Are regulation and tech the solutions for financial inclusion?

A harmonious relationship between regulation and technology can bring economies forward sustainably. This has been evident in countries like Singapore and Estonia where regulation supports the utilization of technology to streamline government processes, speed up economic growth and development, and satisfy the needs of the general population.

President Rodrigo Duterte conducted the ceremonial signing of Republic Act No. 11057, also known as the Personal Properties Security Act (PPSA). This law enables and supports the adoption of movable assets like receivables and warehouse receipts as acceptable collaterals for bank financing, which is beneficial for a lot of underbanked SMEs that normally don’t have assets like real estate to back up their application for financing.

The biggest challenge for any law is enforcement. To bring this law forward, massive campaigns to educate stakeholders are required. For the longest time, financing has not been accessible to small- and medium-sized businesses, not because there is lack of money to lend, but because of the lack of trust. There is a stigma on SMEs for being prone to default or non-payment.

We’ve been working with SMEs for quite some time now. Even before the passing of PPSA, we’ve already dealt and utilized receivable contracts as a tool for SMEs to get financing. As a tech company, we created a platform where we can match SMEs that want to sell their receivables to funders at a discount to get immediate liquidity on the receivable instead of waiting for it to mature in 60-90 days. Once the receivable matures, we collect the payment directly from the SME’s client and send that money back to the funder.

We’ve built a technology that’s supposed to bring trust to the ecosystem, especially for funders to buy receivables, but as soon as we tell them that we deal with SMEs, a lot would automatically frown at us. With the passing of PPSA, we are hoping for this to change and stir confidence among financial institutions to lend more to SMEs. At the end of the day, the keyword remains to be “trust” — trust in the system, trust in the technology, and trust in people — people because it is people who enforce regulations, people who adopt technology, and people who run businesses and request for financing.

Being inside the circle

It is not uncommon to hear about horror stories when it comes to collecting from SMEs. As mentioned, there is a strong stigma on SMEs defaulting on their payments, which is why banks are very careful when it comes to offering loan terms to SMEs, especially to ones in their early stages.

We wanted to challenge this thought, so we did our own study. The first thing we did was to check our processes. This is when we realized that we were only visible to the SMEs during disbursement of financing and collection, what happens in between, we have no visibility. Relationship wise, this already shows how detached we are to the SMEs.

This brings me back to a question I get a lot when I was young — “if a boat is sinking, who do you save first?” Basic human instinct — if between someone you know and a stranger, you would first save the person you know. It’s the same concept in finance. During a cash crunch scenario, if you are to choose whom to pay between your employees and your finance provider, the group you will pay first is your employees, because you are closer to them, even at the risk of losing your credibility to your finance provider.

As a finance provider, it is important for SMEs to see you as a business partner, not just a source of financing. By having a strong relationship with them, the last thing they would do is something that would cause them to lose face to you. You have to make them feel that you are part of their inner circle.

Going back to the case of visibility, collection problems arise from the lack of communication and interaction with SMEs. A lot of SME owners have grit and vision, which for me are the two most important factors in business success, but they may need assistance when it comes to the management of their finances.

The ironic thing about the business of finance is it seems to be more about building relationships than finance and technology. You need to know how to manage SMEs and help them in a way that you both benefit. With this approach in mind, we can slowly change the stigma towards SME financing and truly bring trust to the ecosystem.

Summing it up, in between regulation and technology, are people — regulation without enforcement and technology without adoption lead to nothing in the end. With people being the center of everything, a strong relationship is the truest form of trust. If we solve trust as an issue, we solve financial inclusion.

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