While India is working hard to be on track to become a $5 trillion economy by 2025, we must understand that reaching there will take more than what we as an economy have been doing so far. With exports amounting to 48 percent and as many as 11 crore job creations (until July 2020), SMEs in India are leading the way to fulfil India’s trillion-dollar economic dream. At this crucial juncture, it is extremely important for us, as a country, to support and strengthen SMEs that form the very backbone of our economy, through accessible credit options.
However, before we explore the great things technology can do to bridge the credit gap between financial institutions and SMEs, it is important to understand what is blocking access to credit for these small businesses.
Lack of digitisation
When it comes to digital maturity, India ranks 9th in the small and medium businesses segment in the Asia-Pacific region (according to the CISCO India SMB Digital Maturity Study 2020). The road to the digitisation of SMEs is far too complex for anyone to tread alone; there are ‘n’ – number of challenges ranging from lack of skills and access to talent, to lack of business-appropriate technologies required for an overhaul.
Challenging unit economics
Most traditional financial institutions struggle as unit economics does not favour penetration in the SME segment. Despite having great unit economics for individuals and corporates, traditional banks struggle to serve SMEs due to lower margins, higher operational, and risk/ underwriting costs. The fact that costs often exceed the revenue generated results in SMEs being underserved as a segment.
Absence of reliable credit methodology
For most traditional financial institutions, credit underwriting and identifying SMEs with reliable credit history is a cumbersome process. Underwriting alternative data on trade receivables in the traditional setup is not just expensive, but time-taking as well; which leads banks to shy away from the process. This has led to a strained relationship between banks and SMEs, which, in turn, has created a huge gap in the market.
The fintech advantage
It is often said that the use of technology is not impressive on its own, it is the experiences you create with it that matters. This is exactly where fintech startups step in to fill that void and create a rather conducive environment for all to survive with utmost comfort.
Access to technology
Fintechs bring convenience and help SMEs get easy access to products like bank accounts, cards, securing working capital, managing cash flow, etc.
Being a digital-only platform, fintech startups offer SMEs with tailor-made products and solutions that help create a digitised credit history for them, which further helps them get seamless access to credit. Digitisation brings higher transparency and efficiency in the ways of conducting business – this is empowering for SMEs as a segment.
Bridge the credit-data gap
By using tools such as AI (Artificial Intelligence), ML (Machine Learning), and big data analytics, fintech startups develop alternative forms of credit risk analysis, which allows them to understand and effectively price credit risk as well as underwrite cases that traditional banks may refuse.
Moreover, fintech startups act as aggregators to access and analyse digitally available GST-linked data, and thus, customise lending solutions to unlock credit supply for the sector and connect customers (SMEs) to suitable lenders. Fintechs also use social media footprint and digital data establishing the quality of the business network for underwriting new to credit segment.
Method to the madness
There are millions of SMEs in India with no or low capability to manage cash flows, operational compliances and documentations; fintech startups help provide a structure to their credit flows, enabling them to seek credit faster and maintain financial health to help them grow. They address various pain points like managing online bank accounts, automating finance, assisting the credit-underwriting process, and more.
Being prompt, straightforward, adaptable and highly cost-effective, fintech startups have the potential to efficiently emerge as enablers for SMEs looking for seamless access to funding without having to dilute their equity.
By using APIs, demographics and business trends, fintech startups look to use Platform as a Service (PaaS) to perform an effective risk analysis to underwrite their own customers. This helps them customise their lending process, starting with small credit lines that can be paid off in a smaller duration, gradually increasing their eligibility, and unlocking more credit over time. Challenging traditional methods of funding through equity finance, P2P lending, etc. Fintech startups are providing bespoke solutions to meet the revenue requirements of SMEs.
DIY ways to grow
Lastly, Fintech startups assist small businesses with several useful DIY tools that help them make a huge difference and achieve a competitive advantage. Be it communication, accounting, bookkeeping, project management to marketing, several fintech startups and neo-banks provide most of these tools all under one roof for SMEs with limited resources to help manage day-to-day operations and monitor administrative tasks with convenience. Technology helps deliver these resources to SMEs at an efficient cost.