CGAP has found segmenting the market to be a helpful tool in understanding how to close financing gaps for MSEs. By carrying out a market sizing study in 2021, CGAP also established the status of access to finance for MSEs and the size of the credit market across four different geographies, including Peru. What stood out most from research in Peru was that fintechs, despite their potential to meet financing needs, are only responsible for a minuscule 0.3% of the MSE credit market. Below, we explore some possible explanations for why that is.
Informal sector MSEs are excluded from data sources on access to finance
Local data sources in Peru tend to cover only the formal sector, leaving much to be understood about the entire spectrum of the MSE segment in the country. CGAP’s market sizing exercise attempted to fill in some of these data gaps and estimated the Peruvian credit market to be approximately 23.7 billion USD (see figure below). CGAP also identified high levels of informality in Peru similar to findings in Kenya, Nigeria, and India. All four countries also have mature financial services markets for MSEs, largely dominated by incumbent providers such as banks and MFIs.
National statistics are likely excluding or undercounting MSEs’ fintech borrowing
In Peru, as we’ve seen in other emerging economies, local policymakers are not consistently collecting enough information about alternative credit sources for MSEs. When looking at data from formal MSEs (those in compliance with legal and financial reporting requirements), which represent 99.5% of formal businesses in Peru, we found that fintechs are not explicitly included as lenders in the questionnaire administered by the National Survey of Enterprises (2019). In this survey, the question asking about the sources of finance for formal MSEs includes banks, MFIs, NGOs, cooperatives, the National Development Bank (COFIDE), individuals and, at the end of the list, a blank space for “others”—but no mention of fintechs.
Similarly, the same questionnaire did not include questions about the kind of credit service obtained (i.e., working capital, factoring, digital lending, etc.). This limits insights into new trends in credit for MSEs such as Buy Now Pay Later (BNPL) or digital lending, among others.
Between June 2017 and June 2022, the Report of Financial Inclusion Indicators produced by the Superintendency of Banking, Insurance and Pension Funds Administrators (SBS) showed that MSE borrowers had increased by 700,000. While this figure shows an advancement in the financial inclusion of formal MSEs, it does not shed light on the availability of credit for informal MSEs, as their owners tend to take out consumer loans or credit cards as individuals when starting or expanding their informal businesses. Indeed, not even credit fintechs or the Peruvian Fintech Association have collected and disclosed information about their share in the MSE credit market.
Lack of a level playing field with policy support skewed toward incumbents
Peruvian policymakers are well aware that local MSEs are not competitive enough, which slows the growth of the local economy. To address this situation, the government has adopted the National Policy of Competitiveness and Productivity and the National Plan of Competitiveness, both of which seek to formalize MSEs, make businesses more competitive, and bridge the credit gap faced by MSEs by adopting several laws and regulations to foster innovation, create capabilities for MSEs, incorporate new financing alternatives such as crowdfunding, and create public collateral funds for MSEs.
Over the past few years, various funds have been incorporated with the aim of broadening access to finance for MSEs and start-ups in Peru. One of those is Fondo Crecer, a trust fund providing guarantees to banks and MFIs for MSE credit. Unfortunately, fintechs are not listed as eligible entities to receive this public guarantee. Similarly, during the COVID-19 pandemic, relief efforts such as Reactiva Peru or FAE MYPE did not include fintechs in their list of lenders eligible for public guarantees. Such policies have created advantages for incumbents unintentionally while overlooking fintechs. However, this is not exclusive to the Peruvian market, and this has been seen in other markets as well.
Fintechs face a highly competitive market with mature and digitized incumbent providers
Credit for MSEs in Peru is already a competitive market. With mature and innovative players such as Caja Arequipa or Mibanco already on the scene, it is complex for young fintechs to find a niche based on technology-enabled business models when their competitors have already embarked on their digital transformation journeys. Therefore, in contrast to other markets in our research, in Peru, fintechs must make additional investments to capture the underserved informal MSE market to avoid suffering losses. Given this situation, local fintechs often end up offering credit to formal MSEs that are already served by incumbents.
Moreover, Indecopi (the local antitrust authority) issued a preliminary report about the fintech market acknowledging that credit fintechs share similar characteristics with MFIs, such as offering small credit amounts with volatile repayment defaults. Yet, despite these similarities, fintechs face costs that traditional incumbents do not. For instance, the Indecopi report pinpoints that fintechs face limitations in accessing the payment clearing house (ACH), that credit fintechs pay VAT for their credit services, and that they do not have free access to the information housed at the Registry of Debtors (managed by SBS) as they do not report to this database (as overseen financial services providers do).
MSEs are hesitant to access alternative forms of finance like digital credit
MSE owners tend to be cautious and sometimes traditional when it comes to their options for accessing credit. As evidenced by surveys to measure financial capabilities or programs to digitize Peruvian MSEs, digital financial education is a pending agenda topic - only 42% of adults verify that the financial products they are engaging with are from regulated financial service providers. In a recent pilot project conducted with “mom and pops shops” (also known locally as “bodegas”), 91% of participants said that never received training to digitize their businesses. Indeed, when looking at the profiles of bodega owners, most of them stated that they do not feel capable of dealing with digital tools, possess little experience with these tools, or do not acknowledge the value of digitization for their businesses.
Different national policies, such as Financial Education, Competitiveness, and Financial Inclusion, have already put in place strategies to inform MSEs owners how to interact with credit services offered by fintechs, and these will be well-served to expand quickly.
At the same time, fintechs need to come up with communication strategies targeting MSE owners – both formal and informal - to inform them about their services and especially their value proposition.
What could increase the share of fintechs in Peru’s MSE finance market?
Ultimately, we found that a lack of data can help explain why fintech penetration is so low in the MSE credit market in Peru. Therefore,It is also important to conduct further research about informal MSEs and their credit needs.
It is undeniable that policies play a significant role in leveling the playing field for all competitors in the MSE credit market. As we saw happen 20 years ago with Peruvian MFIs, it is necessary that policymakers adjust the current frame to foster greater competition between fintechs and traditional incumbents. It is also important to pay attention to the preliminary findings of the Indecopi report to ensure fintechs have access to critical financial infrastructure and do not incur higher costs than traditional incumbents.
Finally, financial education for MSEs in compliance with the current national policies and better communication of credit services from fintechs to MSE owners could also raise awareness and interest about digital credit, BNPL, e-factoring and other means of financing schemes designed for MSEs.