Digital Inclusive Finance and SME Development

Qirun Qiu

School of Mathematical Sciences, Soochow University, Suzhou, 215000, China

Keywords: Digital Inclusive Finance, SMEs, Technological Innovation, Transformation and Upgrading.

Abstract: Due to cost and information asymmetry, traditional finance always ignores the development needs of middle

and small-sized enterprises (SMEs), which impedes their development. By comparison, digital financial

inclusion enhances the accessibility and convenience of financial services through digital technology.

Recently, under the background that aims to promote the integration between the digital and the real economy,

whether SMEs can use its development to achieve high-quality development is of great significance in the

modern economy. This paper focuses on digital inclusive finance has several benefits within SME

development, including improving the efficiency of SMEs' financial activities, facilitating SMEs'

transformation and upgrading, and promoting SEMs' scientific and technological innovation. But the

development of this kind of financial model is facing some impediments, such as financial risk, the excessive

scale of investment, and the difficulty of digital transformation. In the future, we need to find a balance

between risk control and service expansion to promote the development of SMEs better and accomplish

sustainable economic development.

1 INTRODUCTION

Under the traditional financial market, the financial

service target is mainly large enterprises, while

middle

and small-sized enterprises (SMEs)

are ignored. The

fundamental reason is that traditional finance requires

a lot of labor costs for company endorsements.

Secondly, because of problems such as the financial

system, imperfect corporate structure, and inadequate

information disclosure, financial institutions and

commercial banks have insufficient information

collection for SMEs, thus leading to unclear financial

risks. Therefore, the vast majority of financial

institutions and commercial banks feel powerless

when providing financial services for SMEs.In

addition, financial institutions pay little attention to

SMEs, which is partly attributed to various

uncontrollable factors in the market, making private

enterprises keep a distance from financial services, or

even blindly avoid them. Against this background, the

convenience of financial development has had little

impact on private enterprises, resulting in the majority

of SMEs' business models or borrowing scale being

in the old era or the old mode. At present, as private

enterprise is China's main economic support, this

https://orcid.org/0009-0004-4349-0510

situation will hinder economic development to some

extent. Therefore, promoting the growth of inclusive

digital finance is crucial.

The continuous progress of digital technology has

brought new possibilities to the financial industry.

The concept and practice of digital inclusive finance

have been produced by the constant growth of fintech

and other related fields. Digital inclusive finance aims

to establish a data-driven risk control system by

leveraging digital technologies. This approach not

only expands financial inclusion but also strengthens

its impact on entrepreneurship, income growth, and

income distribution, while enhancing the accessibility

and convenience of financial services. Additionally,

digital inclusive finance promotes information

sharing, which decreases the expenses associated with

financial transactions, aids high-quality SMEs in

securing appropriate financing, and helps business

leaders formulate sound investment strategies.

Consequently, the sustainable development of

modern China's economy is largely influenced by

digital inclusive finance.

Currently, studies of digital inclusive finance and

its impact on enterprise development have garnered

significant attention from scholars, with a focus on

128

Qiu, Q.

Digital Inclusive Finance and SME Development.

DOI: 10.5220/0013207900004568

In Proceedings of the 1st International Conference on E-commerce and Artiﬁcial Intelligence (ECAI 2024), pages 128-133

ISBN: 978-989-758-726-9

how it influences efficient investment and alleviates

economic financing challenges. For instance, Teng

and colleagues have emphasized that digital inclusive

finance promotes the efficient growth of financial

activities among SMEs, a point that has been

thoroughly summarized and reviewed in existing

literature (Teng, 2020). In addition, Zhang and other

researchers have highlighted the positive role in

enhancing the technological innovation capacity of

SMEs (Zhang, 2023). Li and his team have explored

how digital inclusive finance contributes to the

transformation and upgrading of enterprises (Li,

2023). So far, Many existing related research results

and literature can enhance our understanding.

However, there remains a lack of consensus among

scholars on key issues such as its concepts, causes,

and consequences. This divergence stems from

differences in theoretical perspectives, research

contexts, and the timeliness of the studies, leaving

some general issues unresolved.

Most of the existing studies on the impact of digital

financial finance on SMEs focus on a specific aspect

and lack a comprehensive literature review. Besides,

the development time of this field is relatively short,

and the relevant research is still not systematic enough.

To address these issues, this paper aims to offer a

thorough summary of the current literature on how

inclusive digital finance influences SMEs. By

identifying existing research gaps and outlining future

prospects, the paper seeks to guide and support

scholars in advancing their studies and developing a

more cohesive understanding of this evolving area.

2 THE IMPACT OF DIGITAL

INCLUSIVE FINANCING ON

SMES

Many scholars have investigated the influence of

digital inclusive financing on SMEs, particularly in

terms of financing, risk management, market

expansion, and technological innovation. This paper

will discuss three aspects of corporate financial

activities, technological innovation, transformation,

and upgrading development of digital inclusive

finance.

2.1 The Impact of Digital Financial

Inclusion on Corporate Financial

Activities

As for the impact of digital inclusive finance on

corporate financial activities, this paper mainly

discusses two aspects improving investment

efficiency and alleviating financing constraints.

Digital inclusive finance helps SMEs make effective

investments in digital technology, significantly

enhances the availability of finance to SMEs, and in

turn fuels business development.

2.1.1 Digital Finance Promotes the

Investment Efficiency of SMEs

Digital finance helps SMEs allocate funds reasonably

to some extent, thereby improving enterprise

investment efficiency. According to relevant

literature, Peng et al.concluded that its development

is significant in improving the investment efficiency

of enterprises, whether for enterprises with excessive

or underinvestment. The reasons behind this may be

multiple. First, the digital economy facilitates the

digital transformation of enterprises to realize

automation and intelligence faster, reduce transaction

costs, improve operational efficiency, and thus

improve investment performance. Second, Its

development provides management with more

diverse and real-time information, which reduces the

uncertainty and risk in the investment. This helps

enterprises make more accurate and objective

investment decisions, avoid inefficient investment

behavior caused by opportunistic motivation, and thus

significantly enhance the investment efficiency of

enterprises (Peng, 2022). In addition, from the

perspective of corporate financing, Li Liang et al.

found that digital finance can help SMEs find and

choose the appropriate volume of financing

investment strategies, to make effective investments

and increase the return on corporate financial

activities (Li, 2024).

2.1.2 Mechanisms for Digital Financial

Inclusion to Alleviate Financing

Constraints

In the traditional economy, insufficient information

collection about SMEs leads to reduced trust in

commercial banks, impeding corporate finance.

Digital inclusive finance has emerged as a significant

solution to this challenge, as noted by Teng. This

modern approach alleviates the financing constraints

faced by SMEs through two primary mechanisms.

First, the risk mechanism enables digital financial

platforms to assess the financial risks of SMEs with

greater precision using big data and artificial

intelligence technologies. Second, the credit

mechanism allows SMEs to establish and accumulate

their own credit assets in the credit market formed by

digital technologies, thereby improving their

Digital Inclusive Finance and SME Development

129

trustworthiness with commercial banks (Bu, 2024).

Moreover, its impact on reducing SMEs' financing

constraints is not uniform but rather exhibits

heterogeneous characteristics. Digital financial

platforms correct mismatches in attributes, domains,

and regions within conventional financial lending

services, allowing SMEs to secure loans more quickly

and accurately, which in turn enhances the

availability of enterprise financing (Bu, 2024).

Second, digital technologies have created credit

markets that enable SMEs to build and accumulate

credit assets, making it easier for them to raise finance.

Research by Lu et al., which analyzed panel data on

Chinese SMEs from 2007 to 2017, underscores that

digital finance represents a transformative shift in the

lending environment, yielding substantial benefits for

businesses (Lu, 2022). Digital trading platforms, for

instance, simplify the loan application and approval

processes for enterprises. Furthermore, in a digital

inclusive financial environment, regional challenges

between banks and SMEs can be effectively

addressed, significantly reducing information

asymmetry and lowering the operational costs for

banks. This presents enterprises with the chance to

acquire more targeted financial products and services.

Therefore, Digital inclusive finance provides a

beneficial and major impact in decreasing SMEs'

financing constraints, therefore improving the

availability of financing for SMEs. These findings

align with the conclusions of Chauvet and Jacolin that

financial inclusion can enable SMEs to break through

the “ financing gap ” and that SMEs may have

greater chances to obtain financial support in a more

inclusive financial environment (Chauvet, 2017).

Financial institutions utilize digital technology to

accurately assess enterprises' financial situation,

operational capacity, and credit level so that financial

resources can flow more efficiently to enterprises

with development potential and investment value. It

promotes the rational flow of funds between different

enterprises and projects, improves the efficiency of

capital utilization, and avoids idle or wasted funds.

2.2 The Role of Digital Inclusive

Finance on Enterprise

Technological Innovation

SMEs have a simple organizational structure and a

flexible mode of operation, so they are more

adaptable and sensitive to the changing market. In the

present competitive market, the small scale of SMEs

leads them to be easily abandoned and eliminated by

the market. Therefore, this encourages SMEs to

generate new ideas and thoughts on the current

technology to gain a foothold in the competitive

market with less cost. According to China's relevant

patent survey report, SMEs completed more than 60%

of the patents, which shows that promoting

technological innovation in SMEs has become an

immediate priority. Secondly, some studies show that

Chinese enterprises' patent exports account for a

relatively low percentage, the competitiveness of

domestic enterprises' patents in the international arena

is on the low side, and at present, SMEs' patented

technologies are imported more but exported less.

This report shows that the current domestic scientific

and technological innovation environment is severe,

and the "gold content" of domestic enterprises' "going

out" patents still needs to be improved. The

significance of promoting the technological

development of SMEs is further highlighted.

According to relevant data, the lack of capital is one

of the main difficulties and obstacles for SMEs to

innovate in science and technology.

Hansen and Birkinshaw's research paper proposes

the innovation value chain as a new staged framework

for assessing innovation performance (Hansen, 2007).

Developing a new patent consists of three main stages:

idea generation, idea transformation, and idea

dissemination. The study by Qi Hongqian et al. goes

into more detail about the shortcomings as well as

drawbacks of SMEs in the innovation chain. The

weakness of SMEs in the two levels of creative

transformation and creative dissemination has led to

different degrees of interruptions and resource

mismatches in the implementation of the innovation

value chain by Chinese SMEs, which has resulted in

the uneven quality of China's innovative products and

even their indiscriminate use (Qi, 2023). For SMEs,

innovation was a necessary factor for their sustainable

development.

In this context, introducing scientific and

technological talent and adequate funding are key

factors, and digital inclusive finance is crucial in this

regard. The growth of digital financial inclusion has

increased the availability of financial support for

SMEs. Its online advantages enable financial

institutions to have rich collection capabilities. It

means that the geographic barriers of traditional

finance are broken down by digital financial

inclusion, which will bring the marginal cost of

financial institutions as well as commercial banks

close to zero. With low survey costs, commercial

banks can reach out more to SMEs to learn more

about more creative and valuable technology ideas

and dispel the crisis of confidence.

In addition, there may be “financial exclusion”

by traditional financial institutions as well as

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commercial banks and a “hot outside, cold inside”

phenomenon of financial inclusion (Song, 2023),

which leads to inefficiencies in lending and

borrowing. Digital inclusive finance well relieve this

phenomenon as well as make corporate technology

financing more efficient. As most of the science and

technology innovations are time-sensitive, Expired

projects lead to the waste of capital and time cost of

the enterprise and even bankruptcy. This financial

model can improve the efficiency of corporate finance

by constructing a streamlined loan approval process,

which enables fast approval of SME-financed loans

and a nearly 20% increase in approval speed (Song,

2023).

Moreover, under the traditional economic model,

commercial banks may encounter challenges in

comprehending the operating conditions of SMEs due

to the lack of information collection, financial

strength, and solvency, thus reducing trust in them

and making them more cautious in providing financial

services, or even refusing to provide them. This

ultimately makes it difficult for SMEs to access

external financing and hinders technological

innovation. However, the financial inclusiveness

contributes to providing diversified financial services

to those who the traditional financial system cannot

cover. It can accurately assess the risk profile of

enterprises, customize financial services according to

their risk characteristics, encourage technological

innovation, and assist in the planning and

management of innovative projects.

2.3 Impacts of Digital Financial

Inclusion on Business

Transformation and Upgrading

First of all, since SMEs are the main source of the

country's major economic output, it is important to

actively promote the new development of SMEs,

which is an inevitable trend for China to move

towards its second hundred-year goal. For the

transformation and upgrading of SMEs, the study of

Li et al. explains its definition in detail, that is,

transformation mainly refers to enterprise

transformation between different industries and

development models, and upgrading refers to

continuous improvement of firms in the industrial

chain and value chain through innovation and

integration (Li, 2023).

Due to the fierce market competition, SMEs are

generally eager to form a strategic cooperation system

with a complete supply chain by looking for partners.

The supply chain is centered on the core enterprise,

which is usually a listed company or a large

enterprise, while ordinary SMEs are usually dealers

downstream of the supply chain. Because first-tier

suppliers generally hold the “lifeblood” of the core

enterprise, Suppliers directly connected to the core

enterprise are first-tier suppliers, and generally first-

tier suppliers are better-developed SMEs, while other

common SMEs mostly serve first-tier suppliers.

Theoretically, this will allow companies in the supply

chain to grow better and cope better with the storms

and turbulence of the market. However, the imbalance

between core firms and firms at the two ends of the

supply chain puts SMEs at both ends of the chain in a

more constrained position when negotiating with core

firms. Among them, some core enterprises in the

supply chain credit sales to upstream SMEs, so that

they can only use most of the business funds to pay

for the working capital and inventory related to the

core enterprises in the supply chain. Downstream

SMEs adopt the receipt and payment method of cash

settlement or collection in advance， leaving most

fluid funds occupied and thus can only reduce the

amount and frequency of their purchase of raw

materials. Additionally, due to upstream credit sales,

first-tier suppliers cannot get funds quickly and

deliver them to lower-tier suppliers, making their

credit assessment impaired and financing difficulties

worse. Downstream, given that the core enterprise

requires downstream sellers to collect payment

immediately when dealing with retailers or

downstream customers, may trigger doubts about the

trust of customers or next-tier partners, damaging the

enterprise's credibility.

In this case, the role of digital financial inclusion

is demonstrated. Digital financial inclusion allows

SMEs to have sufficient liquidity so that some

potential SMEs will not lose their credibility due to

the biased treatment and unfair delivery methods in

the supply chain, which in turn improves financing

and operational difficulties. Digital financial

inclusion enhances the imbalanced position of SMEs

in the supply chain by reducing their business risk and

instability. In the future, more investors will also

increase their trust in SMEs based on their transaction

records with core enterprises in the supply chain,

rather than determining the strength of an enterprise

through its short-term operations. This will help more

promising enterprises to try other fields or develop

new technologies with sufficient capital.

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3 BARRIERS TO THE

DEVELOPMENT OF DIGITAL

FINANCIAL INCLUSION

Current research on impediments to the development

of digital financial inclusion finds that these

impediments involve a variety of aspects such as

infrastructure, data privacy, regulatory policy, market

acceptance, financial education, and economic and

social factors. This paper will explore three

impediments in terms of financial risk, investment

scale, and digital transformation.

3.1 Financial Risk (FR)

The improvement of financial security makes the

growth of digital financial inclusion initially rise

slowly and tend to a stable state, but when financial

security is improved to a certain extent, its positive

impact is rapidly diminishing and even transformed

into an inhibitory effect (Liu, 2023). Financial risks

and benefits coexist, it follows that on the one hand,

if too much emphasis is placed on the rapid

development of digital financial inclusion, there may

be a lapse in risk management. On the other hand,

while an excessive focus on financial risk control can

reduce the likelihood of risk, it also limits the

popularization and diffusion of its financial services.

This is shown in the existence of a reverse inhibitory

link between the development of digital inclusive

finance and financial hazards to some extent. High

financial security is also a hindering factor. Strict risk

controls lead to high service thresholds and overly

burdensome review processes. To achieve excessive

security, financial institutions often need to invest

significant resources in technology development, risk

monitoring, and compliance management. These cost

increases may be passed on to customers, leading to

higher prices for digitally inclusive financial services,

which in turn affects social stability. As a result, too

much financial security without finding the right

balance between risk control and service expansion

may dampen the development of digital financial

inclusion.

3.2 Investment Scale (IS)

The increase in the scale of investment causes an

initial rise in the growth of digital inclusion, but whit

the scale continues to grow, more investment presents

a significant disincentive to digital inclusion

development (Liu, 2023). More investment can

support digital financial inclusion platforms to

expand their business, promote science and

technology, improve service efficiency, and help

build a strong risk prevention and control system.

However, when the scale of investment is too large,

financial institutions may take excessive risks and

neglect risk control in pursuit of high returns. The

positive impact of increasing the scale of investment

diminishes when market saturation is high. In times

of economic instability, over-investment can increase

its negative impacts, such as increased investment

risk, reduced output efficiency, over-allocation of

resources, and waste. In addition, high investment

also implies huge cost outlays, so financial

institutions may raise service fees to cover costs,

reducing the inclusiveness of digital inclusive finance

and hindering the balance of society. Meanwhile, the

influx of investment may trigger excessive

competition and lead to market disorder. Further,

over-investment may also give rise to industry

bubbles, the bursting of which can hit the industry and

seriously affect sustainable economic development.

Therefore, appropriate investment will reduce the cost

pressure on the development of digital inclusive

finance, promote the development of technological

innovation, and promote economic development.

3.3 Difficulties in Digital

Transformation

The integration of digital technologies into all aspects

of an organization is referred to as digital

transformation, which drastically alters how it

operates and provides value to its customers. Digital

inclusive finance has a significant indirect facilitating

effect on the high-quality development of SMEs by

enabling digital transformation (Liu, 2023). Digital

transformation can help financial institutions better

serve SMEs, and improve the efficiency and quality

of financial services. However, some traditional

financial institutions have shortcomings in

technology research, talent pools, and organizational

structures, so enterprises may face challenges in

different areas that make it difficult to achieve rapid

digital transformation. Moreover, enterprises need to

invest sufficient resources and technology and

readjust the traditional organizational structure of the

enterprise, which requires decision-making and

resource allocation by top management, as well as the

active cooperation and adaptability of employees.

These obstacles impede enterprise digital

transformation and hence have an impact on the

development of digital financial inclusion.

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4 CONCLUSIONS

In this paper, we summarize and elaborate on various

studies about the impact of digital financial inclusion

in SMEs and the existing obstacles in previous years.

For the impacts, we summarize three main aspects.

First, digital financial inclusion provides businesses

with easier access to financial services through lower

financial costs in order to help them invest efficiently.

The new mode of investigation and lending can

improve enterprise financing efficiency and alleviate

the shortage of funds for high-quality SMEs. Ease the

financial difficulties of SMEs through efficient

financial activities. Secondly, SMEs, as the mainstay

of patent innovation in China, should make efforts as

soon as possible to solve the obstacles encountered by

SMEs in science and technology innovation. Through

geographically disruptive online services, efficient

lending models, and a widened information network,

people can break down the barriers to science,

technology, and innovation in SMEs. Third, this

financial model can mitigate the imbalanced

negotiation position of SMEs in the upstream and

downstream of the supply chain by providing them

with appropriate funds, ensuring that their credibility

is not damaged by factors other than their own, and

promoting the sustainable development of SMEs.

In addition, this paper provides a summary of the

current impediments to digital financial inclusion.

First, people should strive to strike a balance between

risk and service expansion when developing digital

inclusive finance, as well as to ensure that the

development is benign, constructive, and beneficial to

the public. Secondly, enterprises should control the

quality of investment in digital inclusive finance to

prevent excessive hype and follow-through, leading

to capital bubbles and wasted resources. Finally,

companies should actively promote digital

transformation and utilize new management

structures to ensure that digital financial inclusion can

be carried out efficiently.

The main research direction of current scholars

focuses on the theoretical analysis of the impact of

digital inclusive finance on SMEs, and the empirical

analysis is still relatively rare. Based on this it is

necessary to expand from the following aspects.

Firstly, it is hoped that future literature will collect

data information on SMEs in different aspects.

Secondly, because too much theoretical research

makes the implementation of digital inclusive finance

stay on the surface, scholars should pay more

attention to the research on the implementation in the

future.

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