Embedded Financing In B2B E-commerce Can Catalyse the MSME Sector Embedded financing allows businesses to natively implement financial services without depending on third-party services or establishing a fintech arm for the organization

By Amit Bansal

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Embedded financing, in a nutshell, is the integration of banking services such as payments, lending and insurance into non-financial services. From Amazon to Apple, all major B2C platforms have adopted it. B2B e-commerce MSMEs have only to gain from this trend.

A safe port during unprecedented times

The past two years since the COVID-19 pandemic began, have been a learning experience for businesses, to say the least. The first wave brought supply chains around the globe to a screeching halt. What was revealed through the economic side of the crisis was the reliable, stabilizing power of embedded finance. During the pandemic, B2C platforms tactfully used embedded financing to their advantage. B2B e-commerce platforms should do the same in order to flourish.

The route to expansion

Embedded financing allows businesses to natively implement financial services without depending on third-party services or establishing a fintech arm for the organisation. The benefits of embracing embedded financing are manifold. Besides logistical ease provided by auto-reconciliation and multi-purpose cards, it leaves the business with time to expand its operations and upgrades customer experience by making transactions more accessible. India is rapidly emerging as the largest market for fintech investments. Since 2020, there has been a 60 per cent rise in fintech investments in the country. With more cutting-edge technology being developed, fintech is bound to grow further. The impact of buy now, pay later (BNPL) and other credit-based payment products are a testament to the potential of fintech in India.

No time like now

The current data infrastructure in India is conducive for platform play and newer ways of improving businesses. India is home to around 6.3 crore MSMEs. According to the data from the MSME Ministry from May 2021, a whopping 30,00,000-plus MSMEs are registered on the Udyam portal.

MSMEs are the key to the $5 trillion economy

The government of India has ambitions to double the Indian economy to $5 trillion in five years. The employment opportunities and revenue created by MSMEs will likely be the contributing factor in the achievement of this goal. It is, therefore, highly pertinent to focus on boosting MSMEs in India through innovative and more promising methods of financing. One significant hurdle to surpass on the growth journey for MSMEs is the credit constraint. Irregular cash flow and changeable demand and working capital requirements are constant issues for MSMEs. Credit-based payment systems like BNPL or the open credit enablement network (OCEN) not only allow retailers their freedom, but they also helps create information through data. The data, in turn, allows MSMEs and public sector banks to assess the requirements for funding, participate more effectively and ease the credit faster.

Data over matter

The current addressable credit gap for MSMEs is estimated to be $397 billion. For example, a recent nationwide survey of MSMEs conducted by Solv, found that 90 per cent of supply chain participants in high volume commodity segments are actively seeking collateral-free loans of up to INR 3 lakh. Although there is an atmosphere of willingness among banks to lend to and support MSMEs, the lack of data about their borrowing and purchasing needs makes it difficult to identify and assess the requirements directly. Embedded financing can come to the rescue here as well. The digital data trail of transactions that is created makes it easier to track and analyse the data available. Furthermore, the data collected through embedded financing would help in strategically bridging the credit gap for MSMEs.

Mainstreaming the trend

The fintech industry is growing with new innovations such as AI for predictive analysis and digital-only banking. Amidst India's credit-starved MSME sector, the power of alternate credit scoring mechanisms is becoming more and more visible. Alternate credit scoring models driven by high performing digital ecosystems are rapidly gaining the trust of public sector banks and other financial institutions as a reliable means to take credit-related choices while lending to MSMEs. Apart from traditional datasets such as GST and transactions, these scoring methods channel various data points and make use of AIL/ML tech stacks to facilitate a faster and more secure lending process for MSMEs. Given that embedded financing will significantly benefit the MSME sector, adopting it sooner rather than later should become a priority for B2B e-commerce platforms.

Amit Bansal

CEO, Solv

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