PROMOTING DIGITAL AND INNOVATIVE SME FINANCING AND INNOVATIVE DIGITAL PROMOTING PROMOTING DIGITAL AND PROMOTING DIGITAL AND INNOVATIVE SME FINANCING INNOVATIVE SME FINANCING PROMOTING DIGITAL AND INNOVATIVE SME FINANCING © 2020 International Bank for Reconstruction and Development / the World Bank 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of the World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because the World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for non-commercial purposes if full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, the World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522- 2625; e-mail: [email protected]. This report was produced by the World Bank Group for the G20 Global Partnership for Financial Inclusion under the Kingdom of Saudi Arabia’s G20 Presidency. The report represents a stock- take of different cases and examples that highlight private business trends and regulatory approaches in G20 and non-G20 countries. The stock-taking exercise is not intended to be an analysis or evaluation of any particular model. Cases, including those referencing particular firms, financial products, or services, are presented for illustrative purposes only and do not constitute an endorsement by the World Bank Group, the G20 Global Partnership for Financial Inclusion, or its members. CONTENTS ACKNOWLEDGMENTS ........................................................iv ACRONYMS ..................................................................v GLOSSARY OF TERMS ........................................................vii EXECUTIVE SUMMARY .......................................................xi CHAPTER 1: BACKGROUND .................................................... 1 The Role of SMEs in Economic and Social Development ...........................1 Access to Finance Remains a Key Challenge for SMEs .............................1 GPFI’s Focus on SME Finance and Report Objectives ..............................5 Methodology .................................................................5 CHAPTER 2: HOW DIGITAL INNOVATION IS A POTENTIAL GAME CHANGER FOR SME FINANCE ..........................................9 Digitalization as a Leading Enabler of SME Finance ................................9 Key Technologies Transforming Financial Services and Impacting SMEs ............12 CHAPTER 3: SME FINANCE DIGITALIZATION TRENDS ........................17 Business Trends and Developments ............................................17 Regulatory Policy Issues ..................................................... 45 The Impact of COVID-19 Pandemic on SMEs and Potential of Digital Financial Services as a Response ..................................................66 CHAPTER 4: CHALLENGES AND RISKS TO DIGITAL SME FINANCING .........69 Challenges and Risks Related to the Digitalization of SMEs ....................... 69 Challenges and Risks Related to Digital Financial Products for SMEs .............. 73 CHAPTER 5: POLICY OPTIONS FOR FOSTERING INCLUSIVE DIGITAL SME FINANCE ........................................................77 APPENDIX A: P2P/Marketplace Lending Business Model—Overview .............. 87 APPENDIX B: Adoption of Digital Tools and Software Solutions by SMEs ........... 88 APPENDIX C: List of Additional Case Studies Submitted by G20 and MENA Countries .........................................................90 Endnotes ...................................................................99 ACKNOWLEDGMENTS This report was produced by the World Bank Group for the G20 Global Partnership for Financial Inclusion under the Kingdom of Saudi Arabia’s G20 Presidency. It was authored by a team led by Ghada Teima, and comprised of Miguel Soriano, Luis Maldonado, Volha Monfiston, in partner- ship with Matthew Gamser, the SME Finance Forum. The report benefitted from the guidance of Mahesh Uttamachandani and the input of technical peer reviewers Erik Feyen, Matthew Saal, and Onur Ozlu. The team would like to especially thank the G20 GPFI Saudi Presidency team, led by Haitham Alghulaiga and comprised of Alia Kabbani, Hamad Aljaad, Hamad Alrushaid, Sundos Altwaijri, Saud Albarrak, Hettaf Alqattan for their leadership and guidance. Additionally, the team extends its gratitude to the G20 member countries and implementing organizations for their input and contribution and to the Arab Monetary Fund and Islamic Development Bank. iv PROMOTING DIGITAL AND INNOVATIVE SME FINANCING ACRONYMS ADB Asian Development Bank AI Artificial Intelligence AML Anti-Money Laundering AFIN ASEAN Financial Innovation Network API Application Program Interface APIX API Exchange ASIC Australian Securities and Investments Commission B2B Business-to-Business B2P Business-to-Person BaaS Banking-as-a-Service BIS Bank for International Settlements BOT Bank of Thailand CBE Central Bank of Egypt CCAF Cambridge Centre for Alternative Finance CDR Consumer Data Right Act (Australia) CFT Countering the Financing of Terrorism CGAP Consultative Group for the Advancement of the Poor CMA Saudi Arabia Capital Markets Authority CRSPs Credit Reporting Service Providers EC European Commission DLT Distributed Ledger Technology DFS Digital Financial Services EBA European Banking Authority EU European Union FATF Financial Action Task Force FCA Financial Conduct Authority FSB Financial Stability Board FTC Federal Trade Commission GCC Gulf Cooperation Council GDP Gross Domestic Product GDPR General Data Protection Regulation GPFI Global Partnership for Financial Inclusion HLPs GPFI High-Level Principles for Digital Financial Inclusion IDB Inter-American Development Bank IFC International Finance Corporation ILO International Labor Organization IMF International Monetary Fund ACRONYMS v IoT Internet of Things KYC Know-Your-Customer LEI Legal Entity Identifier MAS Monetary Authority of Singapore MCA Merchant Cash Advance MENA Middle East and North Africa MFS Mobile Financial Services ML Machine Learning MNO Mobile Network Operator mPOS Mobile Point of Sale NFC Near-Field Communication NPCI National Payments Corporation of India OECD Organization for Economic Cooperation and Development OJK Indonesia Financial Service Authority P2P Peer-to-Peer POS Point-of-Sale PPP Public-Private Partnership PSD2 Payment Services Directive 2 PSPs Payment Service Providers PwC PricewaterhouseCoopers QR Code Quick Response Code RBI Reserve Bank of India SaaS Software-as-a-Service SAMA Saudi Arabian Monetary Authority SCF Supply Chain Finance SDGs United Nations Sustainable Development Goals SEC Securities and Exchange Commission SME Small and Medium Enterprises TReDS Trade Receivables Discounting System UAE United Arab Emirates UPI Unified Payments Interface (India) USSD Unstructured Supplementary Service Data WEF World Economic Forum vi PROMOTING DIGITAL AND INNOVATIVE SME FINANCING GLOSSARY OF TERMSa Anti-Money Laundering (AML): Set of laws, regulations, policies, and procedures designed to prevent criminals from disguising illegally obtained funds as legitimate income. In most cases, money launderers hide their illicit proceeds through a series of steps (layering) that make the ill-gotten gains appear to be obtained legitimately, enabling the illicit proceeds to be integrated into the financial system. AML is typically linked to Countering the Financing of Terrorism (CFT) (see below). The global standards for AML/CFT are established by the Financial Action Task Force (FATF) (see below). Application Program Interfaces (API): Set of routines, protocols, and tools that specify how different software should interact. They allow the development of computer programs such as personal finance management applications that access a person’s bank (or other) account information to provide a range of facilities (e.g. financial management tools). Banking-as-a-Service (BaaS): Business model that enables FinTechs and other third parties that meet banks’ security, legal, and compliance requirements to connect directly with the banks’ systems via APIs so they can integrate the banks’ API-driven products and services into their own offerings without obtaining their own banking licenses, allowing them to leverage the bank’s regulatory infrastructure. Big Data Analytics: Digital processes that examine large amounts of structured and unstructured data to uncover hidden patterns, correlations, networks, and other insights. BigTech Firms: The largest (by market cap and users) and most dominant information and com- munication technology (ICT) companies, such as Alibaba, Amazon, Apple, Facebook, Google, Microsoft, and Tencent. BigTech firms are starting to offer digital financial products and services to its customers. Countering the Financing of Terrorism (CFT): Set of laws, regulations,