SMEs are the backbone of the Indian economy, and key contributors to the $5 trillion Indian economy target. Unprecedented action-oriented focus on the issues faced by the sector in the recent past stands testimony to the seriousness with which we view this segment to drive growth.
That being said, the key problem that has always plagued the segment has been the money flow; both on receipt and payout as well as the access to formal credit. In this regard, it is relevant to discuss the payment challenges faced by the sector today, which is a critical factor for their thriving or even survival in some regions.
Multi-channel payment facilities: In the era of high internet penetration and the millennial consumers' preference towards online payments, it is imperative to have omnichannel payment tools available for every SME. Gone are the days when cash, cheque and bank transfers were the only mode of payments.
Today, UPI and QR channels have become a preferred way of day to day transactions at most retail businesses and the online modes, be it cards, net-banking or wallets are equally popular in digital India amongst the users. Nevertheless, the small businesses find it a challenge dealing with multiple service providers, interfaces and expensive solutions, beyond their ability to understand and afford, adding to the complexity of them doing business, both for collections and for payouts in the business.
Reconciliation challenges: All payments, through whichever mode the collection is made, or payment is done, hits the business account like rivers joining an ocean. Once it comes in, there is very little trace of the source or purpose. This leads to key reconciliation problems, thereby limiting organisational visibility. Since the business account is in no way connected to the billing/business/accounting systems, it often limits the business's ability to say with certainty about various stakeholder balances, even after a lot of manual effort for reconciling payments to various systems.
Cost of transactions: Cost of transaction for both offline as well as online still remains high for small businesses which does not generate high volumes for the service providers including the banks. The businesses end up paying a per-transaction cost, except for limited digital channels, which has a major impact on their profitability. This forces them to fall back upon cash as a preferred mode, which in the current environment limits the possibilities including access to credit.
Working capital crunch and inadequate access to formal credit: With an overall long cycle of recovery and limited credit availed from suppliers, SMEs often face working capital challenges. However, access to formal credit is also limited, given that the systematically recorded transactions, mainly due to over-reliance on cash, is extremely limited for these businesses.
This pushes them into a vicious circle of lack of capital due to lack of credit history. With a humongous gap of ~$240 billion in the SME segment, access to formal channels of credit in India poses both payments and business challenges for SMEs.
Lack of tailormade and integrated solutions by the service providers: SMEs are not always equipped with the resources to put together ideal solutions for their varied payments needs. Hence, the reliance on ready-made solutions or ease of integration is extremely critical for their functioning and success.
Despite that fact, this segment is the most underserved today with respect to the existence of integrated service providers catering to their consolidated payment needs. SMEs have to approach and use on an average 3 service providers to cover minimum required payment solutions.
To conclude, the remedy to overcoming payment challenges faced by SMEs is to bring under a single cost-effective intuitive interface, all kind of payment solutions aiding them to achieve ease of money flow, both domestic and cross border. This is the fundamental need to conduct business profitably and effectively.
(The author is Co-founder and CFO of Open Financial Technologies Pvt Ltd.)
DISCLAIMER: The views expressed in the article above are those of the author and do not necessarily represent or reflect the views of Business Today