Starting a business today is easier than ever – and it’s mostly thanks to fintechs.
Fintechs, or financial technology companies, offer software solutions to help businesses with their money. There are many types of fintechs: lending fintechs, insuretech, payments – but they all centre around one thing:
Finance made easier with technology.
Fintechs have had the biggest impact on the smallest businesses. MNCs and bigger businesses have always been able to afford entire teams of financial professionals to handle their money for them. It’s the smaller, younger businesses that need help.
What did fintechs do for SMEs?
Here’s a list of the major obstacles that young founders have to overcome in their journey to starting a business.
- Gathering capital
- Tax compliances
- Accounting and regulatory compliances
- Time management amidst high growth
- Detailed financial insights for better decision making
Do you see a pattern? The common thread that runs through all these problems is money. Good money management is the make-or-break for most small businesses.
This is where fintechs come in. Before we get into the details of how fintechs helped the startup economy, let’s understand what the fintech landscape looks like in India.
The fintech landscape in India
With the support ecosystem that India provides to young founders, it is no surprise at all that India is home to so many extremely successful startups. Here are all the different kinds of fintechs that are part of this support system.
Banking and lending: Traditional banking is robust, but unable to keep up with the fast-evolving needs of today’s startups – no founder today wants to sit around and manually execute payroll or hundreds of vendor payments.
Payments: With the rise of digital payments, UPI and buy-now-pay-later systems, fintechs have managed to improve payment tech much faster than traditional banking.
Investing and wealth management: Fintechs like Zerodha and Groww offer wealth tech to make investing and wealth management accessible to every retail investor out there.
Insurance: What used to be a complicated, dusty industry that resisted all change is now sleek, new and much easier to use. Insuretechs like Acko and GoDigit Insurance have managed to make personal and corporate insurance more approachable than ever.
Regtech: This is a newer, upcoming category of fintech that develops software to help startups with their regulatory compliances – be it accounting, tax or legal.
It’s important to note that since fintechs are not banks or NBFCs, they don’t have the license to lend or hold deposits. To solve this, most fintechs choose to partner with a licensed bank or NBFC.
Benefits of fintechs for SMEs
Here’s the story so far. Startup founders had it hard, and fintechs made it easier. But how exactly?
Easy access to credit
The first problem that any founder faces – capital. You need money to make money, and startups are the best example.
Traditional banks, in the days before fintechs, were very resistant to lending to startups.
This is because startups are a risky affair – while they are high-growth, there is always the chance for a young startup to go belly up and end up bankrupt.
Then came lending fintechs like Upstart and Growth Capital, offering loans and credit to startups. The perks were endless: flexible terms, lower interest rates, no collateral.
These lending fintechs acknowledged the risk of doing business with startups, but they believed in the potential of the Indian startup ecosystem. And it paid off!
This pushed traditional banks to also start offering loans to startups, and ICICI Bank launched its StartupXcelerate program in 2016 – a whole five years after the first lending fintech Indifi Technologies!
Automation and integrations
Big businesses and MNCs have huge finance teams. These huge finance teams run the entire business’s financial operations – executing payroll, maintaining books of accounts, managing vendors and customer accounts, ensuring compliance with regulations, paying taxes correctly and on time…
The list is endless.
But what about small businesses and startups? Young businesses usually have a finance team consisting of two, maybe three people in total, handling all those operations and more.
Things are made worse when you consider the possibility of human errors, manual entry, and lapses in judgement – financial management for startups was quite a daunting task.
At least, before fintechs used the magic of automations and integrations to solve this problem.
Here’s what automation did for businesses:
- Bank accounts integrated with accounting software so that transactions are automatically recorded into your books of accounts
- Automated calculation and payment of taxes to avoid missing a deadline and having to pay penalties
- Automated payroll, vendor and customer payouts so that you don’t have to spend hours executing hundreds of payments
Over the years, more and more businesses have become entirely online entities. Ten years ago, if you wanted a pair of shoes, you’d have to go down to your local shoe store. But today, Amazon does one-day delivery right to your doorstep.
The more businesses went completely online, the more they had to streamline their payment processes. They needed a way to accept payments online, and this is where fintechs swooped in,
With the introduction of UPI and other online payment options like BNPL, people started preferring online payments over offline or COD payments – being able to pay online means you can choose from a wider variety of options.
This is the end result of those magical fintech solutions – a lot of money saved for startups.
When you’re not wasting money, time and resources on manual tasks or paying penalties for late or incorrect tax payments, you’re putting that money into the growth of your business.
Startups today are able to save lakhs of rupees and hundreds of hours by using these fintech-enabled solutions for their business.
Laws and regulations around fintech
The rapid growth of fintechs means it’s been largely an unregulated sector for a while – but the RBI is very quickly catching up.
In the past few years, the RBI has issued guidelines and established rules for the fintech sector as it tries to tame this high-growth industry and reduce the risks involved.
Here’s a quick list of the steps that the RBI has taken to regulate fintechs in India:
Digital Lending Guidelines
The RBI’s Digital Lending Guidelines were issued in September 2022.
These guidelines aim to promote responsible digital lending and protect consumers from fraud and abuse.
The guidelines cover a wide range of aspects of digital lending, including:
- Loan origination: The guidelines require lenders to conduct due diligence on borrowers and to ensure that borrowers are able to repay the loan.
- Loan pricing: The guidelines require lenders to be transparent about the cost of the loan, including the interest rate, fees, and charges.
- Loan servicing: The guidelines require lenders to provide borrowers with clear information about their loan terms and conditions. Lenders are also required to have a robust customer service mechanism in place to address borrower queries and complaints.
- Data protection: The guidelines require lenders to protect the personal data of borrowers.
- The First Loss Default Guarantee is an agreement between a lending fintech and the bank that it has partnered with.
- Lending fintechs, in order to get a bank to agree to partner with them, used to offer default guarantees on the clients they sourced.
- They would offer 50%-100% guarantees, implying that they would cover up to 100% of the loss in case their clients default and fail to pay off the loan.
- This business model was highly unstable in the eyes of the RBI and so they issued guidelines on FLDG in June this year.
KYC and AML Compliance
- KYC stands for Know Your Customer and AML stands for Anti-Money Laundering.
- These are regulations that are designed to prevent financial crimes, such as money laundering and terrorist financing.
- Fintechs are required to comply with KYC and AML regulations in order to operate in India.
- The RBI’s fintech sandbox is a platform that allows fintechs to test new products and services in a controlled environment.
- This sandbox provides fintechs with a safe space to experiment and innovate without the risk of harming consumers or the financial system.
- The RBI has approved a number of fintechs to participate in the sandbox, and the platform has been successful in promoting innovation in the fintech sector.
P2P Lending Regulations
- These regulations require peer-to-peer lending platforms to be registered with the RBI and to comply with certain prudential norms.
- The regulations also prohibit peer-to-peer lending platforms from charging exorbitant interest rates or fees.
Ban on Cryptocurrency
- The RBI issued a circular in 2022 that banned banks and other financial institutions from providing services to cryptocurrency exchanges.
- This circular was issued due to concerns about the risks associated with cryptocurrency, such as its volatility and the possibility of fraud.
The future of fintech in India
It’s simple: fintech is the future.
There’s no way we are going back to a world of manual payments or manual finance management – fintechs have made it so much easier that we can no longer imagine a world without them.
With the RBI clamping down on fintechs and issuing more regulations, we can expect the Indian fintech sector to only grow and evolve to accommodate these new laws. Those who embrace fintech solutions are far more likely to grow and survive than those who don’t.