Why MSMEs should adopt digital payments in today's ecosystem, according to this fintech expert

The Unified Payments Interface (UPI) developed by the National Payments Corporation of India (NPCI) has greatly disrupted the Indian fintech industry. MSMEs are slowly recognising the value such digital payments technologies can bring to their businesses.

Arun Singh, Lead Economist, Dun & Bradstreet India, says:

“MSMEs are realising the importance of digital payments within the growing ecosystem. Various estimates suggest that around 10-15 million MSMEs in India are now accepting mobile payments.”

But not all MSMEs are on the same page. Some are skeptical and do not want to leave a digital footprint. They prefer dealing in cash only as they have been doing for many years. Many others are simply unaware of the advantages of adopting digital payments.

So what is the way forward for MSMEs whose customers are rapidly adopting digital payments?

In an exclusive interaction with SMBStory, Arun describes the current scenario for MSMEs and explains why they should move to quickly adopt digital payments in their business.

Edited excerpts:

SMBStory: What are some key research findings in the space of digital payments?

Arun Singh: Increase in consumer adoption has been a driving factor behind the growth of digital payments. One in every 10 adults in India use mobile wallets for regular payments.

Further, the number of Point-of-Sales (PoS) machines deployed has more than doubled (since demonetisation) to 3.6 million. Nevertheless, there are only four PoS machines for every 1,000 outstanding debit and credit cards in India, which is much lower than in China and Brazil.

Despite this huge potential, the growth in PoS deployment has been declining in the recent months. This suggests that mobile payments would likely emerge as the most preferred payment mode in the coming years.

SMBS: What are the advantages of using digital payments for MSMEs?

AS: The actual benefits of digital payments for MSMEs are greater than it may seem when only transaction costs are considered. Digitising payments reduces the time required for payment execution and reconciliation, minimises error, improves visibility in administration and expense management, and increases customer experience.

It also opens up the business to new markets, domestic and overseas, that were previously inaccessible due to high prevalence of cash transaction. These benefits certainly provide a competitive edge over those who don’t embrace digital payments.

SMBS: What restricts MSMEs from using digital payments?

AS: While there are various reasons for low adoption rate of digital payments amongst MSMEs, three reasons stand out as significant. First, some MSMEs do not want to leave behind digital footprints. Many studies contend that there are various issues related to reporting actual revenue and profits.

Second, the source of financing too has a role to play. In India, only around four percent of MSMEs have access to formal sources of finance. This suggests that those in need of finance turn to informal sources where cash transactions are the norm.

Third, some MSMEs perceive digital payments as unattractive value propositions because of the processing fees, and have very little or no perception of ‘cost of cash’. The level of awareness about the advantages of digital payments remains low. However, this knowledge gap is fast shrinking with the introduction of payment solutions in multiple languages.

SMBS: For which business functions are MSMEs more likely to adopt digital payments?

AS: The sales function is at the forefront of adoption. Around 10 to 15 million entities are now accepting mobile payments. There has been a steady growth in merchant onboarding by various fintech companies and this trend is likely to continue.

Supply chain finance and digital lending are other areas of growing interest. Several fintech companies are providing loans to MSMEs that are either unserved or underserved by banks.

SMBS: Does a one-size-fits-all or standardised approach work?

AS: Though the number of entities which have digitised payments has increased exponentially in the last two years, market data suggests that still 75 percent of all entities are yet to adopt digital payments. A ‘one-size-fits-all’ approach will not drive adoption at scale. Supply-side push initiatives will translate into rapid adoption only when they are complemented by large demand-side pull factors.

For example, digitising recurring payments, such as salaries, offers an attractive value proposition for formal sector entities with large number of employees. But this may be of little to no value to an informal sector micro entity which have just a handful of employees.

Essentially, these demand-side factors are dictated, inter alia, by customer demographics, transaction value, use-case and level of awareness about the benefits of digital payments. Hence, what we need is tailored supply-side push initiatives.

SMBS: Besides digital payments, how can MSMEs digitise their cash flows?

AS: In addition to lending, fintech companies have a wide range of offerings such as e-insurance, investment advisory, customer relationship management, e-invoice management, account receivables and payables automation, e-procurement, etc.

These solutions benefit MSMEs which often lack the expertise or the technology and manpower to digitise cash flows. Digitised cash flows in turn lend themselves to seamless audit capabilities and higher organisational visibility. Many fintech companies are now offering innovative solutions which tap into cash flow data of a firm for making credit extension decisions.

In a recent Dun and Bradstreet India study, we observed that the minority of Indian micro enterprises that do have access to external finance report a 19 percent return on capital employed. This is compared to only two percent micro enterprises that do not have similar access. Given that MSMEs contribute to over one-third of our GDP, any measure that aims to promote their access to capital would reap significant benefits for our economy.

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