Exploring the evidence: The power of tailored digital financial services for small businesses

This post is part of a series on our findings from Mastercard Strive’s Small Business Digital Evidence Map. The Evidence Map, developed by Caribou Digital, is the first interactive public tool charting evidence on the impact of digital and data-first interventions on small businesses. It documents the impacts of digital upskilling, digital market participation, digital financial services, and tools for digital business operations programs against seven core outcomes for small businesses. To learn more about the Evidence Map, visit the website and read our previous posts.

Access to finance is a significant obstacle to growth for micro- and small businesses. As a result, improving access to credit has become an important part of the support offered to small businesses. In recent years, digital lending solutions have made financing available to small businesses that have been previously excluded from traditional loans. Digital credit has been shown to help small businesses maintain liquidity, bridge shortfalls in their account balance, and manage shocks and emergencies.

However, to promote the meaningful use of relevant and affordable digital financial services — including credit — we need to better understand when and how positive impacts materialize as a result of credit provided to small businesses. Using the Small Business Evidence Map, the measurement and impact team at Caribou Digital has uncovered evidence to support claims that digital credit has a (positive) impact on small businesses, under what circumstances we see benefits, and what we — as a small business support community — still need to learn more about.

The scale of evidence for digital financial services

Thirty-seven percent of studies in the Evidence Map (n-41) tested elements of digital financial services (DFS) against the seven core outcomes from the Mastercard Strive small business Theory of Change — finding overwhelmingly positive impacts. Digital credit was the most tested product type (n-25). Of the studies that involved providing access to credit, 54% included only positive impacts, while 46% showed mixed (negative and null) results. The lack of evidence around negative and null impacts parallels the wider Evidence Map findings and highlights what we believe to be a general hesitancy among practitioners to report negative and null impacts from their programs.

Figure 1: The scale of positive, negative, and null data impacts of credit on small business outcomes

Although this evidence base is growing, only one-third of the studies involving credit tested it in isolation from other interventions, and only three studies involved rigorous experimental methods. So it is difficult to untangle the specific impacts of each product or service and conclusively state if a particular impact (positive, negative, or null) is from the digital credit provision, another part of the intervention, or the combination of the two.

Despite these challenges, our team uncovered four key takeaways about digital credit’s impacts on small businesses and the conditions that help generate positive impacts.

1. Credit products build small businesses’ resilience by improving capacity to deal with negative shocks.

Credit can provide small businesses with access to new coping mechanisms to deal with negative shocks. Access to credit is considered to be a core marker of a multidimensional concept of resilience, along with other financial capabilities (e.g., access to savings), digital and operational capabilities (e.g., use of digital tools), entrepreneurial capabilities (e.g., use of particular rules or heuristics) and psychosocial capabilities (e.g., attitude). Thirteen studies in the Evidence Map tested the effects of credit on resilience, with 70% of those finding only positive results. However, very few studies tested the specific products, customer types, or delivering mechanisms involved to understand what worked and why. Findings from these studies do include:

• In Latin America, businesses with access to alternative, digital credit were significantly less likely to shut down or permanently close during the pandemic. While different forms of alternative credit were measured — including peer-to-peer, invoice trading, and crowdfunding — this study did not report on how different products affected survival rates.
• The IADB found that government-backed COVID-19 loans to small businesses in Colombia and Chile had positive and statistically significant impacts on liquidity, helped small businesses face the economic crisis in a better position, and were used productively by businesses. However, this study gave no insights into the different types of businesses affected or how the loans were delivered.
• In Zambia, 75% of NomaNini agents reported an improved ability to meet major unexpected expenses after taking up the Trader Direct platform that offers a range of DFS, including payment tools and credit lines. The study did not detail which products were used, nor did it attempt to correlate different product uptake with resilience, making it difficult to ascertain if the provision of credit or other DFS products were responsible for improvements to confidence and resilience.

The results of digital loan uptake were also sometimes null. One-third of the studies in the Evidence Map found mixed results from credit on small business resilience, often due to barriers to entry and other costs that nullified the effectiveness of loans.

• Steep entry fees: In Laos, steep entry fees for women to set up accounts and to access alternative financing were a sufficiently large barrier to women accessing credit products that the results from those who did were insufficient to claim similar benefits as had been found in Colombia and Ghana.
• Effects on savings capacity: Research from Uganda, as well as a multi-country intervention led by Accion in Bolivia, Colombia, Ecuador, Guatemala, India, and Nigeria, found that access to credit products resulted in a null effect on entrepreneurs’ ability to save — another marker of financial capacity for resilience.

2. Digital credit provides small businesses that are traditionally excluded from financing with working capital, which supports growth.

Ten studies in our Evidence Map highlighted the positive impacts of credit on small business growth — particularly for small businesses that had previously been unable to access financing through traditional financial service providers. These loans were often used as working capital for operational purposes rather than funding longer-term investments.

• Deep dive studies into the Latin American and ASEAN regions by the Cambridge Centre for Alternative Finance found that small businesses using alternative credit products (e.g., invoice trading, peer-to-peer/marketplace lending, and equity crowdfunding) often saw profits increase. Between 44% and 59% of businesses in ASEAN countries, and 53% to 60% in Latin America, reported increases. Peer-to-peer/marketplace lending was the leader in ASEAN, while non-investment crowdfunding was most likely to lead to revenue growth in Latin America. In both cases, these businesses had high levels of financial integration (e.g., >80% using banking products weekly), but less than 10% had been able to access loans previously through traditional banks.
• In China, an IMF-led study found that MYbank digital loans to small businesses were positively associated with sales growth (volume and revenue). This financing played a significant role in smoothing out drops in revenue related to COVID-19 closures until business activities could resume. Over 90% of MYbank customers are micro-enterprises, many of them food and beverage businesses deeply affected by COVID-19 closures. A majority (70%) reported having difficulties with accessing loans previously from other financial institutions.
• In Uganda, women micro-entrepreneurs with loans disbursed via mobile money had 15% higher weekly and monthly sales, and 10% higher profits, than control groups who received loans as cash. This was attributed to the fact that women who received their loans through mobile money accounts could better safeguard that money for business purposes rather than being pressured to share it with family.

Four studies out of twenty-five in the Evidence Map also found mixed (null) results from credit interventions on small business growth. These studies found no significant differences in sales or revenues related to credit access or financial integration. However, they do not suggest any negative impacts on revenue from financing.

3. There is emerging evidence that credit contributes to work creation for small businesses, but the causal mechanisms to explain why and how this happens remain unexplored

The impacts of all forms of digital support on work creation for small businesses are largely under-studied. However, there is emerging evidence (four studies) suggesting that some digital credit solutions may be linked to increases in the number of paid workers hired within small businesses. Although these studies found correlations between digital credit and work creation, the mechanisms causing these correlations remain unexplored.

• Across the ASEAN region and Latin America, researchers found a small positive correlation between micro-entrepreneurs’ use of peer-to-peer/marketplace lending and invoice trading and the number of paid workers hired.
• One study found that fintech products (in general) led to slightly higher increases in employment for small businesses in Southeast Asia. This effect was significantly more pronounced for male-owned small businesses than it was for women-owned small businesses (45% vs 21%). The reasons behind this difference are unclear, as women entrepreneurs reported similar or higher levels of resilience and business growth in the same study.

In Mastercard Strive, our working hypothesis is that, just as financing enables small businesses to scale and expand, it can also enable them to take on additional (paid) workers to support that growth. However, we believe that the timeline for this to happen is likely long (hiring a new paid worker is a significant and often long-term investment), and empirical research is rarely set up sufficiently to measure this (hence the small body of evidence).

4. Tailoring credit products to small businesses’ unique needs and contexts can increase product uptake.

Findings from the Small Business Evidence Map highlight that access to finance can have a significant positive impact on small businesses. However, they also highlight that small business owners value and benefit most from solutions that are low or no cost, tailored to their needs, and offer a “one-stop” solution that combines credit access with other forms of support. This includes combining credit with different financial services (transaction processing, bill payments, financial reports) and non-financial digital operations support (such as advertising and communication with clients and suppliers) or training and consulting within the same platform.

Tailoring products — for example, by “hiding” loans to women entrepreneurs in Uganda through the use of mobile money accounts — decreased unplanned expenditures on personal items or pressure on women to give the money to other family members and resulted in more capital available for business use.

• In Zambia, Standard Bank Group developed NomaNini, addressing needs for banking wallets, payment products, and credit into a single low-cost, easy-to-use, one-stop solution — which resulted in higher levels of resilience, efficiency, and growth for small retailers.
• MYBank in China leveraged their existing expertise in remote lending to small businesses — including novel data analytics and machine learning — to manage risk for customers who lacked the traditional credit scores needed to qualify for loans, to quickly provide support to small business customers during the pandemic, leading to more sales and higher revenues for customers.

These products highlight the importance of providing digital loans that focus on small business needs.

Key takeaways

So what do these findings mean for organizations that are interested in digital financial services — especially loans — for small businesses?

1. There is evidence emerging that affordable alternative finance, government-backed loans, and embedded lending can positively impact small business resilience. More robust research is needed on the differential effects of these products for small business owners (e.g., women, rural, youth, etc.) and into specific product types — including bundles with other support mechanisms — to begin to explain how and for whom digital credit increases resilience.
2. Digital credit has the potential to bypass traditional financial service providers and provide products that address small businesses’ needs for working capital. Non-traditional and small business–focused lenders are a valuable source of financing for small businesses because they are more willing to offer innovative credit to previously excluded segments. When small businesses have access to working capital they manage their businesses more effectively and grow.
3. Significantly more (and higher-quality) evidence is needed to understand the causal relationship between credit and work creation, and the specific conditions that can lead to it. Researchers need to be more explicit about how they test work creation to understand the true scale of impacts.
4. Tailoring products to small businesses’ specific needs can ensure that loans are relevant to and accessible for small businesses. Bundled products, that made use of embedded analytics can enable rapid scaling of solutions to businesses previously excluded from formal financing, which has significant positive impacts on those businesses.

Mastercard Strive supports small businesses to access digital finance through our diverse program base, which includes:

• Open Contracting Partnership has created an automated system, CREDERE, that uses open data to enable banks to pre-approve credit for small businesses that win public contracts. Within 2 months since launching the platform, more than 1,200 businesses accessed the credit service, 9 submitted applications, and 2 have received credit — with another 6 under review.
• Accion is working with KMF, the largest microfinance institution in Kazakhstan, to provide credit to KMF’s largely agricultural client base. In 2024 the program will launch a new digital marketplace for small businesses that will provide credit to thousands of small agribusinesses.

The studies in the Evidence Map represent our best knowledge of digital support for small business insights. New studies are continuously emerging; thus, the Evidence Map will continue evolving. If you have questions on the Evidence Map, are interested in discussing research priorities, or know of relevant digital support for small business impact studies, please contact hello@strivecommunity.org.