for those who need it. Too many people who are considered “financially included” struggle to manage their financial obligations or withstand economic shocks. To improve financial resilience and outcomes within communities, regulators must embed action into policies that work to contribute to the overall financial health of their populations. 

Each country will have a slightly different approach for building their population’s financial health and resilience. These approaches should consider the local context, social dynamics, government capacity, and availability of resources, talent, and funding. However, there are certain universal steps that countries can take to achieve impact at scale. Below, we suggest three strategic imperatives policymakers can implement to strengthen financial health and resilience.

1. Enabling MSMEs with digital tools
The pandemic tested Micro-, Small, and Medium-sized Enterprises (MSMEs), bringing many small businesses to the brink of collapse. Those that survived found new ways to adapt. Most notably, these businesses accelerated shifts to digital platforms and found new distribution channels. A report from the Mastercard Economics Institute that examined MSMEs in 19 markets around the world found that e-commerce solutions closed sales gaps between small and medium businesses and larger competitors.

The report revealed that sales at small and midsize businesses (SMBs) lagged behind those of larger companies by up to 20 percentage points at the height of the COVID pandemic. As spending recovered in 2021, total sales at SMBs rose 4.5% through August 2021 year-to-date compared to the same period in 2020. For e-commerce sales, that jump was more than 31%—despite the fact that many of these small businesses ventured online for the first time in 2020. In Latin America countries, the number of businesses going online for the first time went above 200% in 2020. The differences in success for traditional versus e-commerce sales revealed that, when MSMEs have the tools to navigate a digital world, they adapt, succeed, and enhance financial resilience.

How much further can small businesses grow when public and private partners provide MSMEs with training as well as tools? Mastercard has invested considerable resources in finding out. In India, for example, we helped launch the Digital Saksham Initiative, a capacity building initiative in partnership with the Confederation of Indian Industry and the National Institute of Small & Medium Enterprises under the Ministry of MSME. The program targets key supply chains to deliver digital know-how to the last-mile entrepreneur. To date, we have empowered 35,000 MSMEs, and aim to spread financial literacy to 300,000 MSMEs in the coming years. We believe that increased financial literacy will help these MSMEs and rural communities move up the digital value chain.

2. Boosting MSME access to credit
Despite progress toward financial inclusion, access to credit remains limited in many nations. For example, a new study by McKinsey and the Federation of Indian Chambers of Commerce and Industry finds that India’s retail credit is only 14% of GDP, compared to 30% in Brazil and about 60% in China. Rural communities and MSMEs need access to credit to thrive, but financial institutions fail to deliver adequate funds when using traditional risk approaches. 

Progress in this area requires companies and governments to create new digital solutions. The “digital footprints” MSMEs create using new technology solutions can serve as a proxy for credit history in assessing risk and underwriting loans. 

As an example of how this can look, Mastercard partnered in 2021 with HDFC Bank, the U.S. Agency for International Development, and the U.S. International Development Finance Corporation to launch a $100 million credit facility. Its goal is to promote and encourage small businesses in India to digitize. The credit facility extends working capital loans to small businesses that need financing to support digitization and recovery from the effects of the pandemic, with an imperative that 50% of the new small business borrowers be women entrepreneurs. 

3. Ensuring trust in the digital and financial ecosystem
For programs to succeed, MSMEs must have trust in the digital tools and in the processes put in place by financial service providers and banking institutions. MSMEs will not buy into the digital economy without trust in the security of tools and transactions.

Securing this trust begins with placing new emphasis on cybersecurity, privacy, and data responsibility. Data privacy and security must be embedded into every effort to promote digital and financial inclusion. This becomes more important as more people enter the digital economy, increasing the volume and value of transactions and thereby magnifying the potential for cyber risks.

As a case in point, the Indo-Pacific region accounts for more than 60% of global Internet users and provides over 35% of global GDP. By 2040, it will account for 50% of GDP, and the digital economy will drive much of this commerce and investment. Cybercriminals are aware of this shift. 2022 marked the second year that the Indo-Pacific was the “most attacked region,” accounting for 31% of all cybersecurity incidents. The majority of these attacks were basic phishing and ransomware. New digital entrants and small businesses are most at risk of these attacks because they lack the tools, knowhow, and financial resilience to protect their financial information.

Cyberhygiene education can stymie the success of cyberattacks. The Digital Saksham Initiative mentioned above puts cybersecurity at the center of Mastercard’s work to promote digital literacy among MSMEs. However, all members of the digital economy have a responsibility to prioritize security in their investments and rulemaking.

A place to start the journey to financial resilience
These three strategic imperatives are not an exhaustive list. They are simply a starting point for all financial stakeholders to accelerate their efforts, build partnerships, and bring together the required expertise to strengthen financial resilience and health within the digital economy.