Financial and Monetary Systems

How public-private partnerships can enable digital recovery for small businesses

Woman using smartphone buying online shopping by credit card while wear sweater sitting on desk in living room at home.

In 2020 consumers spent more than $860 billion online with US businesses. Image: Freepik.

Jim Magats
Senior Vice President, Omni Payments, PayPal
Claire Sunderland Hay
VP corporate Risk, Visa
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The Digital Transformation of Business

  • Micro, small, and medium sized enterprises (MSMEs) account for more than two-thirds of jobs worldwide.
  • COVID-19 has exposed a digital divide between those able to continue trading online and those offline being forced to close.
  • We now need public-private partnerships to empower struggling businesses to access capital and embrace e-commerce solutions.

Micro, small, and medium sized enterprises (MSMEs) are the foundation of our global economy and the backbone of our local communities. They are job creators, community builders, enablers of opportunity and drivers of innovation, competition, and diversity. When these businesses thrive, so do local communities and economies, but when they struggle, the impact is widespread. In order to help these businesses recover from the impacts of the COVID-19 pandemic and the financial recession, it's important to first understand their current situation.

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MSMEs are responsible for more than two-thirds of jobs worldwide, accounting for the majority of new job creation globally, and contributing more than 50% of GDP in most OECD countries. Importantly, MSMEs are also more likely to employ underserved communities and populations.

They are critical to the health of the economy and our communities, but the pandemic has had a major impact on small businesses. Some MSMEs are actually experiencing growth, and business formation in the US last year was up nearly 20% year over year (YOY) according to US census data. However, many small businesses have not been as fortunate as the digitally enabled ones.

Growth among businesses that digitized or received capital

Small businesses that are leveraging digital payments and commerce platforms are growing, according to research conducted by PayPal. Digital small businesses in the US that use PayPal saw 25% YOY growth in Q2 of 2020, compared to a publicly reported 9% drop in revenue for overall MSMEs and -3.6% growth in overall US retail in the same quarter. The ability for small and medium-sized businesses (SMBs) to leverage online tools to reach customers outside their state borders has long been a source of growth and resilience associated with e-commerce, but a diversified customer base has become particularly important during the pandemic. Seventy-five percent of digital small business sales were outside the SMBs home state in Q2 of 2020, according to the PayPal study.

These trends extend beyond the US global online search patterns, highlighting the shift to the digital economy as searches for things like “online shopping”, “food delivery” and “online doctor” have increased as a result of the pandemic.

In addition to digital small businesses, many MSMEs that received access to capital have also seen growth. For example, many recipients of the US Small Business Administration’s Paycheck Protection Program (PPP) loans saw growth after capital injection. According to the same PayPal study, digital SMEs that received PPP loans in April recorded -15% YOY revenue growth in the month before the loan and recorded an average of 14% YOY growth in the three months after the loan. A comparison of transaction data of overall PayPal SMEs, and PayPal SMEs that received a PPP loan, shows that the group that received a PPP loan recorded 177% as much total payment volume as did those without a PPP loan, on average, in April to August of 2020.

While some MSMEs have survived and even thrived amidst the pandemic, many more traditional MSMEs around the world have been less fortunate.

Huge challenges remain for MSMEs harmed by the pandemic

The pandemic has forced a meaningful number of businesses, particularly offline businesses, to permanently close their doors while leaving many more barely surviving. Of the roughly 30 million small businesses in the US, nine million are at risk of closing down this year unless they get some form of government assistance. Global stay at home orders and non-essential physical business closures, combined with the decrease in incomes and spending power of consumers, have had a real impact on small businesses.

This has resulted in one of the greatest wealth transfers from small businesses to large enterprises. The IHL Group estimated that more than $250 billion shifted from small businesses to larger enterprises in North America alone early on in the pandemic as a result of mandatory non-essential business closures aimed at stemming the spread of the COVID-19.

Adding to the challenges MSMEs are facing is the fact that the economic recession has left millions of people unemployed, though there are recent hopeful signs. Consumer finances are in many cases still uncertain, and consumers are being more cautious in how they spend. In the US alone, nearly half of those unemployed have less than $2,500 in their savings accounts and 17% of consumers reported having no money in savings at all, according to a recent study by PYMNTS. In Europe, consumers are also cautious, as more than 30% believe the pandemic will have a lasting impact on the economy, and one-third of European consumers say they are looking for ways to save money.

Millions of small businesses around the world – particularly brick and mortar businesses unable to digitize – have shut down.

Jim Magats and Claire Sunderland Hay.

As a result, consumers are spending less in certain verticals and looking for ways to extend their tight budgets and responsibly manage cashflow. They are in need of solutions that enable them to access the things they need now and pay for it later. In addition, the pandemic has caused consumers to move online and toward digital commerce at an accelerated pace, while also expecting safe, touch-free digital payments, like QR Codes or near field communication (NFC), in physical stores.

The trend toward online commerce and payments is nothing new, but the pandemic has accelerated the move to digital commerce. Consumers spent more than $860 billion in online commerce with US businesses last year, up 44% YOY, according to some estimates. In Uruguay, online purchases abroad grew around 37% between June 2019 and June 2020, showing the power of online commerce to transcend borders and open businesses up to new customers.

As commerce moves online, millions of small businesses around the world – particularly brick and mortar businesses unable to digitize – have shut down. In India, about 35% of MSMEs indicated that their businesses were beyond saving, according to a June survey by the All India Manufacturers Organization. In the UK, research by Simply Business found that between March and September, the pandemic had already resulted in the closure of more than 230,000 small businesses.

Image: World Bank.

Across European countries more broadly, a McKinsey study conducted in August 2020 of MSMEs in France, Germany, Italy, Spain and the UK found that 70% of respondents said their revenues had declined as a result of the pandemic, and one in five said they were concerned they might default on loans and have to lay-off employees. In addition, more than half of the businesses surveyed said they may not survive longer than a year.

In developing countries like Mexico, more than one million MSMEs closed in 2020 due to the pandemic, according to the National Institute of Statistics (INEGI). In Brazil, Colombia, Malaysia, the Philippines and South Africa, a survey conducted in October 2020 by the Visa Economic Empowerment Institute (VEEI) found that one-half of the firms surveyed saw steep declines in business activity and revenue. But the pandemic harmed the smallest firms more acutely; more than 60% of MSMEs were hurt in the crisis, with growth flatlining or turning negative.

Public-private collaboration can help businesses thrive

However, there are signs of hope. Similar to the PayPal findings, the VEEI study of developing countries found that digital businesses or businesses that leveraged digital services – like accepting remote orders or leveraging online marketplaces – were able to mitigate the impact of the crisis. The study also found that a significant percentage of MSMEs have heavily adopted digital and mobile payments, QR Code capabilities, and other payment services during the pandemic, while also expanding their use of social networks and marketplaces. Businesses that adopted these tools reported doing better, and they were more optimistic for the future.

The MSMEs surveyed overwhelmingly reported that what they need over the next three to six months was their customers to come back, followed by digitizing their sales channels, acquiring better internet connections and improving their digital payments capabilities.

As cities, states and countries begin to reopen, it’s clear that businesses need to digitize and move online in order to reach more customers. Even physical businesses need to re-tool and digitize their in-store experiences given new consumer expectations. In order to make these much needed changes and adapt to the new commerce landscape, MSMEs need access to capital and incentives to digitize that can be provided through public and private partnership.

To help the global economy and local communities recover and enable small businesses to survive and thrive, there is an urgent need for collaboration between the public and private sectors to expand ways for small businesses to access capital, enable incentives for small businesses to digitize, and democratize access to payment and commerce tools so small businesses can effectively compete. It’s only through programmes like these that MSMEs – the foundation of our global economies – will be able to emerge from the pandemic from a position of strength.

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