As the May 2024 Visa Payments Forum in Istanbul revealed, SMEs in Africa are at a crossroads. The first blog in this series outlined three key challenges that limit financial inclusion for small and mid-sized businesses (SMEs) in Africa. These challenges include the lack of connectivity to electricity, telecommunications, and transportation networks; the lack of financial sector expertise to competently evaluate SME credit risk; and the lack of digital literacy among SME owners.

In this follow-up, I propose three actionable strategies for financial institutions and policymakers to close the digital payment gaps that hinder SME growth in Africa.

Idea #1: Understand the SME

I worked on a project in West Africa a couple of years ago with a leading mobile money provider. My role was to conduct research involving a few hundred SMEs to understand what would get them to adopt mobile money.

Our biggest takeaway was that the SMEs could not care less about the provider’s merchant payment app. They had bigger challenges, such as the need to manage working capital needs, to assess the real state of their finances, and to understand and manage the timing and volume of their inflows and outflows with clients and suppliers.

Looking back, I see the mobile money provider made the common mistake of designing a product first, and then trying to convince the customer that they needed it. If it had started instead by understanding the customer and walking around in their shoes, the mobile money provider might have developed a product that was more suited to the problems their target SME customer group desperately needed to solve—problems more urgent than how to make payments at the point-of-sale.

By truly understanding SMEs, financial institutions can develop solutions that not only meet immediate needs but also position SMEs for sustainable growth and competitiveness in the market. Taking this idea of understanding the SME, it is essential to consider not just product functionality and design but also behaviors and practices. In Africa, we are, in every sense, a mobile-driven continent. Mobile means smartphones for some and feature phones for many others. Successful solutions will align with that reality.

Banks that do the work of understanding their target SME customer group turn every SME into a digital ambassador because they offer relevant solutions that make life easier for the business owner. This applies not just for end-customer-facing SMEs but for those all along the supply chain, including wholesalers, distributors, and retailers.

Idea #2: Engage at the Point of Overlap Between Capital and Payments

Working capital constraints represent the biggest challenge to growth for SMEs. This finding came through clearly in recent data from the Small Firms Diaries research project, which showed that the main reason firms in Kenya seek credit is to address working capital needs.

Yet about 80% of SMEs in Africa face challenges in accessing affordable financing, according to the African Development Bank Group (AFDB), with an estimated credit gap of over $300 billion. In the context of working capital, SMEs want this credit so they can buy inventory when the terms are most advantageous, not just when they have sales. For example, if non-perishable supplies are less expensive in early September, having a working capital loan can allow them to buy a large number of supplies even if they expect that sales will not accelerate until late October. An inability to make purchases strategically in this way hinders growth and expansion.

Knowing that, it was very refreshing to hear from speakers at the Visa Payments Forum about payment trends that could help bridge the finance gap, particularly the emergence of embedded financial solutions. Imagine how those solutions could help SMEs with their working capital challenges. We know anecdotally that SMEs may get around their working capital constraints by delaying payment to a supplier or accepting delayed payment from their customers. This is akin to leveraging payment timing for informal credit.

Providing embedded finance for SMEs in their supply chain formalizes arrangements that are already happening informally – and without the involvement of financial institutions. By offering embedded finance solutions, financial institutions can participate in the SME value chain while also providing greater financial security and certainty for SMEs. This transition is already underway—according to a new study by IDC Financial Insights, 74 percent of digital transactions will be done on nonfinancial platforms by 2030.

Engaging SMEs at the intersection of capital and payments can unlock new growth opportunities, enabling these businesses to scale and compete on a level playing field with larger enterprises.

Idea #3: Advocate for Change Earlier in the Value Chain

In the African digital payments system, our goal is to enable SMEs to pay and get paid instantly, anywhere and everywhere. At the Visa Payment Forum, Andrew Torre, the Regional President for Central and Eastern Europe, Middle East and Africa (CEMEA) spelled out the untapped opportunity to facilitate the estimated $145 trillion of B2B payments that currently move through the region.

Yet one of the big challenges hindering that money movement is the lack of government-issued IDs and other documentation necessary to fulfill know your customer (KYC) and customer due diligence (CDD) requirements. In Sub-Saharan Africa broadly, 78% of people over the age of 15 have an ID, according to the Global Findex and ID4D, but this varies widely by country. Digital IDs are even less common, yet necessary to identify and authenticate SMEs to enable seamless e-commerce transactions.

This issue goes well beyond local transactions to encompass cross-border payments. Tap, scan, swipe, or click is ubiquitous and should be how SMEs in Africa engage with customers in their cities and across the border. SME owners increasingly expect it—especially younger SMEs who are coming up with more digital literacy than their predecessors.

Digital ID programs are at the core of government efforts within Digital Public Infrastructure, yet there is an important role for the financial sector to advocate for ID approaches that integrate with the financial platforms—including instant payment systems—to help accelerate digital money flows.

Advocating for early value chain changes will not only ease the adoption of digital payments but will also empower SMEs to expand their reach, driving economic development across regions.

What’s Next?

These are just a few ideas that could help shape an enabling digital economy for SMEs in Africa. The money movement future we want must be grounded in local realities and consider the trifecta of challenges I discussed in the previous article, namely infrastructure, knowledge-driven financing, and digital skills for entrepreneurs. There are many opportunities, and capitalizing on them begins with identifying the most widespread barriers to the movement of money to and between sellers.

I urge financial institutions and policymakers to internalize these ideas and turn them into real-world actions. Whether it’s getting to know SMEs better through customer research, finding ways to offer embedded financial solutions that can help with their capital needs, or pushing for digital ID systems that make transactions smoother, your involvement is crucial.