By Puneet Chhahira, Head of Marketing and Platform Strategy, Infosys Finacle
On the fifth anniversary of Micro, Small, and Medium-Sized Enterprises Day (MSME Day), we would like to emphasize the extreme importance of accelerating the progress of this sector, and the role that technology-led banking can play in it.
Deemed the “economic backbone” of the world, SMEs make invaluable contributions to social and economic development, accounting for 50 to 70 percent of jobs globally, and 40 to 50 percent of GDP across both developed and developing economies. The well-being of the SME sector directly impacts the well-being of nations.
Hence it is a matter of great concern that these firms continue to battle a number of challenges in their day-to-day operations. Small businesses are simply unable to match large organizations in talent and technology, and also lack the right processes to scale the business. Another challenge is that because the bulk of SMEs are informal, they are not able to secure credit of good quality, at a reasonable price, from the formal financial sector. What’s more, even formal businesses suffer from inadequate funding: according to the International Finance Corporation (IFC), a whopping 65 million firms, or 40 percent of formal MSMEs in developing countries, have unmet needs amounting to US$5.2 trillion every year. The situation is worst for the firms in East Asia and Pacific (46 percent of the funding gap is in this region) followed by those in Latin America and the Caribbean (23 percent), and Europe and Central Asia (15 percent).
The pandemic was the proverbial last straw, affecting about 60 percent of small businesses that are only now starting to recover. While governments are doing their bit to aid the revival of small and medium enterprises, industry – which depends on tiny and small firms for many things – should also support them in whatever way possible.
For instance, the financial services industry could deploy various digital solutions as a force multiplier in SME banking to enable better access, better credit, better decisions, and more, for small business customers.
Digital onboarding, based on digital KYC, document scanning using OCR technology, APIs-based access to national databases, and online liveliness detection, has opened up access between banks and SMEs. After onboarding their small business clients in this manner, banks can continue to serve them a full range of offerings – including working capital, receivables and payables management – on online and mobile channels, ensuring anytime, anywhere access.
The unfortunate practice of underreporting income to evade taxes dents SMEs’ ability to secure credit from banks, which base their decisions on financial statements. Hence small businesses are unable to arrange the funds they need to run and grow their business. Now, technology solutions enabling cash flow-based lending are stepping into the gap. By integrating with the order and accounting systems of SMEs, these solutions provide a view of their cash flow position to banks, who offer credit on that basis. National digital infrastructures, such as the GST system in India, are also enabling data sharing by SMEs, in turn providing banks with insights that they can use for making credit decisions. Further, digital-first platforms are also improving access to credit by eliminating friction from the lending process, including shortening the approval cycle.
Juggling many responsibilities, the proprietors of small businesses are usually pressed for time. Automated cash management applications, virtual accounts for easy reconciliation, real-time payments, and other digital solutions can free valuable time and effort that they currently spend in mundane banking activities. Digitized trade finance is likewise a huge support to businesses with substantial trading activities. To quote one example, the Indian Banks’ Blockchain Infrastructure Consortium, built on an Infosys Finacle platform, aims to digitizes trade documents such as LCs, GST invoices and e-way bills and automates manual processes, to dramatically shorten the financing cycle from ten days to two.
Last but not least, banks can provide digital solutions for processing payroll or managing taxes to improve the operational efficiencies of SME customers.
Today, SMEs want more than just banking from their banks. Offering business solutions like those mentioned in the preceding paragraph (payroll processing etc.), is one way to meet those expectations. But better still, banks can use their extensive insights to help clients make smarter financial decisions. For instance, they can provide dashboards that visualize descriptive insights to tell clients where they overspent, and also provide quarterly comparisons; insights from diagnostic analytics can point to the reasons behind the expenditure. Further, banks can leverage predictive insights to forecast all-important cash flows and other scenarios. The most progressive banks will even use insights to prescribe a best course of action to their SME customers, such as to automated sweeps to balance cash flows.
Wider Ecosystem Integration
Typically, small enterprises use several tools to run their business, for instance, accounting packages, human resource management solutions, ERP software, and so on. They would like their banks to facilitate banking integrations with these providers. Progressive banks are taking the lead – ICICI, with over a hundred ecosystem integrations for SME banking, is a great example. SMEs also want help with sharing data with ecosystem partners, such as tax advisors, which banks can provide via online dashboards or APIs.
A significant facilitator of ecosystem collaboration/ innovation is the Banking as a Service (BaaS) proposition, whereby providers offer specialized services addressing niche requirements – say, for a particular industry or group. Kontist, an integrated banking and tax solution for freelance businesses in Germany, is one example. Through BaaS, the ecosystem can collectively meet requirements that no single bank can on its own.
Several banks, including Deutsche and HSBC, have built marketplace platforms where SMEs can network, share information, or do business with each other. Some also offer marketing tools to help the businesses use the platforms to advantage. Banks are also setting up funding marketplaces where the small businesses they are unable to serve can seek loans or investments from other providers.
Taking a long-range view, some institutions are going so far as to develop useful skills among SME clients. Examples include providing financial calculators for banking products to improve financial awareness, producing educational video content on subjects of interest, hosting industry-centric learning events and meetups, and so on.
When SMEs manage their financial activities better, it will rub off on their overall business performance. Better performing SMEs create not only jobs and wealth, but also more inclusive societies. Therefore, every effort should be made to ensure their success.