Small and medium-sized enterprises (SMEs) are the backbone of the Asian economy. They already account for over 95% of all businesses in Asia and employ an estimated 60% of the region’s workforce (Mastercard and the Economist Intelligence Unit 2019). Hence, helping SMEs grow can translate directly into economic and workforce expansion.
Trade is one of the most effective ways of supporting SME development across the region. As Asian economies are already heavily reliant on the cross-border exchange of goods and services, encouraging greater SME participation in trade is a natural avenue for raising their growth potential.
However, for SMEs to reap the full benefits of trade, they need improved access to capital, talent, and technology; they also need easier pathways to scale. Addressing these barriers is complex but key to enabling SMEs to capture the large growth opportunities cross-border exchange can create.
The challenges confronting SMEs
The challenges SMEs face largely stem from their small size and lack of digitalization. Given their small trading volumes, the processes involved in cross-border exchange make the per-trade overheads expensive for SMEs. These time-cost overheads are exacerbated by resource-consuming paper-based trade documentation.
In addition to the lack of digitalization, there is little interoperability between the digital systems of business and government agency participants. This makes the digital workflow elusive, requires repeated paperwork to enable digital data transfers, and further contributes to overheads.
Trade-driven business growth also requires additional capital. However, SMEs suffer from low levels of trust from lenders as their financial statements lack the rigor of larger businesses. This results in a much higher trade loan rejection rate. According to the Asian Development Bank, 56% of SME proposals for trade finance are rejected compared to 34% for large and multinational corporations.
Finally, trade is often riskier for SMEs as they have neither the resources to perform counter-party due diligence nor access to reliable public resources that can rate small buyers and suppliers.
What needs to be done?
These challenges are complex and involve a multitude of stakeholders. At the same time, there are several necessary but insufficient fundamental issues that need to be addressed to enable progress within this interlinked environment.
Specifically, these are in the areas of setting standards for documentary interoperation; establishing open and agnostic digital platforms for SMEs; developing digital fulfillment services for SMEs; and encouraging SMEs to go digital.
Setting standards for digital documentary interoperation
The majority of the participants engaged in trade today leverage digital technology in many parts of their organizations. However, these stakeholders all operate in digital islands that are largely interconnected by paper. This fragmentation imposes time and costs on cross-border trade, particularly for SMEs.
To solve for this, a set of standards needs to be mutually agreed upon and adopted for digital documentary interoperation. This is not the same as having digital document standards. For example, there are hundreds of e-invoice standards, but these do not solve the issue of communication between parties unless everyone is not using the same invoice standard.
This challenge is compounded by the fact that established documentary standards, such as tax compliance e-invoices, have evolved over time to reflect the specific nuances of their respective markets. This creates barriers to change when policymakers are looking for ways to convert these to more globalized standards. On-soil data regulations further complicate matters.
Regardless, the digitalization of documentation in trade and trade finance and the automation of manual processes has the potential to significantly streamline cross-border exchange and make it more cost efficient. In addition, standardizing the exchange of digital documentation will allow nimble tech companies to build more digital workflow solutions that can support SMEs. In contrast, the absence of these standards means the processes used in preparing the right documentation will continue to be fragmented, limiting the impact that technology can have on driving their efficiency.
To encourage this standardization, governments can facilitate the introduction of interoperable documentary exchange both domestically and across borders. Coalitions of different stakeholders should also be encouraged to drive sandbox experiments in the difficult area of data handoffs between industry verticals. For example, logistics information required by the financing industry is still regularly exchanged on paper.
One example of government facilitation is Business sans Borders, a public initiative between the Monetary Authority of Singapore and Infocomm Media Development Authority. This is aimed at creating more trade opportunities by driving interoperability between SME marketplaces and providing them with digital trade services.
Establishing open and agnostic digital platforms for SMEs
Digital trade connectivity cuts across marketplaces, logistics, financial services institutions, and governments. Establishing open digital platforms that bring these pieces together can reduce frictions, make trade less expensive and less risky for Asian SMEs.
In tandem, incentivizing tech companies to solve problems related to SME operations and interface with other SME solutions is one way in which policymakers can encourage the interoperation of digital systems within SMEs.
As companies go through multiple external connections in the course of doing business with both private and public institutions, a variety of collaborations across the private-public spectrum is necessary to help create more open digital connections.
A government-to-government (G2G) example of this in the Asia and Pacific region is the Global Trade Connectivity Network, a joint project between the Hong Kong Monetary Authority and the Monetary Authority of Singapore. The key objectives of the network are to remove the inefficiencies and reduce fraud risks in today’s paper-based trade finance workflows and to help streamline trade-related processes.
Developing digital fulfillment services for SMEs
In another example, Mastercard Track, currently integrated into Singapore’s Networked Trade Platform, gives SMEs a better understanding of who they are buying from and selling to, thereby reducing partnership risk. It also offers integrated digital payments services across a range of trade products and services, from booking container space to insurance. This makes payment and record reconciliation processes simpler and more integrated.
Additionally, policymakers could review and develop policies that improve access to capital for SMEs, as trade financing is essential for most SMEs, yet paradoxically their requests are far more frequently rejected by traditional banks. Funding support will also help SMEs address the costs of digital infrastructure investment, especially capex, integration, and training.
Encouraging SMEs to go digital
In addition to policy support, trade associations can also play an important role in assisting in the digital upskilling and training of SME employees.
It takes two to tango, however. While it is true that governments, businesses, and nongovernment organizations have a critical role to play in building capabilities among SMEs, traditional SMEs need to invest in their employees too. Prioritizing financial and digital literacy can help SMEs in this regard.
The way forward
The issues SMEs face are also not necessarily new, but they are complex, and the need to address them is growing. Setting standards for documentary interoperation, creating open and agnostic digital platforms, developing digital fulfillment services, and encouraging digitalization for SMEs will require collaborative and coordinated efforts from the various stakeholders.
While these issues are all solvable, there are no silver bullet solutions for any of them—all efforts will take time to bear fruit, and the returns on these investments will not be immediate. For example, committing to creating standards and solutions for SMEs can, in the short run, feel more like altruistic support for SMEs than investing for commercial gain.
However, for the regional economy to benefit from growth in trade, a degree of altruism is needed. All parties involved need to make investments toward the common good in order to better interconnect the regional SME community. In turn, they will inevitably benefit from the opportunities that these connections will create.
Di Caprio, A., S. Beck, Y. Yao, and F. Khan. 2016. 2016 Trade Finance Gaps, Growth, and Jobs Survey. ADB Briefs, No. 64. Manila: Asian Development Bank.
Mastercard and the Economist Intelligence Unit. 2019. The Digitalisation of SME Finance in Asia: Expanding the Rewards and Assessing the Risks.