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Can credit push digitisation in the MSME sector?

Rajat Deshpande   /    CEO    /    2022-11-04

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    While the rest of the world marched to the beat of digitization, two sectors seemed to look on from the sidelines – MSMEs and B2B businesses. The core benefit of digitization has been convenience and customer experience, long left out of the imagination of those working in these spaces.

    Whether in response to a global pandemic and the GoI’s ‘Make in India’ call, or simply to catch up, MSMEs and their suppliers have been forced to digitize. Study after study has highlighted the importance and inevitability of this moment in B2B e-commerce. 

    KPMG gave this event a name - the ‘consumerization of B2B’. On average, customers found the CX 2.3 times better if the same brand also dabbled in B2C.

    It can’t be denied that this consumerization has resulted from digitization. An India Business Spend Indicator (IBSI) report found that 42% of micro, 57% of small, and 53% of medium-scale companies would spend more on technology that could improve productivity.

    A proliferation of B2B platforms across industries like electronics, agriculture and more is further evidence of a gradual digital transformation in the B2B space. They recognize MSMEs’ need for point-of-purchase credit and are remedying it with innovative, tailored in-platform loans.

    I would go so far as to venture that the early pilot phase of MSME digitisation is complete. Now, the attention of the industry has turned to making the most out of these early spoils.

    B2B platform digitisation walked so that MSME operations could run. Now, credit will be at the vanguard of MSME digitisation.

    The purchase of supplies holds the key to unlock MSME digitisation 2.0. But there is a dilemma at play here:

    1. A majority of MSMEs still secure their supplies through physical and local channels. 

    2. MSMEs need credit at the point of sourcing their supplies.

    Enter, checkout financing for MSMEs

    Point-of-sale financing, buy now, pay later or checkout financing – this flavor of MSME credit has many names. The specifications of the product may vary slightly, but the foundational concept is the same. 

    A B2B supply platform typically partners with a FinTech and (by extension) an NBFC. Alongside payments, the platform’s customers are offered a financing option when they checkout. The loan amount ranges from a few thousand to a few lakhs – just enough to cover the cost of the purchase. The repayment tenure doesn’t exceed a few months. The interest charged is relatively tame, typically hovering around 8%.

    Checkout financing has demonstrated a significant improvement in customer retention and capture of market share for B2B platforms. They are able to perpetuate cycles that function something like this:

    An MSME avails of a loan. This leads to a growth in its business. It returns to the platform to place more orders, further giving a boost to the platform’s customer base. This cycle of customer retention yields an improved CLTV.  Meanwhile, with the MSME’s cold start problem addressed, it now has a credit history which qualifies it for a larger loan.

    Finally, the customer avails another loan, pushing into action the flywheel once more.

    It’s safe to conclude that checkout financing has assimilated MSMEs into the digital fold by offering much needed credit and a superior customer experience – in sharp contrast to their offline sourcing activities and pursuit of informal credit.

    Markers of digitisation

    No doubt, checkout financing has given a taste of the convenience of digitisation to MSMEs that keeps them coming back for more. But this digital credit offering also plays into the overall digital revolution of the sector.

    • Verticalization

    MSMEs are bound to consolidate around a platform that looks after all its needs. Not merely offering, but customizing credit to the requirements of the market will help bolster vertical growth. Checkout financing becomes a product worth cross-selling to existing customers of the core business. Platforms can build a nervous system around a hyper-specific industry. They can do with verticalization what the Amazons of the world have done with horizontal markets.

    • Network effect

    The customer flywheel established above, along with the promise of verticalization, contributes to the creation of a large customer base. This can unleash a network effect– a phenomenon where the value a user derives from a product or service (in this case, platform) results from its total number of users.

    The vast number of users of the platform creates economies of scale on the demand side by introducing ease of credit access in addition to seamlessness of transactions. Once MSMEs overcome the first digitisation hurdle, they engage more with the platform. Ultimately, the barrier to entry for small businesses is significantly lowered. 

    The road ahead

    MSME credit disbursement has already increased 32% in FY22. Interestingly, a bulk of these loans are now disbursed by private banks that have been quicker to digitize. However, the sector continues to languish under a ₹20-25 trillion credit gap.

    The good news is that fulfilling this gap need not be viewed as an end. Credit – checkout financing in particular – is a means to achieve the enduring rewards that would come from a complete digital overhaul of the sector. 

    MSMEs’ best days are, indeed, ahead of it. In addition to advances in technology, the full might of the economic machinery of the state seems to be behind the cause. In the words of India’s Chief Economic Advisor V Anantha Nageswaran –

    “The lending potential of $3 trillion next year will be based on GST invoices and bank statements made available on Account Aggregator and banks adopting OCEN.”

    The cards dealt to those of us in MSME lending are good. It remains to be seen how we play them to secure the future of the economy's backbone.

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