Fintech Disruptions Redefining Growth for the SMB Sector
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Small and medium-sized enterprises (SMEs) are major drivers of the Indian economy. SMEs account for more than half of the world’s gross domestic product (GDP) and a key enabler in creating employment opportunities for the global workforce. SME sector has become a major income source for the population living in India’s tier 2 and 3 markets. In fact, SME/MSME is the second largest employment generating sector in India after agriculture. 45% of the total manufacturing output and 40% of exports is contributed by the sector. Despite contributing 8% to India’s total GDP, the sector hasn’t been given the attention it requires.
Challenges – Loans and Discoverability
Even today the SME sector faces difficulty in securing proper financing or loans. The various reasons being lack of documentation, higher regulation, capital costs to loans and missing credit history. A report issued by International Financial Corporation (IFC) states that MSMEs in developing countries including India face an estimated financing gap of $2.1 to $2.6 trillion.
Another challenge for the SMB sector is online discoverability. A staggering 98% of SMBs are offline, out of which 68% are completely offline and the other 30% though engage digitally on social media platforms for personal use but do not promote or sell their business online. They are still looking for discoverability and establishing themselves in the digital space. There is a lack of awareness among the SMBs on the benefits of digitization and the changes it can bring to their business. Additionally, they also lack the technical know-how and resources to get online.
Digital Business Eco-system
India witnessed some key reforms in 2016 with the government of India banning 500 and 1000 denomination currency notes as a legal tender and implementation of the Goods and Services Tax (GST). This resulted in digital payments witnessing the much-needed push and acceptance by the consumers. The government of India’s aim to make India ‘Digital’ gave an impetus to the FinTech industry promote the advantages and ease of digital payments. Today several FinTech players are stepping forward to support the SMEs and help them in re-writing their growth stories.
FinTech companies leverage technological innovations to create better financial services for businesses and consumers. They have entered the Indian market to disrupt traditional financial markets. FinTech companies provide alternative ways to small businesses in securing funds/loans with the use of big data analytics and assessing credit risk. They have customised their offerings and have come-up with tailor-made products as per the need of SMEs.
To further boost digital payments ecosystem in India, Government of India in its Budget 2018, announced setting up a group under Finance Ministry which will help devise institutional development measures for FinTech companies to grow in India. The government is not only creating a conducive environment for small businesses to flourish, but also bringing them to the digital mainstream to ensure they have access to better opportunities.
Bridging the Gap
As per McKinsey, digital finance could boost the GDP of emerging economies by $3.7 trillion by 2025 and benefit numerous stakeholders. Additionally, FinTech innovations can also help several offline merchants in the unorganised sector to the formal banking system. Less than 2% of India’s 50 mn SMBs have online businesses. The remaining 98% of merchants are still operating on the offline platforms. The need of the hour is for a transition of small businesses and SMEs from the traditional way of offline processes to online platforms for their commerce.
As per the recent KPMG report, digitization of the SMBs will result in doubling their revenue growth and profits. Digital technologies give SMBs a greater market reach and the ability to engage with new-age customers. Thus, we foresee an increased share of SMB players in the digital space.
Superior Growth for SME Sector
The Indian FinTech market is expected to double from $1.2 billion now to $2.4 billion by 2020, says a joint report by ‘NASSCOM 10000 Startups’ and KPMG. This development will further fuel the growth of small and medium enterprises.
Meanwhile, favourable government policies and easy availability of business finance will help create a large SME and self-employed community. There is an immense potential of growth in the SMB sector and thus an urgent need to make SME/MSME sector digitally sound and active and thus contributing more to the nation’s economic growth.