Payment applications are taking over the SMB sector. What can India’s old fashioned lenders do?

Visit a medium-sized store in an Indian city and you’ll wonder if it exists to make money. It might as well be there to process transactions from half a dozen payment apps: PhonePe, Paytm, Google Pay, BharatPe, Amazon Pay and MobiKwik. Add up the merchants who have downloaded the digital services and the figure quickly rises to 80 million. A third of India’s more than 60 million small businesses use four different platforms on average, according to Raman Khanduja, chief executive of Mumbai-based fintech Mintoak.

“The bandwidth of neighborhood merchants is being sucked up to accept cash,” he says. “When do they run their business?”

There are several juggling acts going on here, apart from the millions of small entrepreneurs reconciling their accounts through the many services that have sprung up as an alternative to cash and plastic. Payment apps do not profit from this activity because they all run on a shared public service. What they get is data they can analyze to predict the creditworthiness of small stores. It’s the banks that ultimately lend to these “thin” customers, but fintech controls the flow of information – and gets paid by the lenders to find creditworthy merchants. But why have the banks let fintech come between them and all these potential customers?

Historically, depository institutions in emerging markets like India saw little in the democratization of cashless payments. Card readers were expensive pieces of hardware and could only be deployed in well-established stores. These point-of-sale devices were also dumb: even when lenders got data on a store that used a lot of cards issued by them, advancing money to a retailer based on that knowledge required multiple sales calls. It wasn’t worth it then, and it makes even less sense now that India’s digital revolution has put plastic in the shade. Credit and debit cards are swiped in two out of 10 transactions, typically for higher value purchases and at larger retailers.

But banks have also lagged in adopting payments on smartphones. They lack tech DNA, and the weight of their legacy infrastructure has made their own online products clunky. The fintech, which was much more nimble and more willing to hand out generous cashback to early adopters, jumped at the opportunity created by India’s six-year-old Unified Payments Interface. Using this popular open-source protocol, mobile apps in India transfer funds in real time – using phone numbers for person-to-person transfers and QR codes to pay shopping bills. Nearly 2 billion such merchant transactions were made last month. The government requires that all UPI transactions be free.

Digital beats plastic | With nearly 2 billion smartphone payments to merchants in a month, India’s UPI, a shared digital utility, is far ahead of credit and debit cards

You would think that apps, looking for ways to make money from payments, would then attack the banks’ deposit allowance. They are, in fact. BharatPe is a co-owner of a bank and therefore able to influence retailers to switch current accounts. Similarly, Alphabet Inc.’s Google Pay, the second most popular consumer wallet in India after Walmart Inc.’s PhonePe, is using its influence to promote fixed deposits. If lenders lose control of demand and term deposits, what use is their banking license even?

Lending in a digital world is just as problematic. Banks are not intuitively designed to meet the unique needs of small businesses. Suppose the salesperson for the local unit of Unilever Plc walks into a store and says, “Since I have to meet my quarterly target, you can get an additional 5% discount if you pay upfront.” The internal processes of traditional lenders are too slow to repay an immediate loan like this. What’s needed are pre-approved credit limits based on the borrower’s digital cash flow and innovative products like buy now, pay later, but for retailers. This is what the banks have missed. Now they want to recover the lost ground. But can they?

May be. They should step in as consolidators, leveraging the trust advantage they still have over fintech, which is hampered by its own ubiquity. Because there are already so many apps on the average merchant’s phone, each service only gets a portion of the actual sales. “Nobody gets enough data to offer meaningful financial services,” says Khanduja.

That’s why the former Visa Inc. executive, along with a few of his colleagues, came up with the idea for Mintoak, a white-label merchant payment platform for banks that can accept all digital payments as well than cash and cards. It produces a single report, leaving retailers free to run their business. Mintoak, which works with HDFC Bank Ltd. and State Bank of India, two of India’s biggest lenders, collects subscription fees and gets a discount on the products the banks sell on the platform. HDFC Bank owns 5.2% of the startup.

India’s success in digital finance has inspired many emerging markets to design similar payments, giving Mintoak a foothold in the Middle East and the prospect of its first client in Africa. “We want to reconnect banks with SMEs,” says Khanduja.

Payments are not the only way to operate small businesses. Much of the working capital that retailers need is built into inventory. This credit used to come to them informally through branded distributors, but is increasingly being provided through e-commerce platforms like venture capital-backed Udaan and billionaire Mukesh Ambani’s JioMart app for grocery stores. district.

British company Standard Chartered Plc has attempted to enter B2B e-commerce in India in hopes of replicating the model in Kenya and other emerging markets. Most other banks, however, prefer to stick to what they know. Luckily for them, none of the existing merchant payment apps still has the revenue of a Block Inc. – formerly Square Inc. – in the US Before a dominant player emerged in the fragmented market, Indian banks need to find their way back to the cash counter.


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Elaine R. Knight