Technology made possible a flowering of small enterprises and supporting microfinance in emerging markets, but an extensive study reveals it has also brought risks ranging from cyber fraud to lack of recourse in the event of financial misconduct. These can be amplified by structural, regulatory and informational gaps.
The findings are from Small Firms, Big Impact: Digitization, Financial Services, and Climate Resilience in Five Emerging Markets by the Center for Financial Inclusion (CFI), a think tank hosted by the nonprofit Accion. The center sought to understand “the drivers of financial health” and provide “the clearest picture yet of the challenges and opportunities that determine the business trajectory” of micro and small enterprises (MSEs).
Enterprises that adopted digital payments and financial platforms were up to 10% more likely to report revenue growth than were those that did not. But the survey of 20,000 MSEs, along with more than 4,000 interviews, revealed adoption to be uneven across the five representative cities: Addis Ababa, Delhi, Jakarta, Lagos and São Paulo.
Digitization usage in Africa, for instance, is limited, whereas in Delhi, digital engagement has grown without corresponding improvements in digital safety or support infrastructure.
A core conclusion: Financial inclusion may need to go “beyond access,” with such additional qualities as safety and trust, people and culture management, and resilient systems that protect users and firms in moments of crisis.
Source: Center for Financial Inclusion report (figure 22).
Despite regulatory mandates for customer protection, ground-level enforcement in many emerging markets is patchy and inaccessible, especially for small businesses in underserved regions.
“In the financial sector, customer protection is a critical regulatory priority,” said Asheeta Rigidi, a consultant specializing in fintech, tech and privacy laws. “But the real gaps lie in enforcement and accessibility, especially for customers in tier 2 [cities] and below.”
Redress mechanisms exist on paper but often fail in practice. In India, while complaints can be registered against regulated financial entities, the systems can be too complicated for the average consumer to navigate.
Many people don’t know whom to complain to, or how, said Rigidi, adding, “They may know only the brand name, not the legal entity, or which forum to approach.”
These challenges are exacerbated in regulatory grey zones. “Many fintechs are customer-facing, but may operate outside direct regulatory oversight,” Rigidi observed.
As a result, disputes frequently go unresolved, eroding trust in digital systems. Rigidi recommended a unified, multilingual and intuitive grievance redress forum, accessible even offline – an institutional gap that persists across many emerging markets.
Source: Center for Financial Inclusion report (figure 32).
Digitization is commonly framed as a positive for MSEs, but it can expose them to risks, “particularly around fraud and weak consumer protection,” said Edoardo Totolo, CFI deputy managing director and lead author of the report.
“In Delhi, we see widespread use of digital payments, but also a sharp increase in fraud and scams,” he pointed out.
Phishing and unauthorized charges, for example, disproportionately affect low-literacy users, and again, damages are exacerbated by lack of recourse. “These are not isolated cases – they reflect broader concerns that as adoption rises, so does exposure to sophisticated fraud,” Totolo said.
There are also credit stresses. Indian MSEs “often exhibit clear financial stress signals that reflect deeper liquidity and operational challenges,” said Saikat Roy, business head, corporate and infrastructure, of CARE Ratings, which is part of CareEdge Group.
Many MSEs struggle to pay suppliers and employees on time, leading to over-reliance on short-term, high-cost credit. “Competitive pressure forces businesses to operate on thinner margins while grappling with rising input costs,” Roy said.
The promise of service innovations and digital public infrastructure (DPI) systems like India’s UPI (Unified Payments Interface) must be underpinned by sound governance.
“To legally encode trust into digital systems, it’s important to establish a strong legal foundation,” said Shehnaz Ahmed, who leads applied law and tech research at the Vidhi Centre for Legal Policy.
Vidhi Centre’s Shehnaz Ahmed
“A critical gap lies in the absence of a common oversight mechanism across DPI systems in India,” she said. “Without policy cohesion, it’s difficult to address the complex and intersecting challenges faced by women entrepreneurs.”
Operating in a half-digital or hybrid mode – where MSEs accept digital payments but manage their accounting manually – can complicate credit underwriting and risk assessments.
Totolo stressed the fundamental importance of trust and MSEs’ confidence that any complaints will be addressed. “The fastest erosion of trust comes when business owners feel they have nowhere to turn when something goes wrong,” he said in an interview.
In Delhi, which had the highest digital usage among the cities surveyed, resolution rates were the lowest. Formal complaints there are relatively rare “because many simply believe that complaints won’t be resolved,” Totolo said. Although redress tools are embedded within some digital apps, they are at an early stage and inconsistent.
“The system breaks down at multiple levels,” Totolo continued. “Limited awareness of where to complain, complex or opaque processes, and a perception that nothing will change even if you complain.”
One in three MSEs surveyed had experienced climate-related shocks like floods or heat waves, but fewer than 20% had access to emergency funds within a week. Twenty-nine percent said the experience made them more likely to invest in climate adaptation.
CFI Deputy MD Edoardo Totolo
“The critical gaps in Delhi are two-fold: financial vulnerability and market dependence,” Totolo said. Many businesses still rely on family for emergency financing and remain vulnerable to losing a key customer or supplier.
Credit remains key for resilience, but limited histories and collateral continue to restrict MSE access.
“Operational resilience metrics should be integrated, assessing cash flow buffers, supply-chain diversification and digital adoption,” Roy suggested. He also recommended alternative credit models and broader access to microfinance and sustainability-linked loans.
A plus for digitally-enabled enterprises is richer data trails that make them more attractive to formal lenders.
According to a 2023 study, emerging-market SMEs’ digital readiness depended on technological sense-making, agility and implementation. Another one this June proposed a practical framework to build these capabilities, highlighting the need for learning, adaptability and long-term strategy.
Experts say MSEs need more shock-responsive tools: pre-approved credit lines, microinsurance, and disaster-linked payouts. Trustworthy, user-friendly platforms, transparency, and education – not just access – are key to meaningful digital inclusion.
Totolo regarded “the degree to which micro entrepreneurs prioritize stability over growth” as surprising. “Tools that help them weather shocks matter as much, if not more, than tools focused purely on growth.”
Contingency planning, digital maturity and supply-chain strength could thus matter more than credit scores. Connectivity, logistics and digital infrastructure may have to be enhanced, especially in low-income and semi-urban zones.
As Carmine Di Sibio, former EY global chairman and CEO, has written, “Beyond economic growth, the greatest value of innovation in emerging markets is its ability to create prosperity, social equality, and a stronger foothold in the global economy.”
Resilience, oversight and accountability have emerged as prerequisites.