Why Indian SMEs Enduring Finserv Disruption Will Reap The Benefits

The financial services (Finserv) landscape in India has shifted dramatically in only the last few months. Following the dramatic implementation of demonetization efforts, the nation is now underway with a Goods and Services Tax reform (GST). Both of these events are disrupting the typical way small businesses in India operate — but they’re also encouraging FinTechs to develop new services targeted to SMEs to ease the transaction.

Both demonetization and GST are encouraging a cashless society, and for small businesses, that means electronic supplier payments and eInvoicing. Considering SMEs the world over are struggling with adopting electronic payments and invoicing, Indian companies are certainly facing a challenge.

But according to Murali Krishnan, MD & CEO of business automation company Onymy Infocomm, the migration away from cash toward digitization are two disruptions that will greatly improve the small business community. Joining in that disruption, Onymy Infocomm recently announced news that it has just launched PayBee, a platform that supports B2B payments for both buyers and suppliers, as well as invoice management and transparency into transactions that, according to the firm, can support enhanced cash management for SMEs.

“Cash, in the form of currency notes on hand, does not really help anyone,” Krishnan recently told PYMNTS. “It is a non-productive depreciating asset.”

The problem, he continued, is that cash spreads in small amounts across several members of a single business.

“It typically takes anywhere between a week to a fortnight [two weeks] for such distributed cash to be properly accounted for and show up as bank deposits that can be used,” the executive said. “This means that the decision makers have limited visibility on the cash position at any point in time to be able to commit to other expenses.”

Further, cash on hand means greater working capital requirements for small business borrowers, while increasing the threat of mishandling, all of which can negatively impact cash flow, Krishnan said.

In India, like in many other parts of the world, paper checks are also a common B2B payment method.

Today, Krishnan said that online supplier payments make up a “minuscule” portion of overall B2B payments volume compared to cash and checks.

“The best mechanism for SMEs to get paid is simply through an online mode,” he said. “The logistics and the dependencies involved in collecting cash or check vanish. So does the delay between collection and utilization of the funds collected.”

Demonetization by the Indian government aimed to combat money laundering and to promote the use of electronic payments. For B2B transactions, especially among small businesses, Krishnan’s commentary makes clear that ePayments can be beneficial for cash flow management. But ongoing tax reform, too, can help.

“GST is a game changer as far as the indirect tax regime in India is concerned and is inextricably linked to invoices and payments related to any sale,” he said, adding that eInvoicing and ePayments promote GST compliance, while GST promotes the use of eInvoicing and ePayments.

Electronic invoicing and payments, he added ,“can naturally and seamlessly extend to electronic filing of GST with just a marginal effort for businesses.”

“This can especially be useful for many small businesses in the unorganized sector who, in most cases, struggle to automate business processes and hence have immense difficulty in complying with such major policy initiatives,” explained Krishnan. “Offline manual invoicing and payments make it so much more difficult for unorganized businesses to comply.”

Regulatory shifts like demonetization and tax reform may be disruptive to a business, but in India, they may also incentivize the shift to ePayments and eInvoicing for SMEs in ways that small businesses in other jurisdictions lack. While these initiatives may cause initial friction, Krishnan argued that they ultimately help entrepreneurs gain greater control over and insight into cash flow.

Like in many jurisdictions, India is also a market in which small businesses face delayed payments from their corporate buyers, making proper cash flow management all the more important.

“The suppliers are dependent upon other businesses downstream to ensure speedy clearance of stock and inventory of goods,” he said. “Suppliers also typically offer their business customers credit periods of anywhere from a week to a couple of months, depending on the type of goods being traded. These credit periods are subverted and extended through a variety of ways by business customers, which in turn adversely impacts the cash flows and margins of the suppliers.”

With that in mind, Krishnan added that PayBee was established to not only promote digitization of SME processes like accounts payable and accounts receivable, but to support enhanced cash management at a time of financial services disruption for India.

“Until now, these businesses did not have access to readily available solutions that enabled this and hence were content with manual processes,” the executive explained.

Though he did admit that add-on services offered by PayBee will be critical to meeting the vast array of FinServ needs of today’s Indian SMEs.

“The value addition for the businesses that make payments through this solution isn’t readily apparent to them. The ability to make a payment real time is not really a benefit to this set of users,” he said. “That is where the adjacent benefits such as easy access to loans and automated invoice reconciliation processing on the platform kick in and are attractive”

“The active push by the government of India toward cashless payments, and the resultant policy initiatives that drive digital payments, are quite an encouraging factor toward speedier adoption,” he concluded.