Tackling the digital financing gap to support SMEs in ASEAN

Small and medium-sized enterprises (SMEs) drive growth and job creation, and account for 90% of businesses and more than half of global employment. Yet, within this group lies a segment often referred to as the “missing middle” – businesses that are too large for microfinance, but too small, risky, or informal for commercial banks – that fall between the cracks of the financial system.

In the ASEAN region, they comprise the majority of the entire private sector and will continue to grow in number. These businesses operate with lean teams and often lack collateral and documentation, leaving them unable to access financial products at either end of the spectrum. The result is a persistent financing gap that restricts their ability to grow.

The diversity of SMEs makes the challenge more complex. A digital-first fashion brand in Manila, the Philippines, selling through online marketplaces, for example, may need fast, short-term working capital to ramp up inventory ahead of a sales event, while a chain of kindergarten schools in Viet Nam may need a medium-term loan to fund additional centres.

A one-size-fits-all approach cannot address these differences, so the task ahead is clear: we must design financing pathways that meet SMEs where they are and scale what already shows promise.

Digital connectivity has opened new doors for SMEs to access fast, affordable credit.

Financial technology companies (fintechs), embedded finance and digital wallets are shifting the paradigm of access. They use real-time data from transactions, deliveries, etc. to assess creditworthiness, instead of paperwork and collateral. For many small firms, this reduces the cost and friction of borrowing.

Imagine a retailer in Brunei using a point-of-sale app to qualify for a working capital loan based on daily revenue data, or an online seller in Manila who can access invoice financing directly through their e-commerce platform. These tools build speed, predictability and transparency into the financing process, which SMEs value.

The Mastercard Strive programme, a global small business initiative from the Mastercard Center for Inclusive Growth, helps small businesses grow and build resilience using digital and financial tools, and offers practical insight into how and where these tools can be effective.

In Indonesia and Viet Nam, Mastercard Strive has supported efforts to expand embedded finance to underserved SMEs, particularly women-owned and informal businesses. But one lesson stands out: digital access alone isn’t enough. Many SMEs also need training in financial management to translate access into long-term usage and resilience.

Another insight: digital finance is not a full solution. It supports SMEs that are the digitally ready, but does little for firms without digital footprints, limited connectivity or low trust in formal systems.

Many SMEs in ASEAN still operate offline, in traditional industries such as manufacturing, education, or healthcare. These businesses may have long track-records, reliable contracts and physical assets – but they lack the continuous data streams that fintechs rely on.

That is where traditional and relationship-based lending still play a critical role. Beacon Fund, the first private debt fund focused on Viet Nam, sees this challenge regularly. Many SMEs in its portfolio have proven track records and reliable contracts, but limited digital transaction histories keep them invisible to fintechs.

Their financing needs also tend to exceed the small loan sizes fintech lenders typically provide. The result is a persistent gap between business fundamentals and the data inputs that digital models depend on.

Private credit can help fill this gap to serve the “missing middle” in the ASEAN region. Unlike digital lending, private credit allows for tailored structures, aligning repayment schedules with cash flows and adapting to the borrower’s sector-specific needs. Underwriting is grounded in a deep understanding of the business augmenting data feeds and inputs.

Yet in the ASEAN region, private credit is still in its infancy. Large regional and global private credit funds see SMEs as too small and risky, too much work for too little return. On the borrower side, most business owners are unaware of private credit as an option. For them, getting a loan is still synonymous with going to a bank.

Beacon Fund tackles these perceptions on both ends. Take one renewable energy company in the portfolio: despite strong fundamentals – predictable cash flows backed by long-term contracts with the state utility – it struggled to access suitable financing.

Private credit provided the bridge. Examples like this illustrate how even healthy SMEs can fall through traditional gaps, and why alternative finance matters. These examples help demonstrate the potential of this segment to investors and help business owners see private credit as a credible alternative.

The solution is not about choosing one model that works; it’s about building a system that accommodates the variety of challenges facing the “missing middle”. SMEs in the ASEAN region are diverse, and their financing solutions must be as well.

We need an effective system that blends digital tools, traditional finance and emerging models like private credit – each serving SME needs at different stages of growth, in the segments where they are strongest.

This requires more than just innovation. It calls for coordination between banks, fintechs, funds, development finance institutions (DFIs), policy-makers and ecosystem enablers such as business associations, local chambers of commerce and capacity-building non-profits. Each actor holds a piece of the puzzle. But unless they share common goals, frameworks, data standards and incentives, the system will remain disconnected and underpowered.

We also need to redefine progress. Progress is not only about lending more money in aggregate; it is matching the right capital with the right businesses, on the right terms, at the right time. It is meeting SMEs with the financing they need, when and where they need it.

Policy-makers and leaders in the ASEAN region have begun to lay the groundwork. The Philippines has introduced SME credit guarantee programmes. Singapore and Thailand have invested in instant payment systems like PayNow and PromptPay. DFIs are piloting blended finance models working with banks, investors and local intermediaries to test risk-sharing approaches.

These are encouraging steps, but they remain fragmented. Without stronger links between them, their impact will be limited.

The task ahead is to build coalitions that link these efforts together. Public-private partnerships, ecosystem networks and cross-sector alliances can connect the dots across the continuum of capital – digital and analogue, public and private, mainstream and alternative.

SMEs do not need competing models. They need a connected system. The opportunity is clear: move from siloed initiatives to coalitions that deliver complementary and connected capital, unlocking the potential of the missing middle and driving inclusive growth across ASEAN.