5 ways how Fintech is revolutionizing MSMEs

The fintech space has witnessed tremendous success over the past five years and continued to evolve during the pandemic. It has become essential to look at areas of high growth to increase growth. In the Indian economy, one such unorganized sector is MSME.

The MSMEs contribute significantly to the Indian economy in terms of GDP, exports and employment. Despite their smaller scale of operations, MSMEs across India accounted for nearly 29 percent of India’s GDP, but they often struggle to manage finances and secure enough investment. As per the SIDBI-CIBIL Pulse report, there was a significant increase in credit demand after the 1st and 2nd wave of the pandemic. Demand for MSME loans, measured as the number of commercial credit requests, grew 1.6 times in 2022 compared to the pre-pandemic 2020 level. As a result, the fintech institutions in India have offered MSMEs optimism for rapid growth and relief from their problems.

Below are some identified tactics where fintech has revolutionized MSMEs.

Customized products: With the new technology systems and digital capabilities, fintech will be able to create innovative tailored products to serve the SMEs along with unveiling more financing opportunities for them. They also ensure a quick processing time with minimal documentation for MSME borrowers.

Apart from credit offerings, a digital services marketplace is also made available for small businesses to connect with multiple digital solution providers across digital payment, digital delivery or digital discovery platforms. Moreover, as fintechs enter the lending ecosystem with the help of advanced technologies such as data analytics and machine learning, they offer a large set of customized financial solutions to their customers according to their working capital needs.

Innovative lending business models: The MSME lending landscape has been the most impactful fintech revolution. It is led by innovation, driven by technology and inclusion. As more lending platforms emerge, smaller businesses with no financial records or credit history are getting much-needed access to credit. This meets the financing needs of MSMEs who have generally been excluded due to challenges such as lack of documentation or credit history.

Crowd loans, microloans and unsecured SME loans from non-banks are some innovative methods in the lending market. With new age technologies like AI, machine learning and data analytics, fintech companies can extend customized working capital solutions to the sector facing a credit gap of around INR 16 lakh crore. In addition, MSMEs are also taking advantage of fintech’s omnichannel presence.

Seamless digital based lending: Fintech business is built on the principles of being transparent, cashless, paperless and contactless. This is possible by adopting accurate modern technology and keeping it simple for MSME borrowers. Therefore, to further encourage the paperless strategy and reduce the cost of lending for MSMEs, fintech has adopted the Account Aggregator Framework (financial management and data sharing system introduced by RBI) which facilitates real-time sharing of financial information between regulated entities. For example, fintech provides seamless customer onboarding using on-site technology-based identification systems, such as GSTN, Aadhaar, UPI and other tools, for a quick and easy documentation process, including e-KYC or video-based KYC.

Provide real-time help without credit history: Traditional lending institutions rely heavily on credit scores from credit bureaus to make loans to individual businesses. Therefore, many first-time borrowers, who have no credit history, find it difficult to borrow loans from financial institutions.

To conquer financial inclusion, regulatory bodies encourage fintech lenders to extend various financial services to small businesses with a relatively low ticket size or no credit history. Fintechs use behavioral patterns and analytics to drive legal credit and help businesses opt out of the informal lending system. Cash flow based lending is one such technique that makes it possible to promote loans to MSMEs by analyzing real-time cash flow data in the absence of credit history.

Co-lending partnership: The co-lending partnerships are a “win-win” for non-bank financial companies as well as the banking sector, according to some industry experts. With co-lending as part of the financial ecosystem, the bank-fintech partnerships help financial institutions to integrate and combine their strengths to offer first-to-last mile services to MSMEs.

The vast reach of banks and fintech-led NBFCs – with their digital expertise and innovation – enables MSMEs to borrow from even the remotest part of the country. These co-lending partnerships help them get loans as both traditional and digital lenders analyze their structured and unstructured data to assess risk for faster loan approvals.

Conclusion: The MSME sector has changed over the years and offers benefits to its players. Technological advancements in the digital services ecosystem, such as account aggregators and OCEN, make MSME lending easy. Digital innovations will further enable the sector to rise and be a key driver of the economic and social transition.