How SMBs are Leveraging Digital Payment Solutions

8 min read

"Digital payments aren't just transactions; they're the catalyst transforming SMBs into agile, global players. Embrace the fintech revolution and watch your business growth!" Dashiel Arronte, CEO & Founder of Guayacon Financial Strategy Consulting

1. Introduction

The digital revolution has fundamentally altered the financial landscape. Small and medium-sized businesses (SMBs) are increasingly turning to digital payment solutions to streamline their operations, enhance efficiency, and remain competitive in a rapidly evolving marketplace. Bryan Zhang, Co-Founder and Executive Director at the Cambridge Centre for Alternative Finance, confirmed that SMBs in emerging economies had problems with the lack of access to finance[i]. Fintech[ii] and it has emerged as a disruptive force in the financial sector. McKinsey estimated that it will Fintech grow three times more than traditional banks between 2023 and 2028[iii]. Boston Consulting Gorup (BCG) reported that global fintech revenues grew at 14% annually over 2022 and 2023[iv]. The expectation is to have a Digital Payments Market size of 37.1 Trillion by 2032 compared to 8.4 Trillion in 2022[v]. The main drivers of the growth are the technological advancements (i.e. Artificial Intelligence, Blockchain, Cloud Computing, The Internet of Things) and changes in customer demands, specially SMBs looking for more flexible, efficient, and cost-effective financial solutions (i.e. lending, better pricing, friendly platform utilization).

2. Digital Payments as solution for SMBs critical needs

One of the most critical aspects for SMBs is enhancing cash flow management. Traditional payment methods involve delays, funds taking days or even weeks to be cleared. Based on Cornerstone Advisors, 31% of SMBs would consider opening a new bank account to for better treasury and cash management features[vi]. Digital payment solutions are a game changer because reduces the time for businesses to receive payments, improving their liquidity and cash flow; accelerate receivables conversion by having revenue growth 20% faster than businesses using traditional methods[vii]; and ensures timely payments to vendors without the fear of forgetting any bill or incurring late fees and penalties[viii]. The impact of digital payments into the cash management allows SMBs to reinvest in their operations more quickly, manage their expenses more efficiently, and reduce the risk of cash shortages.

Cost efficiency is related to the previous need. However, it must be analyzed as a separate critical consideration where fintech innovations have provided substantial benefits. High processing fees and significant infrastructure investment are typical of traditional payment systems. On the other hand, digital payments are considered a disruptive mechanism because reduces transaction fees and automate processes that reduce timing and labor costs associated with manual payments handling (Invoicing, reconciliation, etc.). The integration with accounting and business management software also reduces the additional administrative staff; decreases costly mistakes due to human errors[ix]; minimize the need for physical cash management[x] and reduce short-term borrowing or overdrafts facilities cost (connected with first critical aspect explained above). All these benefits allow SMBs to allocate resources more effectively throughout all the different departments to meet business requirements.

Another critical area is the need to increase customer reach. By adopting various payment methods (mobile wallets, contactless payments, Payment gateways, etc.[xi]) and e-commerce platforms, SMBs can reach a global customers base instead of local markets. This provides flexibility, attracts more customers and encourages repeated transactions with other businesses and customers due to the diversity and convenient payments options offered.

Finally, Security and Fraud prevention is a crucial concern for SMBs. Digital payment solutions enhance security measures by offering advanced protection against fraud and cyber threats. Sophisticated encryption, real-time fraud detection algorithms[xii] and multi-factor authentication[xiii] are used to safeguard sensitive financial information during transmission and storage. One of the most effective tools used by the platforms at this time is machine learning algorithms. It can analyze large amounts of transaction data, in order to identify anomalies and suspicious activities that could indicate fraud. Furthermore, the continued monitoring in the digital payments’ transactions reduce the risk of loss or theft compared to traditional methods. The evolution of security features allows SMBs to feel more protected as well as build trust with customers, by encouraging them in the adoption and use of digital payment methods.

3. Digital Payments Challenges

Despite the benefits and solutions provided by digital payments solutions to all the critical financial aspects for SMBs, there are several challenges that must be considered and analyzed.

Adoption barriers: The initial cost and complexity of implementing digital payment systems are the primary obstacles. SMBs work with constraints budgets, which force them to be selective about their investment. There still is a lack of education among the SMBs[xiv] regarding financial and digital technologies. Therefore, the main mindset is that new technologies have high costs associated and potential disruption to business operations. The perception of additional costs related to set-up, maintenance, and staff training, can lead to a delay in the adoption of digital payment methods, despite the growth in consumer demand. Furthermore, psychological barriers, such as resistance to change and a preference for traditional transaction methods complicate the adoption process[xv]. Overall, digital payment methods offer big advantages, but these adoption barriers must be addressed to encourage broader uptake among SMBs.

Security concerns: While digital payments systems provide great security features as discussed above, digital transactions are becoming part of our day-to-day, so the risk of payment fraud and data breaches increases. The SMBs could be in a serious threat if they have limited resources to invest in security measures (similar situation with adoption barriers). Therefore, situations like payment fraud, malware attacks or insufficient security controls over third-party vendors for payment processing[xvi], can lead to substantial monetary losses, reputational damage, and a loss of customer confidence[xvii]. One clear example of data breaches is the case of “Ticketmaster” cyber-attack that affected 560 million customers worldwide in early 2024[xviii]. To mitigate these risks, SMBs must ensure that the systems have a comprehensive security strategy[xix], and compliant with industry standards, so they can safeguard their financial transactions, customers information and preserve customers’ trust.

Regulatory compliance: The complex and evolving scenery of financial regulations requires businesses to deal with several rules and standards. These regulations vary by region and industry, so it can be difficult for the operation in multiple locations or sectors. However, SMBs digital payments system must comply at least with Data Protection and Privacy Laws (CCPA)[xx], Payment Card Industry Data Security Standard (PCI DSS)[xxi], Anti-Money Laundering (AML)[xxii], and Know Your Customer (KYC)[xxiii]. SMBs must be proactive and well-informed of all the requirements because non-compliance could result in severe penalties, legal action, and reputational damage.

4. Real Case Analysis of Process Improvements by Digital Payment

Blue Bottle Coffee a small local coffee shop created in 2002 became an international chain by unifying forces in 2013 with Square (Fintech created in 2009), which helped them to modernize its payment processes, gain valuable business insights[xxiv], and enhance the overall customer experience[xxv]. The implementation of digital payments by Square permitted the company to accomplish the following improvements:

1) Streamline Point-of-Sale System (Square Register[xxvi]) which give the option to accept cash, credit card payments, track inventory and monitor daily reports; 2) Customers making purchases at the location by only saying their names, improving speed and conveniences thanks to Square Wallet[xxvii], as well as later on their release the mobile app where customers place orders ahead of time reducing wait time (the demand was huge due to COVID-19 pandemic situation); 3) More quality data information promoted operational efficiency improvement on staffing decisions over products and peak demand times[xxviii]; 4) Flexible payment methods[xxix] were accepted, for instance contactless payments, mobile wallets, credit cards, etc.

Based on all these benefits, Blue Bottle Coffee was able to scale efficiently by reducing transaction times, improving accuracy, and allowing staff to focus more on customer service rather than managing payments.

5. Future Growth Opportunities

There is a big room for improvement under the digital payment methods, and the SMBs must take advantage of it and invest in future technologies in order to accomplish financial goals, and most importantly be able to be competitive in the market. SMBs will continue to have the same critical needs (Cash Flow management, Cost Efficiency, Customer reach, and Security), and digital payment ecosystem works toward finding out better ways to mitigating these aspects of business.

The consideration should focus on 1) investment in mobile-friendly payment solutions as contactless payments systems[xxx], smartphones and tablets as payments terminals[xxxi], QR Code payments[xxxii], or even Voice-Activated Payments[xxxiii] where customers will perform purchases through smart speakers or voice assistants. All this will attract and retain customer base and improve all Cash Flow management. 2) Artificial intelligence (AI)[xxxiv] and machine learning (ML) integration in the processes will be a key differentiator for the SMBs. There is big room for improvement in these tools since they are essential for analyzing data analytics and customer behavior so tailored payment options can be offered. With this information better forecast cash flow forecast could be done, as well as identification of suspicious transactions with the advanced algorithms. AI and ML will improve on the security and fraud aspects of the business as well as Cost efficiency.

In conclusion, the digital economy is a new era and SMBs must be open for innovation in digital payments to have a sustainable growth, meet the changing demands of consumers by having employees focus on main business activity and customer experiences rather than process payments in order to outpace their competitors.

REFERENCES

[i] 3 reasons why the rapid growth in Fintech is a good thing | World Economic Forum (weforum.org)

[ii] Defined as “Companies that rely primarily on technology and cloud services and less so on physical locations to provide financial services to customers” by McKinsey & Company. What is fintech (financial technology)? | McKinsey

[iii] The future of fintech growth | McKinsey

[iv] 2024-fintech-report-june-2024-edit-03.pdf (bcg.com)

[v] Digital Payments Market Size | Growth Analysis, 2023-2032 (gminsights.com)

[vi] Cornerstone Advisors (Reinvesting Business Checking) The Key to Growing SMB Relationships

[vii] 6 Payment Methods to Accelerate Business Cash Flow | HSBC Indonesia

[viii] How digital payments can save your business’s cash flow - Melio Blog (meliopayments.com)

[ix] The 9 Greatest Benefits of Using a Digital Payment System for Your Small Business - Finli

[x] How Digital Payments Are Transforming Small Businesses | World Economic Magazine (worldecomag.com)

[xi] Digital Payments: 12 Digital Payment Options To Consider Accepting In Your Business (staxpayments.com)

[xii] Fraud Detection and Prevention in Digital Payment Systems – Brandefense

[xiii] Protecting Your Assets: Cutting-Edge Solutions For Digital Payment Fraud Prevention (financialcrimeacademy.org)

[xiv] What do SMBs need to get on the digital payment highway? | Visa