According to a recent survey, 9 in 10 MSMEs say cross-border trade is a key area for business growth, and 2 out of 3 MSMEs use social media today as a sales channel. This change in approach by MSMEs has significantly contributed to the increase in international trade volumes as the world recovers from the economic downfall of the COVID-19 pandemic.
Despite the immense potential that cross-border trade holds, small and medium business owners contributing to India’s growth story have been struggling. They are not sufficiently armoured to handle the disproportionate number of obstacles, when it comes to seamlessly integrating technology into their current workflows and reaping the benefits of cross-border trade. Challenges hinder the growth graph, and it is high right time that we acknowledge those.
Where do the challenges lie?
As per PayPal‘s MSME Digital Readiness Survey, MSMEs are citing challenges related to high costs, exchange-related issues and concerns around fraud while doing business across borders. While many of them are now increasing their reliance on tech to solve these problems, new roadblocks are cropping up due to the lack of an existing structure.
For example, Mahavir Jain, a small-time exporter, had to make umpteen visits to his bank every time he had to send a shipment abroad. There were forms to be filled up, fees to be paid, LoC to be issued, foreign exchange rates to be negotiated and finalised, et al. It seemed as if he was spending more time and energy completing the paperwork than closing the export deal. The tale of small business owners like Mahavir is one of many. Let’s look at some of the key challenges that they are facing today.
Challenge I: Complex processes and increased dependencies
The OECD report on SME participation in a globally integrated economy mentions complexity in trade and cost of trade as the most significant constraints for SMEs to participate in the global value chain. Distributors and aggregators rely on intermediaries due to a lack of reliable discovery options. Even when they connect with retailers directly, they depend on middlemen to sell more than 50% of their products and fill the gap as demand from established importers/buyers fluctuates. This gap has prevented online trade from accelerating – leaving both buyers and sellers dependent on intermediaries.
Challenge II: Informal supply-chain
Traditional cross-border supply chains in most segments such as food and agriculture, retail, manufacturing, homecare, fashion, and more are broken and fragmented. In fact, MSMEs looking to sell overseas have been unable to acquire customers and manage various end-to-end operations, such as logistics, quality checks, payments, and more, which has resulted in an unreliable supply chain. This obstruction to set up a system which is dependable and consistent has been a prominent setback for MSMEs to participate in cross-border trade.
Challenge III: Tenuous business relations
Another challenge that is impeding SMEs from directly participating in this trade is the trust deficit between parties. A lack of secure and reliable relationships exacerbates the difficulties in processes of navigating international transactions, quality verifications, tackling country-specific government regulations and procuring finance (credit & escrow facilities). These roadblocks can often become barriers for MSMEs looking to enter the markets.
The misfortune is that these challenges are occurring in a landscape where an increasing number of small to medium business owners are invested in expanding their business online. According to the MSME Digital Readiness Survey, 29% of MSMEs believe the business environment in India has improved for online sales, and 31% believe the cross-border prospect is good.
So, what is the solution? Can the digital revolution, which has transformed industries like healthcare, finance and more, also extend to exports? Yes, it can!
Leveraging the power of digital
The silver lining amidst these challenges is the fact that employing technology and digital-first business models is working on the ground for MSMEs. The PayPal India report states that accessibility and adoption of digital methods have led 51% of MSMEs to see an increase in spending from existing customers while 46% witnessed an increase in repeat purchases.
This drives home the point that it is critical for SMEs to adopt a digital-first business model to be able to survive, grow and make the most out of what cross-border trade has to offer. Now, let us explore the solutions a tech-led digital approach can offer to MSMEs.
Solution I: Enabling growth – From creation to consumption
There are prominent players in the market that have the potential to unlock growth for exporters. They can enable product development, online commerce fronts, shop floor automation and more. Some prominent names include Groyyo, Nexprt, Zilingo, Tradyl, Maalexi, Farmport, Bijnis, and Produze. Enterprises such as Nexprt and Sourcewiz are creating digital databases and online fronts for the customers while companies like Groyyo and Bijnis are working towards giving thousands of micro-manufacturers an opportunity to take their business global. While many of the enterprises in this space are relatively new, they are helping unlock growth for SMEs which were traditionally dominated by large companies that use traders and middlemen to sell internationally.
Solution II: Access to digital lending / Increased financial inclusion
Gone are the days when MSMEs had to fill out dense documentation and go through tedious processes to acquire a line of credit for their business. The evolution of financial technology coupled with the pandemic fuelled the growth of digital modes of payments, pushing the world towards ‘cash-less’ alternatives. It is in this environment that companies like Tazapay and Payglocal provide digital business verification and digital escrow services to small-medium enterprises. They help MSMEs boost their business by increasing their number of trading partners and streamlining transactions. Access to financial instruments such as Tazapay, Drip Capital, Stenn, Volofin and Tradewind for international transactions can enable direct exporting and participation in global value chains for MSMEs.
Solution III: Value-added services
It is abundantly clear that a large chunk of the procedural setbacks being faced by MSMEs as they move towards digital lies in a lack of streamlined processes. The refinement of these can help to improve efficiency and lower the barrier of entry.
MSMEs need a strong support system to keep their businesses running efficiently. Processes like quality inspections, stock verifications, user verification, logistics, documentation, contracting and more are paramount in the day-to-day activities of cross-border trade. SaaS products like Sourcewiz help exporters digitise their businesses to enable controlled growth and streamline their businesses. They are also helping exporters create customised e-catalogues for their buyers in under two minutes. This optimises time for exporters and helps eliminate disorganisation in the process.
A collective effort for growth
Cross-border trade is going to become the norm for business owners across markets. But to stack the odds in favour of growth, we need to address the existing challenges of heavy dependencies, unreliable supply chains, and trust deficit between parties. With an increasing number of start-ups already disrupting traditional models to provide support to MSMEs, the sector is also buzzing with entrepreneurial energy, making it a magnet for investments! Coupled with favourable policy support such as increasing the amount of interest-free loans and speeding up loan approvals, it is safe to say that we can realise the ambition of making India the manufacturing hub of the world!
(Surya Mantha, is Senior Partner, Unitus Ventures and Adit Naveen, is Senior Associate, Unitus Ventures)