Credit and Finance for MSMEs: Partnership between banks and fintech companies is already around a five-year-old phenomenon in the country. Banks had physical reach through their network, a large base of customers and their trust, and a brand built over the years. Fintech startups, on the other hand, brought technology to digitise banks’ legacy systems at the backend and provide smarter and flexible banking for customers at the frontend. The arrangement has been a win-win for both so far that has further evolved now.
“Earlier everything would be handled by banks but now fintechs are used essentially for everything while banks are being used for disbursals. What really has changed in the past years is that relationship with borrowers is owned by fintechs whether around credit underwriting, onboarding, KYC, and more. Banks are now only capital providers,” Nirav Choksi, Co-founder and CEO, CredAble told Financial Express Online.
DBS Bank-CredAble, Kotak Mahindra Bank- Pine Labs, Federal Bank-CredAvenue, Axis Bank-Ezetap, IDBI-U GRO Capital, HDFC Bank-Paytm, SBM Bank (India)-Lendingkart, ICICI bank-Niyo and many such partnerships in the recent past and in over past five years or more had occurred largely focusing on digitising credit disbursements to micro, small and medium enterprises (MSMEs) and enabling digital payments. As per World Bank estimates, the credit gap for MSMEs in the country has been worth $380 billion while the share of bank credit to MSMEs in the overall gross bank credit is currently around 10 per cent, as per the data from the Reserve Bank of India.
“Partnerships with fintechs enable both parties to leverage the core capability across transaction banking. Fintechs ability to carry out lite integrations with customers allows one to reach out faster and drive efficiency across the supply chain. The collaboration also helps to cross-sell products across retail and corporate, making the engagement stronger than just a transactional one,” Divyesh Dalal, MD & Head – Global Transaction Services, DBS Bank India told Financial Express Online.
CredAble had earlier this month partnered with DBS Bank to cater to the capital requirements for the day-to-day operations of MSMEs and enterprises in the corporate supply chain and pump liquidity to enhance current financing options for working capital needs. “We continue to evaluate partnerships with fintechs that work across specific ecosystems and have the potential to drive significant traffic. The ecosystem play enables one to embed across the commercial value chain, which is value accretive for the MSME,” added Dalal.
ICICI Bank, HDFC Bank, Axis Bank, and others couldn’t share comments by the time of writing this report. SBM Bank (India) didn’t respond to the request for comment.
Over the years, the partnership between banks and fintech players has become stronger, thereby, accelerating financial inclusion, while cutting-edge technologies, such as Artificial Intelligence and Machine Learning, are helping out in quick digital adoption across the country. Small vendors, lacking their own bank accounts are able to seamlessly conduct digital transactions. Moreover, MSMEs in cash-dependent Tier-II and III markets, from grocery stores to neighborhood hawkers, have been able to receive money digitally through UPI systems, QR codes, and payment apps.
“In the bigger picture, the rise of innovative alternative lending platforms, brought by fintechs over the past years has enabled SMEs with no credit history or financial records to access much-deserved credit. With the advent of new-age technologies and digital tools apparatus such as AI, machine learning, and data analytics fintech companies now extend customised working capital solutions to the MSME sector, which currently faces a credit deficit of over Rs 16 lakh crore. Additionally, small businesses can now digitize their ledgers and cash flow management,” Rohit Arora, CEO and Co-Founder, Biz2Credit and Biz2X told Financial Express Online.
While small merchants often lack tools to counter the stiff competition in sales they face from larger enterprises, this had worsened during the pandemic despite the huge opportunity that came with the increase in digital payments adoption. “To bridge this digital gap for small businesses, we partnered with Axis bank to bring in My Vyappar, a tool that would allow merchants to accept and manage their payments digitally while providing additional features like Buy Now Pay Later (BNPL) to increase their sales. For banks, it helps build an enhanced and close-knit merchant-banking community. For merchants, it acts as a one-stack solution for simplifying digital payments management through a suite of options – BNPL, rewards, regional lingual-capabilities, etc.,” Byas Nambisan, CEO at digital payments service provider Ezetap told Financial Express Online.
Gaurav Anand who runs Namaste Credit echoed the benefits on both ends. Anand told Financial Express Online that Indian small businesses armed with a secure online interface for payments, accounting, borrowing, and other business needs will engage more actively with the formal ecosystem. “With more credible information on businesses, banks and fintech will be able to create innovative tailor-made products to serve specifically to the SMEs and in turn unlock the financing opportunity of the small businesses.
However, it is also important to note that with more than 70 million businesses across sectors and segments, the requirements of each business/sector/industry vary widely, and hence one-size-fits-all solutions are deemed irrelevant in such an industry dynamic, said corporate cards and payments platform EnKash Co-founder Naveen Bindal.
“For example, it’s true that bank-issued credit/corporate cards have been one of the finest B2B payment instruments, however, businesses face serious constraints due to lack of digital reach and efficient GTMs by banks. Lately, card fintech companies—in partnership with banks—have plugged in their technological expertise to zero down legacy frictions on extra-long TAT, traditional credit underwriting and billing cycles, rigid eligibility criteria for new-to-credit customers, etc. to improve user experience and fuel B2B payment digitization,” Bindal told Financial Express Online.
Banks are now stepping up their fintech engagement by acquiring stakes in companies serving customers and/or businesses. For instance, ICICI Bank’s stake in fintech company CityCash and neobank service provider Thillais Analytical Solutions, SBI’s investment into payment gateway Cashfree Payments, HDFC Bank’s stake in POS machine provider Mintoak, and more.
“Of late, banks have been actively exploring inorganic growth to widen their customer base through more offerings and solutions that would come from new-age fintech companies along with low-cost technology instead of building these solutions from scratch. Banks don’t want to end up being just a source of capital, they want to continuously evolve into an all-in-one hub of everything that a customer would want through such strategic bets. They might go ahead and acquire these fintechs in the future,” a banker told Financial Express Online. For instance, Axis Bank’s acquisition of payments startup FreeCharge in 2017 – the first acquisition of a digital payments company by a bank in India.