The Covid pandemic spurred a mad dash to keep informal and small businesses afloat with digital technology and enterprise software. To prove such businesses were not only eager, but reliable, customers, tech startups rolled out inventory ordering and business accounting apps, digital payments, logistics management, and credit products. Billions of dollars in venture capital investment poured in to support the tools’ adoption and the startups’ growth.
Is it working?
“Digital tools can help local low-income businesses survive climate shocks, economic disruptions and rising trade barriers,” says Edoardo Totolo of Accion’s Center for Financial Inclusion. But: “Many of these platforms remain ill-suited to the realities of low-margin enterprises.”
Totolo’s assessment is based on a new study he co-authored that randomly surveyed 4,000 informal and small businesses in Delhi, Lagos, Addis Ababa, Jakarta and São Paulo on their adoption and use of digital business tools.
The majority of businesses have access to some type of digital tool to support their businesses primarily because of widespread mobile phone adoption. There’s a mismatch between what tech providers are offering and what businesses want, however. Digital service providers are designing products to support businesses’ growth; business owners are more concerned about continuity and stability. Only about 10% say new tech tools have led to revenue growth.
What’s needed are better and more accessible insurance and savings products, for example, and stricter transparency, guardrails and protections on digital payments, write Totolo and his co-authors. “Products and services designed to support small businesses must prioritize building resilience and stability, avoiding one-size-fits-all solutions centered solely on expansion.”
Regional trends
Use of digital tools varies greatly across gender, age, business experience and geography. Education level is the “strongest and most consistent predictor of technology adoption across all cities,” finds the survey. “Owners with a higher education level use significantly more digital technologies.”
Digital payments is the most widely adopted tool. It’s almost universal in São Paulo and Delhi; in Addis Ababa, where poor internet access has greatly restricted business digitalization, still about 40% of entrepreneurs use digital payments.
E-commerce platforms took off worldwide in the pandemic, but few informal and small businesses use them. The highest rates of e-commerce adoption are just 12% in São Paulo and 7% in Jakarta.
Fewer than half use social media, except among more educated entrepreneurs in São Paulo. In Lagos, those that do use social media, “content creation plays a vital role in digital marketing efforts,” the report finds. “Businesses regularly produce videos and images showcasing their products, manufacturing processes and behind-the-scenes content.”
Adoption of software for managing business operations – which many tech startups launched in the pandemic – is in the single to low double-digits in most cities. “While some businesses are successfully using digital tools to streamline operations, others may struggle with implementation or optimization,” the report finds.
Female entrepreneurs trail their male colleagues in digitalization, particularly in Addis Ababa and Lagos.
Consumer protection
A key reason for slow adoption of business digitalization tools is business owners’ concerns about transparency and security. Low-income consumers and business owners are disproportionately hit by fraud and hidden fees.
“We all should fear fraud, if we already don’t. To me, this is the most critical issue,” said one business owner in São Paulo who was interviewed for the study.
Digitalization tools, without proper guardrails, risk exacerbating financial insecurity and exclusion “leading to devastating losses for small businesses already operating on the brink,” says Totolo. “Cultivating the use of such tools requires smarter, safer and more thoughtfully tailored digital finance ecosystems that combine a deep understanding of the needs of the end user, strong consumer protections, and an emphasis on long-term economic health.”
