It is exciting times ahead for banks/fintechs that undertake digital ‘beyond-banking’ MSME platform initiatives
Micro, Small and Medium Enterprises (MSMEs) are widely, and aptly, referred to as engines of economic growth, globally. In India, they account for more than 30% of the GDP, a significant 42% of exports, and over 25% of employment.
The MSME sector also plays a key role in the supply chain of larger corporates – serving as suppliers for parts, as retail distribution outlets and service providers – contributing to overall sectoral growth.
Yet, this vital sector faces significant credit gaps (~$250 billion in India), in addition to their technological, R&D and skills needs being unmet.
In recent years, government & fintech banks have made strides with credit schemes, tax concessions, online lending platforms, Account Aggregators (AA) ecosystem and digital banking platforms for small businesses.
However, the platforms are still ‘early stage’, and over 90% of MSMEs still lack access to formal credit. There is tremendous potential for FIs to leverage emerging technologies such as Open Banking, Generative AI, 360-degree views for holistic one-stop solutions.
Figure 1
Working Capital and other business loans for MSMEs
Lacking credit history and collateral, MSMEs historically struggled to secure loans from banks, resorting to family or informal lenders at considerably higher interest rates.
Account Aggregator (AA) ecosystem, launched in 2021, enables MSMEs to leverage their account data as collateral for loans. AA has seen promising growth in 2023: over 94 million linked accounts and 200+ FIs registered. Not surprisingly, over 50% of loans disbursed using AA data is directed to MSMEs.
Fintechs/NBFCs have led the innovation, with offerings such as B2B Buy Now Pay Later (BNPL), merchant loans based on payment data and invoice factoring, largely tapping into AI-ML for credit risk assessment.
We will increasingly see collaborative models in India – combining the product, technology expertise of fintechs, with balance sheet and regulatory strengths of banks – for mutual benefit. Open API architectures would be key for such models.
Cashflow management / 360-degree views
Micro MSMEs globally seek a ‘personal banking – like’ experience, with 360-degree views across accounts for effective cashflow management, due to frequent transfers between personal and business accounts.
On the other hand, mid-sized MSMEs, seek more ‘corporate banking – like’ services: multi-level liquidity account structures, payments workflows for multiple users, CXO dashboards etc.
Global Head of BFSI Practice,
Collabera Digital.
In both scenarios, FIs must gear up to handle multi-banking solutions.
‘Beyond Banking’ – Business Growth Enablers
Transaction banking, mandated by RBI to offer free payments, has become commoditized. Consequently, FIs are now prioritizing data monetization for revenue, through lending and value-add services.
Turning our gaze to Southeast Asia, we see interesting initiatives from banks such as café management software for Vietnamese food outlets, international market access for local SMEs, exemplified by the Krungsri bank and Alibaba partnership.
MSME platforms will increasingly evolve into one-stop hubs – offering value-add services such as accounting, e-invoicing, tax payment, payroll and expense management and collaboration tools.
‘Best-in-class experience’
A cornerstone of success for FIs is their commitment to best-in-class experience. Numerous cases have demonstrated that even innovative solutions such as supply chain finance or other value-adds, fail at customer adoption without cohesive “single sign on” experience, and seamless user journeys.
The transformation potential of both traditional and Generative AI technologies is substantial, promising more effective customer service, risk & fraud management, process automation and greater cross-sell success.
In summary, it is exciting times ahead for banks/fintechs that undertake digital ‘beyond-banking’ MSME platform initiatives, to further boost our MSME entrepreneurship and contribution to national and global economies at scale.
