Central bank digital currencies could finally solve the financial friction that hold back emerging market SMEs. Mustafa Syed, Senior Manager, PwC, explores how financial systems haven’t kept pace with the digital economy and how central bank digital currencies could offer SMEs opportunities which they didn’t have before.
In the sprawling markets of Lagos, the factories of Mumbai and the trading hubs of São Paulo, millions of small business owners face the same daily frustration: their money moves too slowly and costs too much. A textile manufacturer waits three days for a supplier payment to clear. A restaurant owner pays 5% in fees to accept digital payments. An exporter watches profit margins evaporate in currency conversion costs.
These aren’t isolated problems but symptoms of financial systems that haven’t kept pace with the digital economy. While large corporations have access to sophisticated treasury management and banking relationships, small and medium enterprises remain trapped in a world of high costs, slow settlements and limited access to formal finance.
Central bank digital currencies (CBDCs) are emerging as a potential solution to this persistent divide. As governments worldwide launch pilots and expand trials, the focus has largely centered on monetary policy implications and financial stability concerns. But perhaps the most significant impact of CBDCs will be felt in the daily operations of the small businesses that form the backbone of emerging economies.
The hidden tax on small business
SMEs contribute up to 40% of GDP in emerging markets, yet their relationship with the financial system remains deeply problematic. The numbers tell the story: cross-border payments can take days to settle and cost 6-8% in fees. Domestic digital payments often carry charges that large businesses can negotiate away but small operators must accept. Cash transactions, while immediate, leave no digital trail that could support credit applications or business expansion.
These inefficiencies compound over time. A small retailer paying 3% on card transactions sees those costs directly impact already thin margins. A manufacturer waiting for international payments faces working capital constraints that limit production capacity. An online seller without access to affordable payment processing may struggle to compete with larger rivals.
The problem extends beyond individual transactions. Small businesses that operate primarily in cash find themselves excluded from formal credit markets, unable to demonstrate transaction histories that banks require for lending decisions. This creates a cycle where limited access to finance constrains growth, which in turn limits the ability to invest in the digital infrastructure that could improve financial access.
Digital payment platforms have made progress in addressing some of these challenges, particularly across Africa and Asia. Mobile money services have brought millions into the digital economy. Yet the landscape remains fragmented, with different platforms unable to communicate effectively, fees accumulating across multiple intermediaries and trust in private providers varying significantly by market and region.
A new financial infrastructure
CBDCs represent a different approach entirely. As digital versions of sovereign currency backed by central banks, they carry the credibility of government backing while potentially operating at much lower cost than traditional banking infrastructure. Unlike cryptocurrencies, they maintain stable value and legal tender status. Unlike private payment platforms, they can serve as neutral, interoperable rails that don’t favour particular service providers.
Technology enables possibilities that current systems cannot match. Payments could settle instantly rather than requiring days for clearing. Programmable features could automate routine business processes, with invoices triggering payments when delivery conditions are met or tax obligations calculating and remitting themselves. For resource-constrained small businesses, such automation could free up time and capital for actual business development.
Recent developments demonstrate how this potential is beginning to translate into practice. India’s e-rupee pilot has expanded beyond traditional banking institutions to include FinTech companies, directly improving SME access to digital payment options. The acquisition of Digiledge by PayPal-backed Mintoak for US$3.5 million illustrates how private investment is flowing toward CBDC integration, enabling established banks like HDFC and SBI to offer specialised digital currency services to small business customers.
Brazil’s central bank has entered the second phase of its Drex CBDC pilot, working with major payment processors including Mastercard and Visa. This collaboration targets improved transaction efficiency and broader financial inclusion, with implications for how small businesses interact with digital payment infrastructure. The initiative expects full launch in early 2025, potentially serving as a model for other large emerging economies.
Cross-border payments represent another frontier where CBDCs could deliver significant benefits. Project mBridge, involving central banks from China, Thailand, the UAE and Hong Kong, has reached its minimum viable product stage. The platform supports real-time, peer-to-peer international payments, offering small businesses the kind of efficient cross-border settlement that was previously available only to large corporations with sophisticated banking relationships.
The reality check
Despite these promising developments, the gap between CBDC potential and current reality remains substantial. Recent survey data reveals that 56% of emerging market central banks express concerns about adoption challenges, with low user uptake and infrastructure gaps leading their list of obstacles. Additionally, 31% of central banks have delayed their implementation plans due to regulatory uncertainties and technical complexities.
Nigeria’s experience provides a sobering case study. Despite launching eNaira in 2021, the initiative has achieved limited penetration, with only 13 million wallets created nearly three years post-launch in a country of over 200 million people. This suggests that technology deployment alone isn’t sufficient to drive adoption. User experience, education campaigns and compelling use cases prove equally important.
Infrastructure gaps persist across many emerging markets. Reliable Internet connectivity remains inconsistent in rural areas where many small businesses operate. Smartphone penetration, while growing rapidly, hasn’t reached universal levels. Digital identification systems, essential for CBDC account creation, exclude significant portions of the business community in many countries.
User experience challenges compound these infrastructure limitations. Complex interfaces or cumbersome onboarding processes can drive small business owners back to familiar alternatives, regardless of potential cost savings.
The supporting ecosystem for CBDCs also requires continued development. Successful implementation needs co-ordination among FinTech companies, telecommunications providers, traditional banks and government agencies.
Learning from implementation
Early CBDC implementations provide valuable lessons about what works and what doesn’t. Nigeria’s eNaira programme, despite limited initial uptake, is being repositioned with small business needs prioritised. The initiative now emphasises offline payment functionality for areas with limited connectivity and simplified onboarding processes for businesses with varying levels of digital sophistication.
India’s Digital Rupee pilot is exploring integration with the established UPI payment system, potentially bringing CBDC functionality to platforms that millions of small retailers already use. This approach recognises that successful digital currency implementation often requires building on existing user behaviours.
These experiences highlight a crucial principle: CBDCs must address genuine business problems rather than showcase technological capabilities.
The path forward
The choices being made now in central banks, FinTech companies and policy institutions will determine whether CBDCs become tools for financial inclusion or simply add another layer of complexity to an already challenging environment for small businesses.
Policymakers should prioritise extensive consultation with SME communities during CBDC design processes, not just input from large financial institutions.
Infrastructure development should proceed alongside CBDC implementation, particularly around digital identity systems that can expand access to formal financial services. Most central bank initiatives expect to work through public-private partnerships, recognising that government-issued currencies will need private sector innovation and distribution networks to achieve their full potential.
Beyond the technology
CBDCs alone won’t solve every challenge facing small businesses in emerging markets. Regulatory reform, infrastructure investment, improved business environments and access to credit all remain essential components of a supportive ecosystem for SME growth. But digital currencies could serve as catalysts, making other improvements more accessible and effective.
The small businesses positioned to benefit most from these developments are already adapting to available digital tools, often showing considerable creativity in working around current system limitations.
Success in CBDC implementation will affect not just individual businesses but entire communities and regions. Getting digital currencies right could unlock growth with impacts that extend far beyond individual balance sheets.
The digital currency revolution is underway, with central banks worldwide moving from research to implementation. Whether this transformation serves small businesses or simply creates new obstacles will depend on the choices being made today in policy circles, technology companies and financial institutions around the world. For the millions of small business owners navigating daily financial friction, those choices couldn’t matter more.
