The ripple effect of disruption: why fintechs and SMBs in India must collaborate?

Instead of relying on fewer big-ticket transactions, fintech startups are open to processing low-value, high-volume transactions that are frequent among SMBs.

Demonetisation, connecting financial services to Aadhaar cards, and the onset of GST – three recent developments in India that highlight how the country has taken advantage of the digital economy opportunity. In 2017, India ranked second in the growth rate of fintech adoption among digitally active consumers across the globe; this surge was paralleled by the rise in fintech funding – receiving over $200 million in the first half of the year.

Fintech firms excel at tapping the tech-literate, but financially underserved population, of which there are particularly high ratios in emerging countries such as India. The financial services market in India is primarily untapped, with 40 percent of the population having no association with any bank, and more than 80 percent of the transactions carried out through cash.

However, according to UNCTAD projections, as economic activities go digital, first-time digital payers and payees will leapfrog traditional plastic cards to new payment modes such as e-wallets and apps. Such trends are indicative of the exponential growth of the fintech industry and the growing appetite for its products and services.

Helping SMBs and startups

Economic analysts predict that the next impetus for growth in the Indian economy will come from SMBs and startups. This is a great opportunity for the fintech industry, especially startups, to make it easier for SMBs, including kirana and mom-and-pop stores that are looking to gain access to capital and grow their business, by providing services where traditional banks and lenders have failed to reach, or have done so at a far higher cost. For example, Mumbai-based online loan platform, SMECorner.com, offers business loans to SMBs with virtually zero collateral.

There’s more. As an increased number of customers go online for their banking needs, their data and privacy cannot be compromised; the sooner we implement solutions to enable the security of transactions through technologies such as blockchain, the faster we can expect the digital payment industry to leap ahead.

Fintech startups can play an important role in making this happen. As these companies discover new B2B horizons such as insurtech, credit loans, and digital business services, the variety of enterprise and SMB-focussed horizontal solutions will continue to expand, but preceded by security.

The advantage over traditional banks

The advantage that fintech startups, specifically, have over traditional banking is that instead of relying on fewer big-ticket transactions, they are open to processing low-value, high-volume transactions that are frequent among SMBs.

Several fintech players are also experimenting with new credit-scoring approaches, leading to many a success story for first-time entrepreneurs – as is the case of a small-time musical instruments store owner from Bengaluru, who required capital but was reluctant to go to a bank. He approached digital lenders Capital Float, and received a quick loan processed based on data collected through his financial transaction history, bank statements and e-commerce behaviour, making the whole experience close to effortless.

While established banks and financial institutions in India use conventional methods to assess an SMB owner’s credit-worthiness, fintech companies disburse loans after using emerging proprietary technology based on big data, artificial intelligence and machine learning algorithms. Even routine jobs such as underwriting and other financial paperwork are automated, making the loan disbursal process much faster – a matter of minutes, in fact.

Similarly, by helping SMBs handle foreign exchange rates automatically, these fintech firms promote cross-border trade, enabling merchants to access unprecedented markets.

Leapfrog legacy systems

Another advantage in India’s favour to make fintech happen faster is that the country has been able to leapfrog to implement newer technologies without having to address legacy systems. For example, India Stack has facilitated cashless payments in a country with limited card penetration, primarily using biometrics to store data and provide services.

Seeing India’s unique ability to bypass analog technologies, incumbent providers are partnering with fintech experts or building in-house the capabilities and services that Indian customers are using here and now.

Major legacy banks are investing heavily in enabling technologies such as AI, IoT, the blockchain, NFC, biometrics and identity management to make their processes more agile, narrow the gap with fintech providers, and to better serve SMBs. This is setting new performance standards – while a typical mid-sized bank requires processing 1,000 to 2,500 transactions per second (TPS), solutions like Infosys’ Finacle can process over 11,000 TPS and lower total cost of ownership by 50 percent for banks to focus more on customer acquisition.

India has created an ecosystem that provides startups an opportunity to exponentially grow into big businesses. As per a KPMG report, rising internet penetration coupled with digital dividends for SMBs could help increase SMB contribution to India’s GDP by approximately 10 percentage points by 2020. The study reiterates that 68 percent of the 51 million Indian SMBs that are currently offline can look to grow twice as fast if they become digitally engaged. Simultaneously, with the Indian fintech software market poised to witness 100 percent growth – $2.4 billion by 2020 from $1.2 billion in FY 2016 – SMBs and fintech companies, supported by each other, are set to scale new heights.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)