With 2020 being one of the worst-hit years for the Indian economy, the entire country expected things to look up this year. While 2021 definitely had a promising start, it was only in mid-March that things started getting gloomy. As India grapples with the second and more-infectious wave of Covid-19, and saving lives becomes more crucial than ever, it is disheartening to see SMEs struggling to survive this almost-immediate second hit.
At 64 million, SMEs are the principal driving force of India's economy and have been one of the worst-hit sectors during the entire course of the pandemic. The industry that employs over 120 million skilled professionals, saw a quarter of its workforce lose jobs during the pandemic last year. Being financially fragile and lacking proper support, the second wave can be detrimental to the very existence of SMEs, let alone their growth.
As opposed to this, the past year saw a 60% increase in FinTech investment in India, to $1,467 million in H1 2020 compared to the $919 million for the same period in 2019, making India the biggest FinTech destination in Asia (as per a report by RBSA Advisors). It is this marriage between financial services and technology that is proving to be a game-changer, especially for the small and medium businesses in India.
Here's how. India ranks quite low when it comes to digital maturity in the small and medium businesses segment; digitisation of SMEs is far more challenging than it seems due to several issues viz. lack of skills, access to talent, lack of business-specific technologies, etc. FinTechs help SMEs get easy access to products like bank accounts, cards, managing cash flows, etc. Being a digital-only platform, FinTechs have the added advantage over traditional financial institutions, to offer SMEs with tailor-made products and solutions that help create their digital footprint. Simple solutions like improving the loan application process, enabling merchants to accept digital payments, seamless repayment options through digital pathways — which is crucial to any business today, have been effortlessly pulled-off by the FinTech sector.
Several FinTech players are also leveraging social media to help provide a boost to their marketing activities by promoting these small businesses to initiate lead generation. Bridging the gap between trusted data and credit sector that contributes to one-third of the GDP (approximately 38%) accounts for only 25% of total formal credit in India (as per BCG Report- 2018: Providing Financial Services toSMEs in an increasingly Digital Ecosystem). The biggest reason for this is that traditional financial institutions find it cumbersome to underwrite credit and identify SMEs with reliable credit history. While FinTechs, with their custom-built API-based platforms and AI/ML algorithms, can access numerous alternative sources of data (GST, mobile data, social, statutory payments, quality lead scoring, litigations, etc.) and analyse them through thousands of data points, making credit underwriting and assessment robust and easier for lenders.
This helps in rapid calculation of their creditworthiness, with some FinTechs even disbursing loans to SMEs within 72 hours with no/minimal paperwork. These tools help in thorough analysis of cash flow patterns depending on the nature of the small business, which further help FinTechs to tailor their lending process in order to offer short-term working-capital as well as long-term financing options. FinTechs have been able to deliver on the needs of SMEs, by customising lending solutions to unlock credit supply for the sector, as well as managing risks effectively. As per the Credit Disrupted– Digital MSME Lending in India report, SME digital lending has the potential to increase between 10 -15 times to reach INR 6-7 Lakh Crore ($80-100 billion) in annual disbursements by 2023, which poses a mammoth opportunity for FinTechs.
As a timely innovation, just before the pandemic struck, RBI allowed banks and other NBFCs to accept Video-based Customer Identification Process (V-CIP), in order to help onboard customers remotely (January 2020). All FinTechs and financial services have been enabled with the same; the adoption of video KYC amidst the COVID-19 pandemic, has provided a huge impetus to the process of digital account opening for all. The digital verification has thereby completely eliminated physical interaction between the bank and customer from the KYC process. The fact that financial institutions have reported an estimated reduction of about 40% costs as opposed to the physical KYC process, proves the analysis that the Global Video KYC market is expected to touch USD 408.8 Million by 2026, growing at a CAGR of around 14.9% between 2020 and 2026.
For FinTechs, serving SMEs is not just about routine lending; by focusing on revival of cash flow, community-building and being a voice of reason, the role of FinTechs in empowering small businesses goes beyond the realms of traditional financial services. In the ongoing and post-pandemic world, FinTechs are redefining the rules laid down by an erstwhile financial system in order to create an uplifting environment for entrepreneurial growth as well as facilitate a vibrant SME ecosystem.The author is the CEO at Tide in India. Views expressed are personal