Facilitating Digital Payment Inclusion For MSME Merchants In India

The MSME segment is virtually untapped and continue to struggle with access to credit and financial inclusion

By Sandeep Gomes


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The Indian economy is home to 63.3 million micro, small and medium enterprises, also known as MSMEs. Of these, around 99.4 per cent are in the "micro' segment, that generate INR 5 crore turnover per annum. In addition to the micro segment, there are around 330,000 small enterprises and 5,000 medium enterprises, that generate turnover of INR 50 crore and INR 250 crore per annum, respectively. The MSME segment contributes to 30 per cent of the National GDP, of which 24 per cent comes from the services sector and 6 per cent from manufacturing. It can be seen clearly that the MSMEs form the backbone of the economy.

Despite this, however, the MSME segment is virtually untapped and continue to struggle with access to credit and financial inclusion.

As a result of the MSME segment remaining untapped, they are not equipped to handle the digital payment push throughout the country, thereby creating a vicious cycle that if not addressed would see digital payments getting relegated to being processed only in the well-penetrated acceptance locations, having a grand tally of just 5.2 million, which is just 8 per cent of the possible acceptance points in the country.

As we dig deeper to find answers, it is essential to understand the reason why MSME's remain either underpenetrated or unpenetrated. The reasons can be attributed to a variety of factors, some of which are: fragmented nature of business, primarily single-shop outfits; perceived as being low profitability and high risk, since these are primarily self-funded businesses; and enablement is a challenge as "cost of acquisition' is a deterrent.

From an acquiring enabler, i.e. acquiring banks, processors and aggregators perspective, they have three main costs: acquisition and enablement, technology and operations. These enablers are faced with a difficult decision between "profitability' and "enablement', and profitability more often than not wins the battle, due to which it is the same set of acceptance locations and merchants that get tapped by all these enablers.

Changing customer behavior with the current pandemic

Now, let's shift the focus to how the current pandemic has been impacting customer spending behavior. Social distancing has become the new normal, and people have resorted to online purchases, or have switched to contactless payments for regular purchases as well as spends in corner stores, kirana stores and other small independent shops. The shift towards online purchases and contactless payment modes are driving MSMEs to cater to the growing change in the transactional behaviors. The absence of digital payment options does impact the customer spends and MSME's can end up losing a sale to competition who have adopted digital payments.

Combine all these factors and we see why the MSME segment is a "powerhouse waiting to be tapped", which will tip the scales in favor of digital payments.

Bringing MSME powerhouse into the financial inclusion fold and drive digital payments

The key is in addressing the core of the problem, i.e. "high-entry barriers", which prevent acquiring enablers from including MSMEs. This can be addressed via a variety of measures, namely digital acquisition, low-cost payment devices, new payment modes such as UPI, QR and differentiated technology and operations platform for servicing MSMEs.

Through a combination of these measures, acquiring enablers can leverage payment processing capabilities available in the market to offer a seamless, secure and cost-effective digital payments platform that drives better transaction economics through optimized technology and operations processing capability, provides a single window solution for complex and multiple integrations and supports quick "go to market' with a custom and differentiated solution.

There are benefits all around for all stakeholders that facilitate enablement of MSME's into the financial ecosystem.

Benefits for banks

  • Leverage the payment aggregators/merchant first-mile enablers who can focus their efforts on on-boarding rather than manage cumbersome integrations
  • Build a clear service differentiated offering to address the requirements of different categories within their portfolio
  • Forge new digital ecosystem partnerships that can enhance their customers' experience to unlock new sources of revenue growth from "white space" offerings that combine digital services from previously unlinked industries
  • Optimise resources allocated to managing multiple payment partners (e.g. acquirers, processors, terminal vendors) and greater cost efficiency by migrating from labour-and capital-intensive operating models to an OPEX model

Benefits for aggregators

  • Scale rapidly across new markets and channels and support for range of payment methods.
  • Improve economics of transaction processing with choice of price points and dynamic transaction routing capabilities
  • Strengthen MSME stickiness and loyalty by offering new, innovative payment experiences.
  • Single window for processing reduces the time and effort spent on negotiating contracts and streamlines reporting and reconciliation. It also means spending less time on additional integrations and security compliance

Benefits for MSMEs

  • Onboard onto the digital economy and reach out to more customer who increasingly prefer to interact digitally with brands
  • Adoption of paytech improves links to markets and suppliers enabling them to operate profitably
  • Builds financial capability and facilitates affordable access to institutional credit
  • Optimises productivity by automating certain business processes, digital payments and eliminating manual tasks such as data entry, processing paper invoices, and managing customer disputes
The entry to a reliable and easy to access payment services infrastructure improves digital adoption among MSME and promote their business growth. Also, digital transactions leave an auditable trail that can be leveraged to gain access to institutional credit for further business expansion.
Sandeep Gomes

Global Head, Acquiring Processing Business, Financial Software and Systems Pvt. Ltd

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