STORY INLINE POST
In the last five years, we have seen a boom in the Mexican fintech ecosystem (which I truly celebrate), bringing new financing solutions to companies and individuals. This has forced traditional banks to boost investment in mobile and digital means to connect with their customers, which fintechs have implemented with success.
Focusing just on lending money to SMEs (understanding that fintech services are clearly more than just that; according to Finnovista just 21 percent of fintechs lend money), I see several challenges that make me believe that significatively increasing the number of loans to SMEs, without implementing other actions, could generate a suboptimal impact on the economy in the medium to long term. Let me explain:
- According to the Bank of Mexico, the NPL (Nonperforming Loan) Ratio for SMEs has increased, from around 4.0 percent in 2012 to 6.6 percent in 2021, which is illustrative when we compare the evolution of the same ratio for big companies, going from 2.0 percent in 2012 to 1.3 percent in 2021. This ratio for SMEs is already a yellow warning.
- Another fact is that according to SHCP, more than 1 million companies closed in Mexico during the COVID-19pandemic, but 620,000 companies have been created already in the last year. Still the balance is negative, so the lending industry has less space with more players.
- With the recent Russian invasion of Ukraine, and its economic implications, Mexico will be less directly affected compared, for example, with some European economies but most analysts agree that an environment with higher oil prices, higher inflation and higher interest rates will have a negative impact on Mexican GDP growth (the OECD has just decreased its forecast for 2022 from 3.3 percent to 2.3 percent), and will further stress the liquidity of the more vulnerable companies: the SMEs.
- SMEs, in general, are already struggling to survive and pay their debts, a condition that, it seems to me, will not get better for them in the next couple of years.
So, as fintechs have raised enormous amounts of capital and debt to place credit, which is very good news for them and for the market in general, the success of their businesses depends on three main factors: their cost of collocating new credit, the efficiency of their risk model, and the performance of their customers. This last element is the one over which they have the least control.
In this order of ideas, having a player that is ready to provide credit to SMEs is very good news, but we must also help SMEs perform better and ensure they have a fairer legal framework to protect them and keep their operations cheaper than their informal counterparts (which is the main challenge for the Mexican economy, in my opinion).
As private players, fintechs can help their SME customers, and themselves by extension, by providing them with more solutions, such as services to increase their sales digitally, to digitalize their operations as well as become more efficient, and, importantly, customizing their financial solutions to really reflect what their customers need. Not doing these would represent a significant challenge to the repayment of loans and the profitability of their operations.
Also, we must ask the Mexican government to work on providing SMEs with a more favorable business environment. This can be achieved through two main actions: reduce the fiscal impact of working in formality (especially for SMEs under a certain volume of revenue) and make government services (at all three levels) an ally of business operations, not a source of extortion. Also, providing the fintech industry with a better legal framework would provide more certainty for their operations, generating value for all players in the economy.