How fintech is helping SMEs survive the pandemic and drive the next wave of India’s growth

Small and medium enterprises (SMEs) are a principal driving force of our nation’s economy. They’re also the worst-hit section amidst the pandemic. The past few months have seen mass layoffs and closures, the collapse of global supply chains, and a struggling economy.

With over 63 million MSME units across various parts of the country, the sector employs about 120 million individuals of which 25–30 million lost their jobs in the past few months. These micro, small, and medium enterprises are financially fragile, which makes them vulnerable and weak to the point of extermination in times of any kind of economic crisis.

Survival of businesses is a major challenge, triggered by a financial crunch emanating from the disruption of business due to the pandemic. While an overall financial crisis is difficult to handle, the larger and immediate worry is the liquidity crisis.

Small businesses in India are habituated to using cash for all their transactions. They are not used to digital transaction methods though efforts are being made to enable digitisation across businesses, agnostic of size and nature.

According to the Economic Census 2013, more than 81 percent of MSMEs are self-funded, with only around 7 percent borrowing from formal institutions and government sources. Being responsible for almost 21 percent of overall employment of the country, 50 percent of total cross-border exchanges and contributing almost 30 percent to the GDP, the road to recovery for SMEs is a matter of grave concern.

Tackling finance is one of the major components of SMEs, often termed as a high complexity and low scale feature. The segment faces various other challenges, which have increased during the pandemic.

ALSO READ

How cloud computing can empower SMBs in Tier II and III markets and boost India’s economic growth

The challenges for MSMEs

Amidst the liquidity crisis, most businesses have only a month or two of cash in hand for their payments. The situation is tough, with job layoffs and cutting supplies par for the course.

All SMEs are facing lack of capital and finding it impossible to raise finance and credit from bigger banks that have high credit values and low trust in small businesses.

A labour force with a technology knowledge gap that cannot contribute effectively to the business in the digital space or cannot provide solutions in the tough times like this one will have to be done away with. Though SMEs is a high potential job creation sector, lack of resources will hurt at least for some time now.

This is where fintech has stepped in.

The ever-evolving financial technology brings innovative business models in financial services. The efficiency and effectiveness of fintech solutions is reaching the smallest businesses, giving them a disruptive power and lighting a ray of hope amidst the pandemic.

How fintech is helping the SME sector

Fintech products are tailored to the need of small businesses. Most solutions focus on a single-purpose solution that offers the most improved platform solution, dynamic, and convenient in its oneness. They provide users with a digital infrastructure, providing space to grow and expand.

The following fintech offerings have helped SMEs to stabilise and have been working to drive them through recession 2.0.

•        Transaction delivery is helping SMEs ease their financial crisis by operations on platforms like expense management solutions. It has helped churn out data that has been put to use by them in identifying the right deliverables.

•        Marketplace lending, or peer-to-peer lending, fills the funding gap. Marketplace lending requires no collateral unlike the traditional banks making it easier to access during a financial emergency. This model makes it easier for borrowers to borrow money from one or multiple lenders providing hassle-free loans than those in formal debt markets.

•        Alternate credit scoring opens indefinite doors for a small business owner, which would not have been possible with outdated credit screening procedures of conventional banks. ACS makes use of data from various digital platforms to understand consumer behaviour for credit risk assessment and terms them eligible for credit. It demonstrates potential strength of combining data from social media usage, bill payments history, etc.

•        Payment gateway is a front-end technology platform, enabling users to make direct payments on the merchant’s website through their credit/debit cards, digital wallets, etc. The sensitive card data is protected by relaying the information from the user to the merchant to the acquirer and the issuer bank using data encryption. 

•        Small ticket loans requires minimum documentation and the transaction period is only 10 to 15 minutes. These loans are easy to generate with typically Low Interest Rate in exchange of customer data with original equipment manufacturer.

•        The phases of complete lockdown have been tough not only on SMEs, but even on individuals. The inability to withdraw cash in times of dire need or visit your branch office for minor issues encouraged most traditional banks to build a digital platform for their users. A lot of fintechs are building a digital monument with business models that are an exact replica of banks, making every minute need of the consumers accessible right in their hands.

•        Digital payment wallets have made it convenient for people to make cashless transactions: to send and receive money directly in bank accounts with no involvement of physical presence. The synergy shared by finance and technology has given birth to a combination of no-frills bank accounts and payment gateways.

The advancing digital infrastructure and climbing adoption rate of fintech solutions by SMEs across the country will help India’s economy gain eventually.

With low transactional costs, fintech is encouraging MSMEs to adapt to the latest technological solutions and products best suited for their business models and offering a plethora of opportunities.