Fintech Inside #10 - 14th Nov, 2020 | SME Finance
This edition looks at the SME Finance market. HDFC Bank targets SME's. RBI hints at regulating Fintech's. Google gives banks ammo to remotely block phones. Tons more updates.
Hi Insiders, Osborne here.
Welcome to the tenth edition of Fintech Inside. Fintech Inside is the front page of Fintech in emerging markets.
First off, wishing you and your family a Happy Diwali!
In this edition, I take a look at the SME financing market along with challenges and business models for startups. There was chatter that HDFC Bank launched a neo bank (not really). RBI released a report that hinted at Fintech regulations (seriously, you should read this report).
In global news, Japanese Bank Mizuho launched a data service to sell customer banking data. Google launched its widely popular and grossly optimistic report on SEA’s digital economy. In UK, Experian is starting to use Netflix and Spotify payments data in credit scores.
As always, you can find all details at: https://fintechinside.club
Diving in
One Big Thought 🤔
Overview of SME financing market in India
Overview: There are over 55.8 mn MSME’s in India, as per a 2018 report by IFC. RBI puts the number at 63.4 mn (2019). But whoever you believe, the number of SME’s in India is large. SME sector’s contribution the Indian economy as well is pretty significant – 45% to manufacturing output, more than 40% of exports, over 28% of the GDP while creating employment for about 111 mn people (~40% of India’s workforce). The government pins the SME sector as the single most important sector that will drive India’s march to being a USD 5 Trillion GDP economy. As one can see (image above), 95% of the sector comprises of micro enterprises and only 15% of the sector is registered.
Being the lowest in the value chain, SME’s suffer from extremely long i.e. 60-90 days, working capital cycles. Because of this, credit is of utmost importance to this sector and is most susceptible to decline in consumer demand, as we’ve seen during Covid-19. Credit to this sector is limited. IFC estimates that only 53% of the sectors debt demand is addressable and 16% is addressed by the formal economy. There are several startups addressing this problem of debt supply gap to SME’s with several business models. Even the government has its own SME loan scheme called MUDRA Loans which has disbursed USD 135 bn from inception to date with only 6% NNPA in FY19!
Challenges of lending: SME financing is incredibly tough – ask any SME lender. There are challenges on the demand side and the supply side of this problem. This is not a problem that can be solved with technology alone and thus is a very “unsexy” problem to solve with that much more return potential.
Supply side challenges: Lenders have low risk appetite, their underwriting method is outdated, documentation is unclear and can take months, there is limited product innovation and difficulty in controlling & forecasting bad debt. Fraud is also a huge challenge in this system as SME’s are extremely creative in gaming the system – intentional fraud as its called. This is aside from the fact that without technology, servicing/transaction costs are high.
Demand side challenges: For an SME, literally the only asset it has is cashflows. And cashflows being unpredictable – most lenders consider it risky and do not lend to SME’s. Other challenges for the SME borrower include – lack of documentation or credit history or collateral (often they give personal land as collateral), lack of access to timely credit (SME’s have seasonal business and if credit is not availed on time they can lose out on income), large existing debt and insufficient infrastructure.
Startup Business models: Startups have begun innovating in this sector and that’s great. There are five business models that I’ve managed to identify – each targeting the SME with a different approach. There is a sixth model – our beloved book keeping SaaS, but I’ve not included it because it doesn’t fall under MSME financing just yet. The startup ecosystem for the SME sector is still so nascent that will take a while before there is any meaningful impact on SME financing. And therein lies the opportunity – the MSME financing sector is so large that there is enough space for at least a dozen really large entities to compete in.
Fintech's Hiring 💼
If you’re a Fintech who’s hiring I’d like to help. Write to me and I’ll put your requirement here.
Fintech Top 3️⃣
1️⃣ HDFC Bank launched a… neo bank?
No, Fintech Twitter. HDFC Bank, India’s largest private sector bank, announced the launch of its updated small business banking solution – SmartHub 3.0. Along with the announcement, HDFC Bank said it aims to acquire 20 mn merchants in 3 years on its platform from 2 mn currently. SmartHub will provide small businesses with several payment acceptance and banking solutions.
– Takeaway: SmartHub has been around for ages. HDFC Bank has been at the forefront of acquiring merchants for its payment acceptance solutions. In fact, as on Aug-2020, HDFC Bank had 913,393 POS devices online – second only to RBL Bank (1.3 mn devices).
– If you remember, when UPI launched in 2016, HDFC Bank went all out to promote its own payment gateway & acceptance system – PayZapp. So much so, that HDFC Bank undercut every other solution in terms of pricing (including for debit and credit card processing).
– Why would HDFC do this? Three reasons: One – current account growth (SME’s need an account to accept payments). Two – small business lending and cross selling products. Three – payment within the HDFC system – no payouts to anyone (HDFC has the largest no. of credit cards outstanding – 14.8mn).
2️⃣ Banks will be able to remotely lock your smartphone for delayed loan repayments
As Black Mirror-ish as that sounds, its true in Kenya – Google developed an app to allow lenders to remotely lock a device for delayed loan repayments. The app is only live in Kenya where it was developed in partnership with the country’s largest Telco – Safaricom. The App – DeviceLockController, is part of Safaricom’s device payment plan for AndroidGO devices where functionality can be restricted if monthly repayments are delayed more than 4 days.
– Takeaway: OEM’s have tried for years to achieve such a device lock functionality but have not launched anything yet. Except Samsung in India that restricts device functionality on Samsung phones. It’s interesting that Android itself has now built such an app.
– The challenges with achieving device lock are two – OS-level and Hardware-level. OS-level device lock is easier to achieve but the problem is that the device can be reset and used as new.
– Then there is hardware-level device lock. This requires the OEM, the device chip manufacturer and the OS to collaborate. This is harder to achieve as chip manufacturers have stayed away from developing this functionality.
– While I see the need for restricting device functionality for devices taken on credit, I have my reservations if this gets extended to any and all loans. Imagine your bank asking you for your device IMEI number while taking a loan.
3️⃣ RBI to introduce regulations for Fintechs?
Not yet, but it is thinking of Fintech’s, their role in society and regulations to ensure consumer protection. On 11th Nov, 2020, RBI released its Bulletin which, among other things, covers India’s Fintech sector. In its Fintech section, RBI “provides a succinct review of the FinTech sector, encompassing its evolution, characteristics and driving factors”. Honestly, if there’s one thing you read this weekend – make it this RBI Bulletin on Fintech (19 pages) titled Fintech – The Force of Creative Disruption
– Takeaway: I’m surprised at how little coverage this report got because its quite important (h/t Medianama). I’ll let RBI give its own taken on the Fintech sector below:
– “FinTech has the potential to fundamentally transform the financial landscape…. The rapid and transformational changes brought on by FinTech need to be monitored and evaluated so that regulators and society can keep up with the underlying technological and entrepreneurial flux”
– RBI highlights 6 challenges in the Fintech sector: 1 – lack of innovation in cross border payments, 2 – Data protection, security, privacy and bias perpetuated through algorithms, 3 – ascertain the impact of Fintech on the country’s financial stability, 4 – rising inequality in access to Fintech, 5 – consumer protection and digital education, 6 – challenge of the regulator to conduct itself neutrally (!!!)
– Aside, have I mentioned how much I love the RBI website? ❤️ It’s a gold mine of raw data and reports that often go unnoticed. I love it.
India 🇮🇳
📰 Market Updates:
Khatabook and Dukaan announced a joint settlement. GooglePay gets pulled up by India's competition commission. Deutsche Bank sold its IT vertical to TCS for EUR 1. IIFL Gold loan branch robbed of USD 500K. NPCI diversified its captable by adding 131 shareholders.
Auto-debit (NACH) failure rates stand at 40% in Oct-20. Rupeek in talks to partner with SBI Bank. Finance Minister directs banks to promote RuPay. India's GDP contracts to -8.6%. Indian household savings grew to 24.1% of GDP (Q1FY2021). Sachin Bansal's NAVI reported USD 30 mn revenue in FY2020
🚀 Product Launches:
Flipkart launched health insurance with 2 partners. Mobikwik launched prepaid card with AmEx. Cholamandalam Finance launched co-lending business and LendingKart introduced co-lending SaaS. Paytm launched Payout Links for payments without beneficiary details.
Godrej launched housing finance company. Naveen Surya and Vishwas Patel, partner to set up payments New Umbrella Entity (NUE). Payswiff to launch BankNXT - neo bank for SME's
💰 Funding Announcements:
SlicePay (consumer finance) - debt USD 7 mn. Instamojo (payments and SaaS for SME) - undisclosed. Rupeek (gold finance co.) - in talks for USD 100 mn. FloBiz (SME invoice management) - USD 10 mn
NSE is acquiring Cogenics (news and data platform) - USD 19-20 mn
South East Asia 🌏
📰 Market Updates:
Thailand's Krungthai Bank launched Infinitas- an R&D platform for digital innovations in financial products. Singapore's MAS has launched a "Productivity Solutions Grant" (PSG) of USD 35 mn.
Japan's Mizuho launched a data service to sell aggregated data. Google released its e-Conomy data report on digital industry in SEA. Singapore's MAS has started open consultations to increase digital verification.
💰 Funding Announcements:
Coherent (HK-based insurance SaaS) - USD 14 mn. LinkAja (Indonesian payments) - USD 100 mn. InvestTree (Indonesian small business finance) - USD 15 mn
Europe 🇪🇺
📰 Market Updates:
Norway's central bank reports that cash payments plummeted to 4%. Experian is using subscription data to amend credit scores.
FreeTrade launched in Sweden as part of European expansion.
Fintech's in EU are using influencers to reach users. Pablo Escobar's brother is suing Klarna. Spanish instant payments crossed 1 mn transactions per day. Amazon and BarclayCard partner for buy now pay later.
VISA launched a Fintech Partnership Program. SumUp and Recognise received their e-wallet and banking license respectively.
💰 Funding Announcements:
Aidexa (Italian challenger bank) - EUR 45 mn. Mastercard's 10 startups listed for accelerator program. PurpleDot (UK buy now pay later) - GBP 1.4 mn. RailsBank (UK, banking as a service) - USD 37 mn. SME Finance (Baltic small business finance) - EUR 80 mn. Ilumoni (credit data analytics) - EUR 450K. Paid (UK, small business SaaS) - EUR 2.4 mn
That's all Folks 👋🏾
If you’ve made it this far - thanks! As always, you can always reach me at connect@osborne.vc. I’d genuinely appreciate any and all feedback. If you liked what you read, please consider sharing or subscribing.
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See you in the next edition.
Cover image by Charu Chaturvedi on Unsplash