While the world is talking about the devastating second wave of Covid-19 in India, the country is not just battling the collapse of its healthcare system but also reeling through the economic damage caused by the first wave. Among several industries that faced severe crisis, SMEs were among the worst-hit due to the pandemic with as many as 70% of them intending to downsize their workforce and 35-43% of them having shut down by August 2020 (as per survey conducted by the All India Manufacturers Organisation (AIMO)). On the contrary, the FinTech sector has seen multi-dimensional growth in the past year; it was amidst the Covid-19 pandemic that India emerged as the leading FinTech destination in Asia in 2020, with the highest investment activities (as per a report by RBSA Advisors). The marriage between finance and technology has, by far, been the most significant innovation — a game changer for most sectors in the economy, especially SMEs.
With their cutting-edge technology and passion to serve small businesses, here’s how FinTech startups have emerged as the much-needed ‘silver lining’ for SMEs in India.
Digitally simplifying businesses
One of the most crucial steps in enabling SMEs is to digitise them. This is exactly where FinTechs have stepped in, they have helped SMEs get easy access to products like bank accounts, cards, managing cash flows, etc. Considering they are a digital-only platform, FinTechs have an edge over other traditional banking services, and are able to offer SMEs with customised solutions that help create their digital footprint. By setting up digital accounts, FinTechs have been able to empower SME merchants to accept digital payments, which has made transactions easier and operations efficient.
Solving the chicken-egg problem
For any small and medium business enterprise, getting their first business loan is their biggest challenge. Unlocking their first line of credit and credit underwriting are interlinked, and in a traditional banking ecosystem SMEs keep struggling with this ‘Catch-22’ situation as they need to produce collateral in order to avail credit or end up paying high interest rates to unorganised lenders. However, tech-rich FinTechs, with their custom-built API-based platforms and AI/ML algorithms use several alternative sources of data (GST, mobile data, social, etc.) to underwrite the ‘new to credit’ segment. Thus resulting in easy access to credit and quick disbursal of loans with no/minimal paperwork.
Processing quick working capital loans
It is not the long-term deliverables but the small day-to-day operational activities like payroll, rent, infrastructure needs, procurement of raw materials, etc., that give rise to the need for short-term working capital requirements for SMEs. These regular cash flow issues are where working capital loans come into play, however a lot of these loans are blocked by those who have a longer payment tenure, as marketplaces favour them over SMEs, due to better returns. FinTechs challenge traditional methods of funding through equity finance, P2P lending, as well as by extending loans against receivables; these solutions go a long way in meeting their short-term working capital requirements. By integrating the open APIs of large marketplaces, FinTech’s have been able to access data on a real-time basis, thus bringing the balance in favour of SMEs from a working capital standpoint.
Flexible repayment options
FinTechs use APIs and demographics, and leverage Platform as a Service (PaaS), to perform an effective risk analysis in order to underwrite their customers, which in turn helps them avail a plethora of credit options. FinTechs are enabling SMEs by bringing affordability platforms at point-of-sale; the same were typically available in organised retail as payment options for their customers (Zero cost EMI, Buy now pay later, etc.). SMEs can start with small credit lines with a smaller repayment schedule and gradually unlock higher credit over time. These solutions deliver higher sales conversion and bigger basket size as these options enhance the customers’ ability to pay; bringing these to SMEs is a huge enablement and gives them the much-needed fillip for their business.
By harnessing the best of technology, FinTechs are not just bringing credit options closer to SMEs, but are also paving the way to build an ecosystem that weighs the business’ growth potential over their present struggles. They indeed are a ray of hope for small businesses in India that need enablement to make the most significant contribution to the economy.
Authored by
Gurjodhpal Singh, Tide CEO – IN