Over 50% of “digitally-enabled” MSMEs highlighted operational improvements in business
In Q1 2019 a total of $646 Mn was poured into fintech startups
Nearly 40% of credit allotment to MSMEs in India is through informal channels
Inc42 & Dell are bringing the startup ecosystem together for The Dialogue on June 27 to celebrate MSME Day 2019 and help startups, tech giants navigate the MSME market, opportunities, and challenges to help them efficiently work with this vibrant sector. We invite all startups, investors, and other stakeholders from the Indian MSME ecosystem to come and enrich the roundtable dialogue.
The irony in the evolution of currency is that the more advanced it has become, the less visible it is. Humans started with exchanging goods, then moved to stone slates and then irregular chips and coins. Silver coins emerged around the 6th century BC, to currency notes in ancient China and Europe. Today, money is virtual and you literally can’t see it besides looking at a bank account balance. Which can be attributed to the advent of financial technology in India– primarily driven by technological advancements carried out by fintech startups of the country
Digital payments were always going to be the future, but the Indian government gave fintech the impetus which was underlined by the demonetisation move which banned INR 500 and INR 1,000 currency notes in November 2016. Unified Payment Interface (UPI) arrived on the scene soon after and from thereon, there’s been no looking back for Indian fintech startups.
The economic turmoil created by demonetisation provided a much needed short-term push to the digitalisation of finance in India and forced people to adopt private and public digital payment standards instead of using cash. This is seen in the transaction volume of UPI, which surged by 51x from 17.9 Mn in FY’17 to 915.2 Mn in FY’18. Similarly, the total volume of debit and credit card transactions surged by 50.6 % from 5.45 Bn to 8.2 Bn, during this period.
Despite such appealing progress, the juggernaut of digital payments seems to be slowing down as cash is making a comeback. The total cash withdrawal from ATM was worth INR 33 Tn in FY’19 in comparison to INR 23.6 Tn in FY’17, which is a surge of 40.27%.
In addition to demonetisation, the advent of Reliance Jio in 2016 played a vital role in increasing the internet subscriber base from 391 Mn in 2016 to 604 Mn in 2018, which is an increase of 1.54x. The increased penetration of internet in India has expanded the addressable market for fintech products in India and paved the way for the arrival of financial technology in the vibrant Indian MSME and agriculture sector as well.
As per government’s estimates, the Indian MSME sector is said to contribute around 30% to the Indian GDP as of 2018. Provided cash was the primary medium of exchange in this sector, the ban on circulation of INR 500 and INR 1000 currency notes created a wave of disruption in the day to day operations of the Indian MSME sector.
Despite the disruption in the MSME sector after the forced transition from cash to paperless, it created a new generation of tech-aware MSME entrepreneurs. Demonetisation ensured that they became aware of fintech advancements in the country such as mobile point of sale machines, digital wallets, accounting software, fintech SaaS and many others.
The introduction of fintech in the Indian MSME sector has expanded the addressable market for startups operating in the fintech domain — the total number of registered and unregistered MSMEs in India is more than 50 Mn which makes this sector a lucrative destination for fintech startups to bank on.
MSME: The Next Big Thing For Indian Fintech Ecosystem
The vibrant Micro, Small and Medium Enterprise sector of India provided employment to more than 123 Mn workers in FY’16. The total GVA (gross value added) of the MSME sector was $568 Bn which contributed 28.77% to the total GDP of India in 2016. According to DataLabs by Inc42, the total GVA of the Indian MSME sector by FY’20 is estimated to be $866 Bn, growing at a CAGR of 11.12%.
Finance is an important aspect in any venture, including fledgeling MSME businesses, and thus for fintech players, this sector is a massive opportunity waiting to be tapped. As per a study conducted by Yes Bank on the impact of digitalisation on the MSME sector, over 50% of respondents highlighted operational improvements such as increased profitability, operational efficiency and higher customer engagement, thanks to digital enablement
In addition to the penetration of the internet, the diversification of the fintech landscape in India from being payment centric to other verticals such as lending tech and insurance tech has acted as a catalyst in the context of fintech awareness among the informal sectors of the Indian economy.
The rising demand for lending tech in India can be attributed to the growth in venture capital investment in lending tech startups of India– From 2015 to 2018 the total startup funding in lending tech startups has surged by 7.18x from $76 Mn (2015) to $550 Mn (2018).
The advent of GST has opened up new opportunities for startups providing tax-filing solution in the MSME sector, In addition to this the additional benefits such as the increased limit of tax exemption, and flat tax rates have made fintech based SaaS products even more desirable in the Indian MSME sector.
This increased awareness of diverse fintech products, significantly higher penetration of internet in India as well as smartphone growth, the MSME sector holds the following opportunities for fintech startups in India.
Emerging Business Opportunities for Indian Fintech Startups
Lending to MSME: Access to credit is an important aspect for any business and so is the case with MSMEs. Lending in this sector has mostly been dominated by informal financial entities such as money lenders. This can be attributed to the fact that nearly 40% of credit allotment to MSMEs in India is through informal channels.
The market potential of digital lending is estimated to be between $80 to $100 Bn by 2023 for this sector. In order to penetrate into the Indian MSME sector, the lending tech startups need to address the common industry pain points — long loan processing times, lack of transparency in the process, insufficient loan size and inflexible loan tenures. Together, these made up 59% of the total credit pain points faced by the MSME sector, as per a study by BCG.
Between 2014 and Q1 2019, more than 80 lending tech startups have been funded. The total amount invested is $2 Bn across 170 deals. MSME lendings focused startups like Capital Float, Aye Finance and Of Business have attracted substantial venture capital confidence — these startups combined have raised total funding of more than $304 Mn across 31 deals.
In addition, out of the total $646 Mn invested in Indian fintech startups in Q1 2019, the share of lending tech startup was the highest (49.98%) with approximately $323 Mn in total funding.
These factors indicate that the lending tech market in India is at its peak with high investor confidence and increased demand.
Business Analytics and Payments: Although the fintech landscape of India has plenty of financial analytics, SaaS and payments platforms, their prevalence in the MSME sector is negligible. After the advent of GST, an estimated 9.2 Mn MSMEs are registered under GST, which is an increase of 50% from the previous tax regime. The probability of adoption of business analytics tools in the MSME sector is higher given that 47% of MSMEs have adopted digital tools for business processes, payments, and online sales in India as per a study by BCG.
Given the tech-averse nature of the MSME sector in India, the biggest opportunity for fintech startups lies in business analytics, payments and lending. With increasing awareness, the MSME sector of India will become more tech-savvy and will be ready for more sophisticated fintech products as well. As of now the enterprise-based solution in fintech is usually clubbed with analytical software. Some examples of such solutions are PayU, Paytm among others. The adoption of such solutions in Indian MSME sectors indicates that the demand for more advanced analytical tools will grow in the near future.
In order to tap the full potential of the Indian MSME sector, the fintech startups need to address the fundamental problem of Indian non-corporate sectors — lack of readiness towards technology. Due to this drawback, the value addition from technological adoption is hidden. The BCG report states that 68% of the respondents from MSME sector said that they do not see any value in digital lending. This is primarily due to the fear of technology which is still deep-rooted in some sections of the Indian society.
Increased awareness and education campaigns in the context of fintech adoption by startups in collaboration with the government would be the best approach to achieve digitalisation of Indian MSME sector with the help of financial technology.
