Why Neobanks will evolve to become financial allies for Indian SMBs in 2022

Digital transformation is not just a choice, but an eventuality. It helps future-proof businesses, create wholesome customer experiences, and improve operational efficiency and profitability. In this rapidly changing environment, while larger enterprises have been able to harness its power, the journey for SMBs has been a steep one. In a diverse market like India, SMBs come in different shapes and sizes. They range from offline businesses that lack access to digitization, slow adopters who want to see quick benefits, to early adopters or start-ups who are familiar with digitisation benefits. The micro, small and medium enterprises sector contribute 30% to the country’s GDP. However, they face different need gaps across the value chain, such as difficult reconciliation, limited access to credit, poor cash flow visibility. Neobanks, the phenomenon which stormed the fintech industry globally and India last year, have the potential to emerge as the preferred partner of growth for SMBs in 2022, with new innovations and solutions in arsenal. Neobanks for business have the potential to revolutionize businesses, bring SMB merchants into the 21st century ad become a powerful catalysts of digital financial inclusion.

A catalyst in easing access to working capital

There have been many positive initiatives by the Government of India to promote ease of doing business or help them with access to credit. In Union Budget 2022-23, it was announced that the ECLGS (Emergency Credit Line Guarantee Scheme) had provided additional credit to more than 130 lakh MSMEs. Neobanks, as well, will support in addressing the credit gaps in the ecosystem. With revenue-based credit assessment, best-in-class loan lifecycle experience, flexible credit ranges and repayment schedules, neobanks are the perfect partners to ensure financial liquidity. A core strength of neobanks is their ability to use alternate parameters to evaluate businesses, which enables them to provide credit to underbanked but credit worthy businesses. They can be a powerful tool to increase digital financial inclusion.

Seamless and transparent payment reconciliations

Effective and timely reconciliation is often the unsung hero of an efficient business. While some neobanks already support account payable and receivable management, many SMBs do not have access to holistic overview of marketplace transactions. A digitized SMB merchant is present across e-commerce sites of different genres - whether it’s his own digital storefront, large marketplaces like Amazon or Flipkart or even social e-commerce platforms like Meesho. In 2022, neobanks will step up their game to offer a unified birds-eye view of all such transactions that happen across diverse marketplaces, simplified reconciliation of platform charges, as well as clarification of all incorrect deductions and payments. With easy reconciliation, payables also become a hassle-free process. Merchants can schedule automated invoice and TDS payments to their beneficiaries for improved work efficiency and productivity.

Policy push to drive further impetus

India has emerged as one of the hotbeds of innovation in fintech. Take the case of United Payments Interface, which gave a new fillip to digital payment transactions, racing past other global markets. With favourable measures, we will see more innovation in the neobanking industry. For example, RBI’s two-stage approach for licensing will help emerging neobanks to scale rapidly and become full-stack digital banking platforms. In this two-stage approach for licensing, it is proposed that neobanks will be issued a digital business bank license first, followed by a digital (universal) bank license. The licensees can operate, innovate, and demonstrate capabilities in a regulatory sandbox environment. Once the licensees showcase satisfactory performance, they will be issued a ‘full-stack’ digital business bank license.  This growth-conducive environment will nourish financial innovation, help fintechs explore right product-market fitment, allow deeper integration into full-fledged banking processes, and create best practices aligned with global standards.

Neobanks, with their digital-only infrastructure, have come at a critical juncture in time, providing solutions for issues across credit, payroll and vendor management, real-time finance settlement, and more. As providers of new, intuitive, seamless, and personalized experiences, neobanks will be crucial in digitizing millions of unbanked, underbanked, and underserved businesses.  SMBs can benefit from companies which have the strongest integration with banks as their partners, advanced technologies like AI and ML, and superior data analytics in place.