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Cash-Trapped: How Open Banking is Breaking the Cycle of Cash while Growing the Lending Bases of Visionary Banks

By Philip Glickman, Regional Head, Commercial Payments, Asia Pacific, Mastercard

Philip Glickman, Regional Head, Commercial Payments, Asia Pacific, Mastercard

Routine means safety for Alif, who owns a small roadside shop in Indonesia. During hours when most people are still sleeping, he receives and hand-inventories his stocks - low-priced daily essentials like soap, toothbrushes, and bandages - and readies his shelves for another day of business. As long as the customers come, he can cover his family’s needs and pay for tomorrow’s goods. But as he learned from his father who owned the store before him, their business has little contingency or margin for change. A miscounted, lost or fraudulent bill can spell disaster, but that is the price of business.

Globally, 85% of consumer transactions still take place in cash. For many merchants, the limiting cycle of cash is not only common - it forms the major operating system of the commercial backbone of the Asia Pacific region, where micro, small and medium-sized businesses, including Alif’s shop, make up over 95% of enterprises and serve as integral parts of their communities. Because of the micro-businesses’ low-price points, though, they have little opportunity to save for the future - or to grow their businesses.

Luckily for Alif, he doesn’t live in the world of his father.

Making cents of the data

Lack of data contributes largely to the cash cycle’s limits. Alif makes up one part of a commercial ecosystem that includes micro-retailers (essentially shopkeepers), larger-scale distributors (often FMCG MNCs) and banks or financial institutions. Cash doesn’t provide a financial history, so owners of cash-driven business either can’t meet onboarding prerequisites for loans, leaving these business owners without extra cash flow. Alternative options like unauthorized loan sharks operate outside of regulation and can charge high-interest rates.

Meanwhile, regional and local banks in Asia are missing out on lucrative opportunities to not only grow their lending base, but also to support their government’s economic, social and “digital nation” agendas which often center around financial inclusion and SME-enablement initiatives. With insufficient data on micro-businesses, banks and financial institutions are bereft of the data they need to create solutions that help businesses manage their supply chains. This is particularly troubling when we know that in Asia Pacific, micro, small and medium enterprises leveraging digital methods in their supply chains can reduce costs by up to 40% for manufacturers and 82% for service providers.

To alleviate these burdens and accelerate the financial inclusion of micro-merchants, this ecosystem requires multi-layered support. Mastercard has been working with a number of visionary banks and partners to launch a digital platform that enhances operations across multiple parts of the lending and procurement ecosystem.

Through the platform, financial institutions get API integration that allows them to access procurement and payments data, add rigor to credit extension decision management, and more easily disseminate offers and educational materials to micro-merchants. Shopkeepers get digital enablement that works – low-cost payment acceptance options like QR codes or digital wallets that increase convenience for their customers while granting merchants more data with which to make sound business decisions.

The platform streamlines communication as well, linking shopkeepers with all parties in the supply chain to more closely connect the ecosystem, thus enabling better inventory management and working capital to be extended.

Banks hold the keys to build smart nations

The Asia Pacific region made up 49.6% of smartphone connections globally in 2017. In mobile-first Indonesia, smartphone penetration is around 40%. So, for 108 million smartphone users in the country, processing digital payments in Alif’s store is as easy as operating the messaging app of his choice.

Then, the micro loan process works as a function of digital payments. A bank discerns a merchant’s credit risk from the sales history in his store. That shop owner then receives several repayment options, and his interest fees are waived over a preset time frame (a few weeks, for example).If approved, he receives his micro loan, which may be insured by the Global Index Insurance Facility.

Mastercard has already found success from the launch of similar programs in emerging markets. These have allowed us to partner with distributors to create digital platforms where shopkeepers can order products via text and apply for loans based on their store purchasing history. From that sales history data and analysis, the platform can then recommend the eligibility of that merchant for a micro loan. In turn, the store owner gains more freedom – instead of being limited by the cash he has on hand, his purchases are motivated by his store’s ability to sell, increasing the sustainability of the enterprise.

Through a similar process, a budding enterprise owner like Alif can spend less resources tracking and securing his earnings, and better prepare for rainy days. Meanwhile, with more insight into the small and medium-sized businesses that make up more than 95% of Asia Pacific business, regional Asian and local banks can help propel their markets into digital literacy, furthering the move toward smart nations.

Financial inclusion gives back to every part of the commercial ecosystem, from providing region-wide insights to FMCGs and other distributors, to improving the welfare of entire communities. Mobile and open banking is integral to breaking the cycle of cash and ensuring more efficient, secure transactions.

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