Beginning November 2016, a particular department in our company started receiving unusually high number of calls and enquiries from customers. The sales force went into full throttle and the product team was finding it hard to meet the excessive demand. This was the ‘card swipe machine’ department.
Demonetisation affected many people in many ways. But the most to feel the heat were small and medium business owners. Largely a cash intensive market, scrapping of Rs 500 & Rs 1000 notes and scarcity of lower denomination notes drove them to adopt digital payment tools to keep the business going. But the real victory hasn’t been for the government, consumers or FinTech companies. It’s been for these small business owners entirely. Besides the obvious transcendence into the digital world, what one fails to realize is that overnight a large number of people opened bank accounts and entered the formal banking system. Small business owners who had long been waiting to access credit and loans just crossed the biggest hurdle that had been threatening their growth so far!
Micro, Small and Medium Enterprises (MSMEs) play a vital role in the framework of a country’s economy, yet have largely been ignored by big banks and financial institutions due to various factors like inability to provide identity documentations, absence of collateral, credit history etc. Even if they met these factors, the small ticket size still made it an unexciting prospect for formal institutions. But one sector’s loss proved to be another sector’s gain.
FinTech companies decided to tap this huge market and solve the problem head on. Over the years, I have noticed and interacted with many startups offering solutions across different verticals in financial services. Not only are they bridging the gap between lenders and borrowers, they have introduced innovative methods to challenge the status quo and make it a win-win situation. Perhaps their biggest contribution is establishing KYC details and pre-approval requisites for disbursal of loans. We know that traditional banks are restricted by regulations to provide credit, but FinTech lending companies resort to alternate credit scoring parameters like data analytics, behavioural and psychometric information, social media traces to assess credit worthiness. This enables them to provide easy, fast and collateral-free customized loan solutions, sometimes even as fast as 48 hours.
Financial product aggregators and credit servicing companies like FlexiLoans, Smelending, Veritas Finance, Lendingkart, FineTrain, Rubique, Capital Float are meeting the loan and working capital requirements for MSMEs. Another concept that I strongly believe has the potential to turn around funding woes in India is the invoice discounting, which players like KredX are exploring. Still at a nascent stage in India, this method of converting invoice into assets has proven to be successful in Singapore and China, and could grow into a lucrative model here.
Though credit isn’t the only void that these companies are filling. Players like Zoho and Profitbooks are equipping small and medium enterprises with software and technology platforms while companies like StoreKey and Catalyst Lab aggregates the demand of wholesale and retail sale for small merchants thereby improving their market power and competitiveness. According to software industry body Nasscom, the Indian FinTech software market is forecast to touch $2.4 billion by 2020 from the current $1.2 billion. These services include everything from payment processing software, accounting and invoicing systems, merchant and e-commerce platforms, retail investing platforms, supply chain finance, export and trade finance platforms, to big data business analytics tools and cloud services.
Banks too have realised that FinTech companies are not a rival, but a resource. They are collaborating with new companies providing unique solutions to enhance their own efficiency. For instance, by adopting CustomerXPs AI software, ICICI can now create an improved profile of the customer, predict the customer’s next product purchase and study the relationship with the existing patron, thereby equipping the bank’s customer service department of ICICI with better data.
Needless to say, India presents an attractive market for a FinTech and MSME alliance. MSMEs contribute around 8 percent of GDP, 40 percent of the total exports and around 45 percent of the manufacturing output. Interestingly, it is a nation of natural entrepreneurs too. From chaiwalas to boot polishers, situations drive people to start something overnight, making it a country of countless sole proprietors, unincorporated companies, home based business owners and street vendors.
The government and RBI recognize this factor and have in the recent years taken various initiatives that supplement the effort of the FinTech companies. The implementation of Aadhar primarily being one. By establishing identity for each citizen on a common network, it will become easier to run eligibility checks for traditional and non-traditional agencies across the country. Other initiatives like Udyami Mitra portal, Trade Receivable Discounting System (TReDS) and Small Finance Banks (SFB) will further ease the challenges faced by small and medium companies and help them enter the gambit of financial services. However, in the coming year, all eyes are going to be on the GST rollout and its outcome.
I believe it can change the dynamics and its impact will be felt across all sectors in the business environment. According to a report on FinTech by KPMG, the transaction value for the Indian FinTech sector is currently estimated to be approximately $33 billion in 2016 and is expected to reach $73 billion in 2020, growing at a five-year compound annual rate of 22 percent. With GST, digital lending will reduce the transaction costs, while simultaneously streamlining systems and improving tax compliance within the SME segment.
It is obvious that FinTech has the potential to transform industries. Since the 70s, we have been witnessing how it has disrupted businesses. Be it ATMs, internet banking, payment processing products/softwares, or upcoming technologies like blockchain, it will continue to change the way we interact with money. This takes us to two pertaining questions. Can FinTech be the game changer for MSME industries? Yes. Has it done enough for MSMEs? I don’t think so…
We as a nation need to give it the supportive environment and tools to innovate, introduce and reach out to the smallest merchant in need of financial assistance. One could argue that FinTech will not necessarily yield the consumer base and loyalty that traditional banks and institutions enjoy, but by catering to an untapped and largely ignored market, they have the opportunity to engulf a whole new generation of customers. From enabling consumers to reach the bank to being the bank themselves, FinTech has the potential to transform the MSME industry.
Read More : Business Standard