Revolutionising Micro-Businesses: The Role of Fintech Companies in Strengthening Banks and NBFCs

Posted On
March 21, 2023

Fintech has made a notable contribution in the domain of micro-business financing. Micro-businesses, generally categorised as businesses with fewer than 10 employees and annual revenues below INR 2 crores, often encounter challenges in obtaining credit and other financial services necessary for their growth and success. Nevertheless, fintech firms are altering this scenario by introducing a variety of novel financial products and services that are explicitly tailored to meet the specific requirements of micro-businesses.

Micro-Businesses - Current Stack

As of February 2023, there are over 1.58 crore registered MSMEs in India, of which 1.53 crore are registered as micro-businesses according to data from the Udyam Registration portal of the Ministry of Micro, Small and Medium Enterprises. These micro-businesses play a crucial role in the Indian economy, accounting for around 30% of India's gross domestic product (GDP) and contributing to employment for millions of people. 

Importance of Micro-Businesses 

Micro-businesses are an integral aspect of the Indian economy, playing a significant role in promoting economic development, creating employment opportunities, and fostering innovation. Due to their small size, micro-businesses can quickly adjust to changes in market conditions and consumer preferences, making them more flexible and adaptable than larger corporations. This agility and responsiveness are critical assets for the economy's overall health, as they promote competition and innovation. In light of this, the growth and prosperity of micro-businesses in India are essential for ensuring the economy's long-term sustainability and prosperity.

According to the World Bank, micro, small, and medium-sized enterprises (MSMEs) account for approximately 90% of all businesses worldwide, and generate around 60% of all jobs. In many countries, including India, these businesses form the backbone of the economy, and their success is vital for overall economic growth.

Despite their significance, many micro-businesses in India struggle to access formal financial services. Fintech companies are leveraging technology to provide innovative financial solutions that cater to the unique requirements of micro-businesses, such as digital lending platforms and mobile payment systems. By enhancing financial inclusion, fintech companies are facilitating the growth and development of micro-businesses, which in turn drives innovation, enhances productivity, and stimulates employment opportunities. Therefore, promoting financial inclusion for micro-businesses is crucial for ensuring the long-term sustainability and prosperity of the Indian economy.

The FinTech Boom in the Financial Landscape

Fintech refers to the use of technology to improve and automate financial services. Fintech companies have emerged as a viable alternative to traditional financial institutions, offering a range of innovative products and services that can benefit micro-businesses.

India's thriving fintech industry is largely attributed to the "India Stack" initiative, which has fostered financial innovation by creating digital platforms that facilitate easy access to public goods, while also ensuring the privacy and security of financial data.

Image Source - Reserve Bank of India

Despite being established players in the financial industry, banks and traditional institutions have found it challenging to enter the fintech market due to multiple reasons. One of the key reasons is their inability to keep up with the rapidly evolving technological advancements in the financial sector. Outdated infrastructure and legacy systems can make it difficult for these institutions to adopt new technologies or processes. Additionally, strict regulatory requirements can be time-consuming and costly to comply with, which can discourage traditional institutions from exploring fintech initiatives. Banks and FIs are typically more risk-averse, which can be in contrast to fintech startups that prioritize innovation and experimentation. Moreover, traditional institutions have primarily focused on the most profitable segments and are not designed for low-ticket financial products due to technical constraints and bureaucratic processes. They have always focused on a supply-side point of view rather than evaluating this segment from a demand-side perspective and devising products needed for this segment. Their processes and tech stack are not designed for economies of scale, making them cost-prohibitive. All these factors contribute to a gap between the services offered by banks and the expectations of modern consumers.

As a results, they have long struggled to address the unique needs of micro-businesses. Fintech companies have been able to fill this gap by leveraging technology to provide innovative solutions that are tailored to the needs of micro-businesses. Fintechs have focused on understanding the needs of this segment and working backwards rather than offering out-of-the-box solutions from the current set of suppliers. This approach has allowed them to offer a more user-friendly and accessible platform for financial services, driving the growth of financial inclusion for micro-businesses.

Overcoming Challenges: How FinTechs are Supporting Micro-Businesses

Micro-businesses are the backbone of the Indian economy, but they face several challenges that hinder their growth and development. 

1.  Limited access to formal credit

Many micro-businesses struggle to obtain loans from formal financial institutions due to lack of collateral, credit history, and other requirements. FinTechs can offer alternative lending solutions that are more accessible and convenient for micro-businesses, such as peer-to-peer lending, crowdfunding, or digital loans. These solutions often use alternative data sources to assess creditworthiness, which can help businesses that lack traditional collateral or credit history.

2.  Lack of financial literacy

Many micro-business owners are not well-versed in financial management, accounting, or bookkeeping, which can make it challenging for them to track their expenses, calculate profits, and plan for the future. FinTechs can provide financial education and training programs that are tailored to the needs of micro-businesses. These programs can help businesses improve their financial management skills, understand their cash flow, and make better decisions.

3.  Limited technological capabilities

Many micro-businesses may lack the resources to invest in technology, such as point-of-sale systems, inventory management software, or e-commerce platforms. This can limit their ability to reach new customers, increase efficiency, and compete with larger businesses. FinTechs can offer affordable and user-friendly technology solutions, such as mobile apps, cloud-based services, or digital marketplaces, that can help micro-businesses improve their efficiency, reach new customers, and compete with larger businesses.

4.  High-interest rates by informal sources

Many micro-businesses may turn to informal sources of credit, such as moneylenders, to meet their financial needs. These sources often charge high interest rates, which can eat into profits and make it difficult to repay loans. FinTechs can offer lower-cost lending solutions that are more transparent and flexible than traditional moneylenders. These solutions often use digital platforms to connect borrowers to.

5.  Complex payment management system

Traditional payment solutions can be expensive, complex, and require extensive paperwork, making it difficult for these businesses to access and manage payments. Additionally, cash flow can be a major issue for micro-businesses, especially those that operate on tight margins. FinTechs are addressing these challenges by offering easy-to-use and cost-effective payment solutions, such as mobile payments, digital wallets, and online invoicing tools. These solutions allow micro-businesses to accept payments more efficiently, track cash flow in real-time, and reduce the need for physical cash transactions.

Fintechs for Banks and NBFCs

Fintech companies provide various advantages to both banks and non-banking financial companies (NBFCs), including broadening their client base, catering to previously overlooked markets, and delivering novel products and services, thereby giving them a competitive advantage in a swiftly transforming industry. In addition, collaborating with fintech firms can provide low-cost market access, additional channels to disseminate services, and enable the expansion of the overall market. 

Moreover, leveraging fintechs' tech stack can help lower operating expenses for banks and institutions. Lastly, specialised and vertically focused fintechs can bring in a deep understanding of consumer needs and product constructs, further enhancing financial institutions' abilities to cater to their clients.

Fintechs + Banks/NBFCs: Tapping the Untapped

One of the most promising aspects of fintech is its ability to complement traditional financial institutions. Rather than competing with banks and NBFCs, fintech companies often collaborate with them to create new opportunities and improve access to financial services for micro-businesses. Through such partnerships, banks and NBFCs can expand their customer base and better cater to the needs of small business owners.

India's fintech sector is expected to reach a valuation of $150-160 billion by 2025 (The Economic Times) . This growth presents a significant opportunity for traditional financial institutions to partner with or acquire fintech startups to keep up with changing market trends. Failure to do so could result in losing market share to new players and falling behind in the race to provide innovative financial solutions.

Successful Collaborations Between Fintech Companies and Banks/NBFCs

Numerous instances of successful partnerships between fintech companies and traditional financial institutions exist. For instance,

  • Nubank and Banco do Brasil (Brazil): Nubank, a fintech company, partnered with Banco do Brasil to offer its credit card products and services to the bank's customers.

  • Grab Financial and Citibank (Singapore): Grab Financial, the fintech arm of ride-hailing app Grab, partnered with Citibank to offer digital lending services to Grab's drivers and merchants.

  • Ovo and DBS Bank (Indonesia): Ovo, a digital wallet provider, partnered with DBS Bank to offer mobile banking services to Ovo's customers.

  • Paymob and Commercial International Bank (Egypt): Paymob, a mobile payments startup, partnered with Commercial International Bank to provide mobile payment services to the bank's customers.

  • Lendingkart and Yes Bank: Lendingkart, a digital lending platform, partnered with Yes Bank to offer small business loans to the bank's customers.

Another illustration of a fruitful collaboration between fintech firms and traditional financial institutions is Fundfina. Fundfina is an embedded platform that connects borrowers with multiple lenders. By partnering with banks and NBFCs, Fundfina has been able to provide borrowers with a broad spectrum of working capital products, including Bullet loans, Short term loans, Daily loans, and long-term loans. Furthermore, the platform utilises TrueScoreTM, which is Fundfina's proprietary algorithm to assess the creditworthiness of merchants based on their cash-flow, thereby increasing the accessibility of traditional banks and FIs to serve a wider, previously underserved population. Through its partnership with conventional financial institutions, Fundfina has been able to leverage its expertise and infrastructure to expand its reach and offer better services to micro-businesses.

The Future of Fintech in Micro-Business Financing

Looking ahead, there is a great deal of potential for fintech to revolutionise micro-business financing even further. For instance, blockchain technology could be used to create more secure and transparent lending platforms. Similarly, the use of artificial intelligence and machine learning could enable fintech companies to more accurately assess creditworthiness and develop more personalised lending solutions for micro-businesses by leveraging alternate data.

By offering quick and easy access to credit, digital payments, and other innovative financial services, Fintechs are helping to address some of the key challenges faced by micro-businesses. Moreover, by collaborating with traditional financial institutions, fintech companies can help to strengthen banks and NBFCs and create new opportunities for growth and development. As fintech continues to evolve, there is the potential for even greater innovation and impact, improving financial inclusion and driving economic growth for micro-businesses around the world.

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