<em>This post originally appeared on the <a href="http://www.accion.org">Accion</a> website.</em>

Chilean banks have made critical advances to drive greater financial inclusion in recent years. From agent networks to payment platforms to the CuentaRUT account — a simplified deposit account with a debit card that the state-owned Banco Estado made available to anyone in Chile with an identity card, Chile has nearly reached universal access to financial services.

However, despite these advances, many small merchants in Chile still aren’t finding financial tools that meet their needs. Micro, small, and medium enterprises (MSMEs) make up <a href="http://www.smefinanceforum.org/data-sites/msme-country-indicators">98.5 percent</a> of enterprises in the country and are a significant driver of economic growth; however, <a href="http://www.smefinanceforum.org/data-sites/msme-finance-gap">more than a quarter</a> of these microenterprises have faced difficulty in accessing financing in times of need. Compounding this problem are high levels of financial insecurity among Chileans. <a href="https://news.gallup.com/reports/233399/gallup-global-financial-health-study-2018.aspx">Nearly half of the population</a> feels unsure about how they would cover their basic needs if they lost their income. For merchants whose personal and business lives are closely intertwined, this lack of financial security in their day-to-day lives translates to lack of security in their businesses as well.

Accion's Customer Strategy team traveled to Santiago to talk to micro-entrepreneurs so we could better understand how they are currently using their financial services. MetLife Foundation supported this research as part of our <a href="https://www.accion.org/accion-metlife-foundation-improve-financial-inclusion-in-latam">joint effort to boost the financial capability of customers</a>. Just as <a href="https://www.centerforfinancialinclusion.org/why-arent-people-saving-money-in-mexico">CFI did in Mexico</a>, we conducted interviews with a wide variety of small merchants to understand their motivations, goals, and feelings toward financial services, and to hear about the strategies they use to stay financially healthy.

Here’s what we learned:
<h3>1. Significant barriers block entrepreneurs from using business accounts.</h3>
Every microentrepreneur we spoke with had a CuentaRUT card, but for many, that was the extent of their relationship with formal financial services. All of them cited high fees, interest rates, and long application processes to access business accounts and credit as barriers to usage. Margarita, the owner of a travel agency and a small bookstore, told us that the most challenging part of starting her business was opening a business bank account, which required numerous documents and costly fees. Therefore, many use their CuentaRUT account for both personal and business purposes, making it difficult to manage their business and personal financial lives separately.
<h3>2. Chileans perceive taking credit from banks as risky.</h3>
Gianfranco, the owner of a small restaurant, wants to expand his business, but he has no interest in taking out a loan. He fears losing everything he has worked for by putting his business up as collateral. He told us, “I don’t like the idea of being indebted or dependent on anyone.” Maritza, the owner of a mini-market, shared a similar sentiment: “I don’t have confidence in financial institutions; they don’t worry or care about their smaller clients.” Many of the merchants we spoke to prefer to borrow from friends and family.
<h3>3. Blacklisting deters participation in the formal financial system.</h3>
[caption id="attachment_34006" align="alignright" width="234"]<img class="wp-image-34006" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2019/01/Screen-Shot-2019-01-08-at-3.32.07-PM.png" alt="A Chilean restaurant owner sits at a table" width="234" height="204" /> <strong>Jamie, a restaurant owner in Santiago</strong>[/caption]

Dicom, the national credit agency, records negative credit information such as payment delays and defaults. However, the agency does not offer a clear path to resolve negative reports and as a result, many small businesses avoid deepening their relationship with lenders. Many major retail stores offer consumer credit cards, and in the past, they did so without proper credit assessment and did not inform customers of the <a href="https://www.nytimes.com/2011/07/24/business/global/abuses-by-credit-issuers-in-chile-and-brazil-snare-consumers.html">consequences of default</a>. As a result, many people, unable to pay or unaware of the lasting nature of default, were reported to Dicom, and remain on that blacklist. Today, nearly 900,000 people are recorded as delinquent.

Jaime, a restaurant owner in Santiago, is 74 and has been an entrepreneur all his life. He was reported to Dicom over 30 years ago and has no way to resolve the black mark on his account. In fact, he doesn’t know what caused him to be listed in the first place, despite his efforts to find out. He has upgraded his business several times, but always with his savings, as he has no access to credit. Today, he hopes to buy a car so that he can purchase supplies directly for his restaurant, without paying for transport. However, he cannot make such a large purchase until he builds up enough savings. Jaime needs information to help him better understand why he was blacklisted and concrete steps to help him improve his credit score.
<h3>4. Informal savings remain more comfortable and familiar for people.</h3>
Findex data tells us that only 21 percent of the population in Chile saves money at formal financial institutions. Many interviewees told us that they have difficulty putting money away, often finding it overwhelming just to meet their fixed expenses. When they do set money aside, they prefer to save informally, either in inventory or through investment in assets that will produce income later. Many told us that opening a savings account seems difficult, but everyone wanted to increase their resources so that they could take more time off and work less.
<h3>5. Merchants prefer to learn about financial products from people, not websites.</h3>
Several merchants mentioned that they are hesitant to make financial decisions based on digital information. Lorena de Diaz, the owner of a house cleaning business, told us that she prefers to learn about new products in person, as she can’t verify the accuracy of information provided through a website or mobile application. She likes to be able to ask questions at the branch and feels that she better understands financial products when a person can explain it.

The microentrepreneurs we spoke to need tools tailored to their needs, from working capital to finance their inventory to inexpensive business saving and checking accounts, delivered with transparent and trustworthy communication from their providers. As we continue working with fintechs and financial service providers of all sizes, we hope that better understanding customers’ pain points, aspirations, and desires will lead to better communication on how to use financial products, or even entirely new products that truly improve people’s financial health. Over the next two years, Accion will be working with financial service providers in Mexico and Chile to use customer research to design, test, and implement product innovations that will drive usage and improve financial health.

<em>This research was conducted by Accion as part of our part of our <a href="https://www.accion.org/accion-and-metlife-foundation-announce-expanded-partnership-to-advance-financial-inclusion/">Building Financial Capabilities and Strengthening Institutions through Customer-Centered Innovations</a> project, supported by MetLife Foundation.</em>

5 Reasons Small Merchants Aren’t Using Financial Services in Chile

Building Financial Capabilities and Strengthening Institutions Through Customer-Centered Innovations

Chile

Latin America and The Caribbean

Behavioral Insights

Entrepreneurs of MSMEs

Financial Capability

Blog Post

This blog from <a href="https://us.accion.org/">Accion in the U.S.</a> was originally posted on <a href="https://nextbillion.net/impact-of-small-business-lending/">NextBillion</a> and is re-published here with permission.

<em>By Gina Harman, CEO, Accion in the U.S., and Liz Urrutia, CEO, Opportunity International</em>

The field of microfinance arose to address a pressing problem in emerging markets: Billions of people around the globe were shut out of, or poorly served by, the financial sector. But while microfinance institutions grew rapidly around the globe, so too did economic inequality in developed countries. It was within this context that organizations like <a href="http://us.accion.org/" target="_blank" rel="noopener">Accion in the U.S.</a> and <a href="http://opportunityfund.org/" target="_blank" rel="noopener">Opportunity Fund</a> adapted the microlending model to the United States more than two decades ago, expanding access to economic opportunity for entrepreneurs who lacked the financing and resources they needed to start or grow their businesses. In the ensuing years, the mission-based lending industry has continued to expand its services across the country – <a href="https://ofn.org/sites/default/files/OFN_20_Years_Opportunity_Finance_Report.pdf" target="_blank" rel="noopener">even in times of economic recession</a>.
<h2>From Financial Inclusion to Financial Health</h2>
In the early days, progress toward our mission could be measured by portfolio numbers, such as number of loans disbursed and amount of capital deployed, as well as by evaluating how many of our clients were from traditionally underserved populations, such as people of color, women and low- to moderate-income individuals. However, we also understood that gaining access to financial services is only meaningful if that access places an individual on a path to greater financial stability and improved quality of life. In short, financial inclusion does not necessarily enable financial health.

Over time, with support from the <a href="https://microtracker.org/assets/documents/entrepreneurtracker-overview.pdf" target="_blank" rel="noopener">Aspen Institute’s EntrepreneurTracker</a> initiative, our organizations have been able to evaluate borrower outcomes such as business survival, revenue growth and job creation in the years following loan disbursement. Still, we knew that these numbers alone didn’t tell the full story. That’s why we kicked off a <a href="https://us.accion.org/impact-study/" target="_blank" rel="noopener">multi-year, mixed methods study</a> in 2015 to more fully understand the impact of our lending and advising services over a longer time horizon. This research, conducted by Harder+Company Community Research, was made possible through lead funding from the W.K. Kellogg Foundation and JPMorgan Chase &amp; Co., with additional support from S&amp;P Global.
<h2>How Are Our Clients Faring?</h2>
The results of this research revealed that, by and large, the entrepreneurs we serve are thriving, even two to three years after receiving their loan. Most businesses in the study increased sales (60 percent) and profit (57 percent). Forty percent of borrowers added employees during the study period, and entrepreneurs with employees significantly increased benefits provided to those employees. What’s more, the majority of study participants specifically attributed progress toward their business and personal goals to the services they received from Accion or Opportunity Fund.

This study also provided unprecedented insight into the emotional benefits of mission-based small business lending. At the end of the study, 63 percent of participants expressed that support from their lender had “a lot” of positive impact on their confidence. In follow-up interviews, entrepreneurs discussed the demoralizing effect of previous loan rejections, sharing that the approval from Accion or Opportunity Fund was a sign that someone believed in them. As one participant put it: “The biggest thing has been the confidence that I’ve gained in myself. I’m really proud of it.”

But the report also highlighted some ongoing challenges – among them, the fact that financial health remains a key need among the business owners we serve. For example, the majority of clients surveyed at the end of the study had not taken steps to prepare for a financial emergency (55 percent) and found finances to be a significant source of stress (58 percent). This was a statistically significant improvement from the beginning of the study, when only 36 percent of participants had prepared for a financial emergency and 71 percent reported significant anxiety about finances. Nevertheless, though these findings indicate that our clients are on the path to greater financial stability, they remain vulnerable to financial shocks.
<h2>Defining Success on Entrepreneurs' Terms</h2>
The multifaceted nature of the study findings illuminates the limitations of a “one-size-fits-all” definition of impact. For instance, as the mission-based lending field moves beyond measures of inclusion to focus on borrower outcomes, traditional metrics like revenue growth and job creation don’t necessarily align with entrepreneurs’ own definitions of success. That’s why the research employed a technique called cluster analysis, which revealed five distinct typologies of entrepreneurs, each with unique goals, challenges and successes.

For example, the <i>Focused and Growing</i> group (44 percent of the sample) sought to grow, and succeeded. By the end of the study, they had all moved into their businesses full-time, had successfully used their loans to expand their businesses, and were experiencing increased sales and profits.

In comparison, the <i>Stable and Strategic </i>group (12 percent of the sample) juggled multiple sources of income while carefully planning for long-term, safe business growth. They increased their financial stability over the study period, and they also reported increased quality of life.

For the <i>Off Balance and Seasonal</i> group (9 percent of the sample), unexpected hardships and seasonal cash flow meant that their main priority was keeping their business afloat. In follow-up interviews they expressed an appreciation for the tailored support and guidance they received from their lender to help them weather financial challenges.

Borrowers in the <em>Retrenching</em> group (19 percent of the sample), were most likely to have used their loan to start a new business. While most experienced business growth over the study period, very few reported taking a salary from the business. Nevertheless, they remained confident about their financial future at the end of the study and reported a significant decrease in financial stress.

For those in the Slowly Growing and Optimistic group (17 percent of the sample), key goals for business ownership included fulfilling a specific dream or becoming their own boss. Although the majority experienced increases in sales, most were not able to increase savings, and some had even drained their savings over the study period. Many of these entrepreneurs operated highly specialized businesses with unpredictable cash flows, and were looking for opportunities to diversify their offerings.

With the completion of this research, we have gained invaluable insights into the impact of our services – as defined by our clients. As our organizations look to expand access to high quality, transparent and affordable financial services, it will be crucial to continue to refine our definitions of success, and to iterate and design new products and services to best align with their needs.

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Beyond Inclusion: How Mission-Based Small Business Lenders in the U.S. Are Evolving Their Definition of Impact

United States

Customer Centricity

Financial Health

MSME/SME Finance

<em>&gt; Posted by Anisha Singh, Senior Research Associate, IFMR LEAD</em>

<em><img class="alignright wp-image-24670" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/11/thumb_72f989620eb54da896649a8461a443a6.jpg" alt="" width="515" height="343" /></em>

<em>Want to receive payments from customers? There’s an app for that. Want to make payments to suppliers? There’s an app for that. Customer wants to pay you one week from now? Scramble to take out diary and note down payment receivable. Customer is not contactable after one week? Oh well, that’s the end of that.</em>

Among merchants in India, widespread awareness of available digital financial services options has not translated into usage of these services. The core challenge here is making digital platforms more inclusive and relevant to their daily lives. While India has made immense progress in transitioning to a less cash-reliant financial ecosystem, recent research concludes that the services on offer in the country do not directly address all relevant merchant pain points and thereby fall short of providing a compelling value proposition for them to make the switch from cash. This shortcoming hasn’t been for lack of trying. Researchers and providers have identified and rolled out various new value-added services that could help increase this value proposition. However, for merchants in India, there is still one key transaction type left unaddressed: how can informal arrangements, such as offering goods on credit, be included in digital services?
<h3>What’s at the heart of merchant transactions?</h3>
Recent research by IFMR LEAD in the space of digital finance for micro-merchants across urban and rural regions of four Indian states suggests that as many as 20 percent of micro-merchants use extensions of credit as their primary transaction method with suppliers as well as with customers. For the majority of merchants surveyed, over 20 percent of the value of their monthly transactions with suppliers and customers is on credit. Merchants typically extend credit to customers for up to two weeks and receive credit from suppliers for up to a month. Credit from suppliers tends to be more formal than credit to customers. Merchants often sign a promissory note while taking goods on credit from suppliers, whereas they deem a simple note in their inventory books sufficient for extending credit to customers.
<h3><strong>What does an ideal</strong> digital<strong> product look like for merchants?</strong></h3>
There is much excitement and openness among merchants to experiment with digital modes and include payment applications such as mobile wallets and QR codes into their daily business operations. However to make it worthwhile for merchants to transact digitally, it is necessary to build a holistic service that includes credit extension. We collected first-hand insights from merchants to understand their preferences and concerns regarding such a service:
<ul>
 	<li>On the supplier side, merchants were not in favor of direct debits from their accounts at a later date for goods received on credit. However, a majority noted the importance of a reminder service to make payments in the form of SMS messages or push notifications. Product provisions to record inventory purchased on credit, make standard monthly digital payments, and record signatures from suppliers for the verbal credit agreements were the next most preferred features.</li>
 	<li><em>‘Facebook’ for merchants: </em>A significant proportion of merchants also indicated their preference for a networking platform wherein they can interact with their suppliers through personalized user accounts. By logging into their account, they would like to be able to see all their suppliers, open chat conversations with individual suppliers, and send them push notifications requesting additional stock or extension of credit terms and such.</li>
 	<li>On the consumer side, merchants are concerned with customers not paying them back and having no way to trace them. The majority of merchants stressed the value of a reminder service through SMS or push notifications to alert customers of their pending payments and allow them to make the transaction digitally without visiting the merchant..</li>
 	<li>Surprisingly, merchants did not express a need for an inventory management component to record goods given on credit and payments collected from customers. Merchants believed that a strong back-end system through inventory management with suppliers would sufficiently translate into better management of credit terms with customers.</li>
 	<li>Across the board, merchants stressed their requests for these features to come at a low cost with low transaction fees. Furthermore, they indicated that services should incorporate credit limits on the amounts that can be extended in supplier and customer interactions and the potential for credit limits to be monitored and enhanced based on transaction history.</li>
</ul>
With high awareness but low usage of digital platforms among merchants in India, exploring such value-added services for merchants is a must to ensure greater uptake and continued usage. However, to ensure sustainability of such products, it is equally imperative to explore ‘stickiness’ for customers and other players in the merchant ecosystem as well.

<em>This post draws on IFMR LEAD’s work in collaboration with J.P. Morgan on '</em><a href="http://ifmrlead.org/process-mapping-and-evaluation-of-digital-financial-services-in-india/"><em>Digital Financial Inclusion and Consumer Capabilities in India</em></a>' <em>and with the Mastercard Center for Inclusive Growth on '<a href="http://ifmrlead.org/the-evolving-financial-ecosystem-for-micro-merchants-in-india/">The Evolving Financial Ecosystem for Micro-Merchants in India</a>'.</em>

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2017/07/10/how-a-human-touch-agent-can-make-a-difference-in-promoting-digital-financial-services/">How a Human Touch Agent Can Make a Difference in Promoting Digital Financial Services</a>

<a href="https://cfi-blog.org/2016/08/11/exploring-responsible-agent-management-in-india/">Exploring Responsible Agent Management in India</a>

<a href="https://cfi-blog.org/2016/09/12/digitizing-self-help-groups-in-india/">Digitizing Self-Help Groups in India</a>

&nbsp;

What’s in It for Me? Increasing the Value Proposition of Fintech for Merchants in India

India

South Asia

Credit

Delivery Channels

Digital Financial Services

Financial Service Providers

Financial Technology

In this report, Christy Stickney, CFI Fellow and independent consultant, highlights the characteristics of owners of small and medium-sized enterprises (SMEs) whose businesses have overcome significant hurdles and grown from their micro size.

Christy has utilized qualitative research to identify and analyze clients of MFIs whose borrowing had increased significantly over time from the portfolios of three leading microfinance institutions in Latin America – MiBanco (Peru), Banco Solidario (Ecuador), and Banco ADOPEM (the Dominican Republic). As part of the research, Christy conducted 55 in-depth client interviews and consulted with institution staff. She identifies and describes in detail a select group of "growth entrepreneurs" (GEs) who operate higher growth businesses, have overcome significant growth hurdles, and express a clear vision for future business growth. Christy argues that this category of emerging SMEs holds great potential for future growth and job creation.

Christy also provides recommendations for financial institutions (including microfinance institutions [MFIs]), FinTech companies, governments, and other financial ecosystem actors to support growth and greater financial inclusion for emerging SMEs and growth entrepreneurs.

&nbsp;

&nbsp;

&nbsp;

Emerging SMEs—Secrets to Growth from Micro to Small Enterprise

CFI Research Fellows Program

Dominican Republic

Ecuador

Peru

Credit Provision

Microfinance Institutions

Underserved Groups

Report

<em><img class="alignright" style="border: 0" src="http://centerforfinancialinclusionblog.files.wordpress.com/2011/08/disc-meter.jpg?w=300&amp;h=174" alt="" width="300" height="174" />&gt; Posted by Center Staff</em>

This edition of top picks features posts that spotlight green loans reducing energy poverty, savings and loans to improve the vulnerability of microbusinesses, and factors driving uptake of mobile insurance services.

In celebration of Earth Day, the Kiva Blog took the opportunity to <a href="http://kivablog.kiva.org/kivablog/2014/04/22/green-loans-are-a-small-step-for-households-but-a-giant-leap-for-emissions-reduction" target="_blank" rel="noopener">share their work on green loans</a>. These loans to individuals and small business owners help with the high upfront costs of clean energy technology. Globally, 1.3 billion people live in energy poverty – without access to modern energy services. Green loans support healthy and environmentally friendly energy switches, like from kerosene to solar lighting. Kerosene lighting produces black carbon or soot which is harmful to breath and also a greenhouse gas. Kiva has facilitated the funding of 39,000 green loans.

New research conducted by the Corporation for Enterprise Development (CFED) asked microbusiness owners in the United States about their current finances. The results, captured in a <a href="http://cfed.org/blog/inclusiveeconomy/new_research_broadens_understandings_of_microbusiness_financial_vulnerability/" target="_blank" rel="noopener">CFED Blog post</a>, indicate that a concerning percentage of businesses don’t have the financial means to cope with economic shocks. Fifty-five percent of respondents reported that they could only cover one month or less of business expenses with their current savings. Thirty percent of those polled had no savings at all. Cash flow difficulty was the most commonly cited challenge.

Drawing from the most recent MMU <em>State of the Industry </em>report, a <a href="http://www.gsma.com/mobilefordevelopment/the-state-of-mobile-insurance-what-are-the-key-factors-currently-driving-success" target="_blank" rel="noopener">new post on the GSMA Blog</a> synthesizes global trends in mobile-based insurance services and indicates key factors driving uptake. There were 84 live mobile insurance services in 2013, 16 of which were launched that year. The regions with the most mobile insurance schemes were Sub-Saharan Africa and South Asia. The most popular type of mobile insurance, offered by roughly three-quarters of the surveyed services, is life cover. Some of the factors associated with successful services are easy to understand terms and conditions, “freemium” business models in which customers receive free insurance in return for meeting certain airtime usage levels, and convenient account debit methods, such as charging customer service fees from an airtime wallet rather than from a mobile money wallet, which is less likely to have an active balance.

<em>Image credit: <a href="http://commons.wikimedia.org/wiki/User:Iainf" target="_blank" rel="noopener">Ianf</a></em>

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Green Loans, Microbusiness Vulnerability, Mobile Insurance – Top Picks of the Microfinance Blogosphere

Energy Finance

Insurance

Insurance Companies

Mobile Banking

Payments

Christy Stickney

Gina Harman

Priya  Punatar

India is a global leader in financial inclusion. For over a decade, Accion has worked with and learned from India’s innovators, investors, and policymakers to expand economic opportunity for its people and businesses.