Digitalisation central to sustainable SME growth in MENA: Mastercard

Tribune News Network Doha A building materials store in Sub-Saharan Africa wants to expand into another city, while an aggregator of grocery stores in one...

Tribune News NetworkDoha A building materials store in Sub-Saharan Africa wants to expand into another city, while an aggregator of grocery stores in one of the Gulf Cooperation Council (GCC) countries and a tailoring boutique in Egypt are seeking affordable e-commerce solutions. These represent the small and medium enterprise (SME) sector, which encompasses 90 percent of businesses1, creates 7 out of 10 jobs in emerging markets2 and 10 percent to 40 percent of all formal employment in the Middle East and North Africa (MENA) region.Keenly aware of the enabling role that SMEs across sectors play in economic growth, governments, policymakers, and businesses are developing ecosystems that empower them to succeed.Globally, as in the Middle East and Africa (MEA) region, the dependence on cash and the lack of access to credit are some of the key factors holding back small businesses from growing to their full potential. How to pay, and get paid, while having enough credit to grow the business – these are universal concerns.Empowering an SME starts with understanding the challenges it faces, in each region, country, and sector. To understand regional SMEs better, Mastercard conducted a wide-ranging survey to gauge the business confidence as well as the needs of these companies.The Mastercard MEA SME Confidence Index 2021 reveals that while SMEs in MEA are generally confident about business growth in the post-COVID recovery period, digitalisation is one of the biggest opportunities as well as a challenge.For SME digitalisation to reach its full potential, the nature of doing business needs to be understood. SMEs are late entrants in adopting digitalisation for many reasons. The key one is a preference for trading in cash in SMEs, particularly those that are part of the informal sector.The absence of technology solutions applicable to the specific business sector is also a hindrance.This is broadly in line with global findings. According to the Organization for Economic Cooperation and Development (OECD), up to 70 percent of SMEs globally have intensified their use of digital technologies in the wake of COVID-19. However, the gaps in SME digital adoption have not been filled. The challenges include access to infrastructure, lack of data culture and digital awareness, and financing gaps for transformation costs, among others. The International Finance Corporation (IFC) estimates the SME financing gap at $5.2 trillion every year in developing countries.The diversity of needs – as is evident in the Index – mandates a diversity of solutions, whether they are based on QR codes or on building in credit card capabilities for a natural migration to electronic payments. A digitalised SME has the capability of reaching a large universe of customers and suppliers quickly, safely, and efficiently. Never was this more evident than it is now when consumers have made clear their preference for contactless digital payments and traditional supply chains have been disrupted.To support SME growth, in April 2020, Mastercard announced its $250 million pledge to micro and small businesses across the globe in financial, technology, product, and services support over the next five years. Mastercard has made a global commitment to bring 50 million MSMEs (micro, small, and medium enterprises) including 25 million women entrepreneurs, into the digital economy by 2025. Of these, as many as 10 million businesses are in MEA.Facets of these initiatives include partnerships with key stakeholders –including governments, Mobile Network Operators (MNOs), Payment Service Providers (PSPs), financial institutions, and social enterprises –to enable greater financial inclusion. Also, it is important to view micro and small businesses as companies rather than individual consumers.The digitalisation of SME operations also brings the benefit of generating data that institutions need to view an SME as a ‘real business’ with potential and make more informed credit decisions. This helps bring small businesses into the financial mainstream.An empowered SME sector is a growth engine for the economic development of a country. A multi-stakeholder approach to strengthening small businesses is the most powerful way forward to achieve this goal. In a world grappling with the impact of the COVID-19 pandemic in 2020 and 2021, far-reaching business digitalisation has been the bridge between the old and the new normal. As countries implemented measures to contain the pandemic, meetings went online, more transactions became contactless, experiences became virtual, and shopping morphed into e-commerce, enabling the world to maintain a business trajectory while also setting the foundation for the future. It is difficult to imagine how a pre-digital world would have coped with the extreme level of mandated physical distancing, without the option to digitalise.Globally, digitalization has been in the works for some time now, with larger corporations, financial institutions and healthcare majors pledging digital-first strategies even as far back as 2018. Research shows that 89 percent of organisations had plans to adopt a digital-first business strategy, even though only 44 percent had fully adopted it in 20181.In 2019, it was projected that 40 percent of all technology spending would go towards digital transformation.These investments paid off in 2020. Digital adoption took a quantum leap at customer, organization, and industry levels, in some cases cramming a decade’s worth of growth into a single year.Companies, both large and small, recognise that digitalisation is essential to stay competitive in a transformed business environment.The largest of these changes – including migration of assets to the cloud, spending on data security, customer demand for online services, and the use of advanced technology in operations – saw accelerated adoption during 2020-21.These are not stop-gap measures. They are likely to stay with us in the long term due to the efficiency gains they bring. E-commerce, for instance, is likely to remain a preference for more than 20 percent -30 percent consumers after 2020. The use of digital payments is also expected to stay, in a region historically dominated by cash payments.It stands to reason that the SME sector, estimated to represent about 80 percent to 90 percent of businesses and 10 percent to 40 percent of all formal employment in the MENA region5, will benefit from embracing digitalisation. There are 44 million SMEs in Sub-Saharan Africa, the majority of which (97 percent) are microenterprises6. SMEs across South Africa represent more than 98 percent of businesses and employ between 50 percent and 60 percent of the workforce across sectors.Businesses have moved operations online, implemented smart working solutions to ensure continuity of business, and overcome disruptions in supply chains.Online platforms have played a key role in connecting users to new markets, suppliers or resources. Globally, up to 70 percent of SMEs have intensified their use of digital technologies due to COVID-19, according to the Organization for Economic Cooperation and Development (OECD).The Mastercard MEA SME Confidence Index 2021 shows the impact of the COVID-19 pandemic on SMEs across sectors, products, and services in MEA. Digitalization is a key focus area of the Index, with a spotlight on payments and the continuing evolution of a cashless economy. Many small businesses recognize the benefits of a cashless economy. The ease of not handling or processing cash, faster access to revenues, and more convenient ways of paying suppliers and employees emerge as the biggest benefits of a cashless economy for SMEs, as stated by 50 percent of respondents across the region.However, despite accelerated digitalization and clear benefits, SMEs face many challenges in digital adoption. Globally, these include lack of access to infrastructure, low interoperability of systems, lack of data culture and digital awareness, internal skill gaps, financing gaps for transformation costs, uncertainty about liabilities and responsibilities when engaging in new digital activities, and the risk of reputation damage, among others.E-commerce witnessed unprecedented growth and emerged as the preferred option during 2020-2021 to ensure continuity of lifestyles and livelihoods. Consumers and businesses together fueled an increase in e-commerce’s share of global retail trade from 14 percent in 2019 to about 19 percent in 2020.According to an assessment by the United Nations Conference on Trade and Development (UNCTAD), 2020 saw online retail grow by 22 percent even though there was a reduction in overall retail sales.The Mastercard SME Confidence Index 2021 shows that a sizeable 67 percent of MEA SMEs believe e-commerce will have a positive impact.Depending on the region, this varies between 89 percent in Kenya and 50 percent in the UAE. E-commerce channels have emerged as a preferred way of doing business for SMEs, who see the value in digitalizing sales via these channels.Businesses sell online via their own website/app, or via online marketplace/platforms, or both. Online platforms - examples of which include Google, Uber, Deliveroo, Amazon, and WhatsApp -connecting two or more independent sets of users, are central to the digital transition of economies and societies. For SMEs globally, these enable access to new sales and sourcing channels, enabling e-commerce sales, among other things.However, despite proven productivity gains, SME uptake of these aspects of digitalisation is less than half in comparison to larger companies. The reasons include lack of digital wherewithal, the cost of listing and selling products and services on aggregator platforms, limited access to shared data, and changing business models.