1 Crossing the Digital Border Four Ways to Transform the SME Global Market BY JAY SINGER AND PAULO FERNANDES JANUARY 2018Executive Summary The business case for growing small-to-medium enterprises (SMEs) has never been stronger. Even in an economy where global giants like Amazon, Alibaba, Kia and Exxon continue to thrive, SMEs account for 90 percent of all businesses worldwide. 1They create four out of five new jobs in emerging markets, according to the World Trade Organization. And the opportunity for SMEs has never been greater. Online buying for both BtoB ($7.7 trillion) and BtoC goods and services ($2.3 trillion) is on a global growth trajectory. Cross-border trade is particularly robust. Fifty-seven percent of all online shoppers say they have made a cross-border purchase online during the first half of 2017. 2Y et, SME growth in the cross-border category has lagged. Despite their contribution to the global economy, SMEs have had trouble entering and competing in the cross-border marketplace. Nowhere is this problem more apparent than in global commerce. Currently, only 38 percent of businesses around the world can process international orders and only 33 percent sell beyond their own borders. That means more than half of all SMEs are missing out on global business opportunities due to lack of access to infrastructure and regulatory expertise. Both will be important to SME growth, which is expected to contribute 600 million jobs by 2030 to fuel a growing global workforce, according to the World Bank. SMEs are widely hindered by lack of access to credit, knowledge gaps, regulatory imbalances and limited access to competitive technology. Public-private partnerships can do more to provide the necessary government intervention and private company strength to extend expertise, technology and access for small merchants. This will require the various stakeholder groups to come together and influence regulation on behalf of SMEs and innovate to make cross-border trade easier. “If SMEs are involved in the formulation of policies that will affect their businesses, they will champion the effective implementation of the same,” says Phyllis Wakiaga, the UN Global Compact Network Representative for Kenya. “In contrast, if there is no consultation to build a shared understanding on the intent of a policy, then not only do small businesses suffer the cost and operational burdens of adjustments, forcing them to shut down, they also are unable to progress their role of social value creation.” 302 1 /iso/news/2015/03/Ref1937.html 2 /shopify/enterprise/global-eCommerce-statistics#GlobalInfographic 3 /capitalfm.co.ke/eblog/2017/08/23/smes-critical-actualizing-environmental-policies/ SMEs face four common obstacles as they grow their cross-border trade capacity:- Access to best practices and partnerships- Regulatory imbalances- Access to technology- Logistics support Paulo Fernandes, VP, Government and Developmentof SMEs say access to financing is a “severe” obstacle 19% 20% avoid applying for loans due to complex application procedures Source: World Bank Some recent developments are signs of progress, like the WTOs Trade Facilitation Agreement (TFA). This went into force in February 2017 to help harmonize the movement, release and clearance of goods to reduce the burden of importing and exporting goods across borders. This white paper will build on examples like the TFA to gather on-the-ground experience and thought leadership from experts on all sides of the issue: private companies, government agencies, NGOs and others that are cracking the code on SME cross-border trade. It is organized into four major recommendations: encourage knowledge sharing, increase efficiencies in procurement, enable innovations in payment technology and examine Free Trade Zones in eCommerce. 03 The findings in this white paper were gathered from several sources, including the Mastercard Salon event in Washington, DC in July 2017, Harnessing Trade for Growth. Thanks to all the experts, government officials and NGOs who gave their time to discuss the issues that are critical to global SME success.Encourage Knowledge Sharing RECOMMENDATION 1 04 SMEs have been able to create success stories and best practices. But they need to be centralized and shared. Businesses have an urgent need for consistent and reliable sources of information on payments technology standards, available partnerships, credit policies, regulations in the legal environment, infrastructure and restrictions on the international transfer of funds. In its June 2017 report, “Enhancing the Contributions of SMEs in a Global and Digitalized Economy”, the OECD Council at Ministerial Level said, “a key challenge for many SMEs is to identify and connect to appropriate knowledge partners and networks,” adding that success for SMEs depends on “their access to strategic resourcessuch as education and training, innovation and infrastructure.” Some existing partnerships serve as models for SME knowledge sharing. In the United States, the International Trade Commission under the U.S. Department of Commerce manages District Export Councils that foster micro-markets. The Export-Import Bank of the United States (Exim Bank) does similar work on a macro level. While macro-economic knowledge access and transparency for SMEs is still nascent, notable projects are using social media-style platforms to achieve scope and scale. The Inter-American Developmental Bank (IDB) is backing an effort in the Latin America Caribbean region (LAC) called ConnectAmericas, which is one such online capacity-building platform. Launched in 2014 by the IDBs Trade and Investment Division, ConnectAmericas has registered 140,000 entrepreneurs in 120 countries, with the majority located in LAC. While the site is not yet transactional, the IDB has set a goal to originate $3.3 billion in trade via the ConnectAmericas platform by 2019. Francisco Estrazulas de Souza, Trade and Investment Specialist with the IDB, says ConnectAmericas has been so successful that it is being offered as a white-label solution to trade partners. “White-labeling organizations will hit the ground running with 140,000 entrepreneurs in 120 countries, 11 online open courses, thousands of purchasing announcements, and the ability to add their own tools,” Estrazulas de Souza says. “As new entrepreneurs join, either through ConnectAmericas or any white-labeled version of the site, they become visible to all members in the system.” Public-private partnerships can make information more accessible to SMEs. For example, Mastercard has been working with the IDB since 2014 to promote the transition to electronic payment services in the region, which can help reduce transaction costs and increase the efficiency of financial disbursements. Replacing cash-based systems with electronic ones also can potentially reduce leakages, increasing the likelihood that payments and benefits end up in the hands of intended beneficiaries and recipients, helping to improve the lives of the underserved. Many entrepreneurs lack financial knowledge, strategic vision, resources and, in some cases, the willingness to attract sources of finance other than straight debt. OECD, 2017Increase Efficiencies in Procurement Optimizing internal SME processes by automating invoices, settlement, payment and reconciliation is a pillar of many SME export initiatives. Digitization will allow SMEs to improve the speed, ease and security of their commercial payments. And because of WTO and World Customs Organization (WCO) agreements, many countries are now installing single digital windows (which act as a platform for electronic exchange of trade information) as cross-border trade portals. Dozens of government agencies can operate off a multiple submission request to a transparent digital platform: submit once and goods clear. On the industry side, private sector players capture essential shipment data at origin, which is then pushed, prior to wheels-up, to the border agencies in the receiving country. This data contains the essential information that allows for the comprehensive processing of a cross-border shipment. “In the age of eCommerce and the immense volume of shipments, the challenge is to ensure border agencies have the capacity and incentive to use the advance data in order to release the shipment upon arrival at the border,” says Amgad Shehata, SVP of International Public Affairs 17 percent are “underserved.” Even fewer use a Letter of Credit facility. Twenty-two percent of the World Bank respondents say the bank requires too much paperwork. Banks, on the other hand, are less inclined to offer a Line Of Credit for lower value transactions as the paperwork and cost involved in processing of a $100,000 versus a $5MM Letter Of Credit is similar, with obvious disparity in returns. 6Bottom line: 31 percent of SMEs say of this restriction impedes their ability to export. 7One of the solutions here could be a business credit card positioned and leveraged for cross-border, low-value payments (usually less than $50K) to bring more efficiency to banks and the small business, for whom the process and approval for credit would be simpler and less costly than a full-fledged Letter of Credit. Enable Innovation in Payments Technology 5 /pymnts/news/b2b-payments/2017/saxo-payments-cross-border-sme-survey/ 6 /smefinanceforum/data-sites/ifc-enterprise-finance-gap 7 /sciencedirect/science/article/pii/S2214845016300539 07 RECOMMENDATION 3 “Interoperability is a game changer, and its happening whether we like it or not.” Torbjörn Fredriksson, United Nations