SME Demand for Money Transfers

| Sunday, October 26th, 2014

SME Money Transfer

Small and Medium Sized Businesses Approach to Money Transfers

The world’s small and medium enterprises (SMEs) are becoming increasingly reliant on making overseas money transfers as production chains become more internationalised, monetary unions expand and free-trade agreements multiply. Firm-level data collected by World Bank Enterprise Surveys in 135 economies between 2006-14 highlight this trend: the study found that 57% of small businesses (5-19 employees) and 68.7% of medium-sized businesses (20-99 employees) surveyed worldwide relied on imported inputs and other primary materials, requiring them to transfer money abroad. On the sales end, the study found that approximately 12.4% of small and 22.5% of medium businesses worldwide engage in either direct or indirect exports.

On average, SMEs reported between 2006-14 that the majority of their inputs and revenue come from their domestic markets; however, the percentage of SMEs active in the foreign exchange market is rising, particularly for imports of primary materials. On average, small businesses worldwide generated 5.5% of their sales abroad, compared to 9.7% for medium-sized firms. However, 35% of total inputs used by small businesses worldwide were imported, and up to 41.5% of inputs used by medium-sized businesses. As cross-border supply chains become more common, it is critical for cost-sensitive SMEs to understand the foreign exchange market and make fx international payments efficiently.

High-Income Markets: Imports Abound

Well over half of SMEs in all regions of the world rely on foreign inputs and other supplies - with the one exception of South Asia, where 42.9% of small businesses are importers. Unsurprisingly, SMEs in high-income countries are the most internationalised. This is true of members of the Organisation for Economic Cooperation and Development (OECD) - which includes most of Western Europe, North America and key economies in the Asia Pacific region - as well as high-income non-OECD countries such as Russia, Latvia, Lithuania, Uruguay and the Bahamas.

Upwards of 70% of small and medium businesses in high-income countries imported some percentage of their supplies. On average, more than one-third of their total inputs are of foreign origin. In general, stable economic conditions, strong trade ties and conducive regulatory frameworks make it easy for firms in these countries to engage foreign suppliers and make overseas payments. The World Bank surveys did not collect firm-level data from many high-income economies in the European Union and North America, so in reality, these totals would be significantly higher.

FXcompared Markets: Key Importing Regions

In the 75 economies studied by FX Compared Intelligence, 46 countries reported that at least 20% of SMEs used imported goods in their operations. Thailand topped the list, where 100% of both small and medium firms reported that they relied on imports. Outside of the high-income category, Eastern Europe and Latin America are the two world regions with the highest percentage of small business importers.

Eastern Europe and Central Asia include seven of the top 15 countries in terms of the percentage of importing SMEs, unsurprising given its increasing economic integration with the European Union (EU). Proximity to suppliers and consumers in Europe, combined with lower average prices and labour costs than in eurozone countries, has made Eastern Europe a key area for foreign investment. Estonia had the second highest rate in the region, with 94.1% of small and 100% of medium-sized businesses importing some of their supplies. Serbia, Romania, the Czech Republic, Russia, Slovakia, Latvia and Lithuania followed close behind, with more than 60% of SMEs purchasing inputs abroad for which they need to make foreign currency transfers.

Latin America and the Caribbean include five of the top 10 countries for importing SMEs. The Dominican Republic leads the group with 91% of small businesses and 72.7% of medium businesses, followed by El Salvador, Jamaica, Colombia and Ecuador. For the region’s island economies, geographic isolation, limited economic diversification and their comparatively small workforces make imports a necessity.

Export-Oriented SMEs

The number of SMEs that receive international payments, either through direct or indirect exports, is much lower on average. However, businesses in several key regions are increasingly reaching out to foreign markets. For example, the World Bank survey found that in high-income OECD countries, nearly 30% of small businesses and 42.8% of medium-sized businesses are direct or indirect exporters.

In the 75 economies studied by FX Compared Intelligence, 13 reported that at least 20% of local small businesses earn a percentage of their revenue abroad. The rate of internationalisation was even higher among medium businesses; 32 countries reported that at least 20% of medium-sized firms had foreign sales. Among non-OECD countries, the Czech Republic led the pack with half of SMEs active in foreign markets, followed by Estonia (49.47%), Turkey (39.1%) and Lithuania (35.5%).

Indonesia, Sierra Leone and Nigeria were among the countries with the lowest percentage of exporting businesses, each with less than 5% of reporting SMEs. This is attributable to a number of factors, including tougher restrictions on international currency exchange and overseas money transfers.

NOTE: The World Bank Enterprise Surveys (2006-2014) collect firm-level data from a representative sample of small and medium enterprises (SMEs) and large enterprises (LEs) in the private sector of 135 economies. By 2013, 80% of the 53,500 reporting firms were SMEs.

Source: World Bank Enterprise Surveys

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