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PAAS models ushering an era of bank-fintech partnerships; enabling financial inclusion for SMEs – The Times of India Blog

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Raman Khanduja is Co-Founder and CEO Mintoak
Small and medium enterprises play a critical role in the economic development of any country. Even though their contribution towards a country’s GDP as well as employment generation is significant, they continue to remain financially excluded due to the unpredictable nature of their income and business models.
SMEs in different countries may differ in terms of their characteristics, size and composition, but they have similar aspirations such as better cash flow management, access to external financing, omnichannel payments platforms and tools to help them grow their business. The enormity of the segment, combined with their financially underserved status, presents a massive opportunity for various players including banks and fintech players in the Financial Ecosystem.  
Who can solve the SME Financial Inclusion Puzzle: Banks or Fintechs?
Perpetual financial exclusion of SMEs has created a very large trust deficit. There is a need for players that can bring forth a combination of trust, network distribution and tech agility to address this. This poses constraints for many players in the current ecosystem. While banking institutions swear by their brand, trust and distribution, they lack the nimble tech agility and seamless tech-forward platforms to meet the constantly increasing digital needs of SMEs. Fintech players on the other hand have been able to create responsive, API-first, cloud native and easy-to-use propositions but are challenged to match banks on trust and distribution.
Banks and fintech: From competing to collaborating
The dotcom bubble in 2000 marked the dawn of internet giants like Amazon, Facebook, Google, etc., driving a paradigm shift across segments.  Similarly, the Global Financial Crisis in 2008-2009 led to the birth of fintech players like Square (US) and Paytm (India). Back then, traditional banks looked at fintech companies with concern. For the longest period, they were perceived as potential disruptors to banking with banks continuing to believe that their own products were best suited for consumers.
Fast forward to 2021, although fintech and new-age financial start-ups have made large strides, banks continue to stay relevant at a much larger scale than they were 10 years ago. The same banks no longer necessarily look at fintech as invaders to their domain. A lot has changed during this time with the dawn of digitization and it has impacted almost every aspect of our life. Platforms like Amazon and Flipkart have changed the way we shop and Zomato and Swiggy have changed how we dine. Similarly, Uber and Ola have transformed the commute, while Amazon Prime has disrupted the entertainment consumption space. However one area that has remained unchanged is how we use banks to save our monies. When it comes to money, consumers including SMEs prefer to stay conservative and trust no one except the good old established banking institutions despite their experience not being the most seamless.  The trust that banks command is their biggest strength. This trust complemented with an agile and nimble tech platform can solve all the financial inclusion challenges including SME that have stayed unaddressed for a very long time. 
Solving the challenge warrants a new approach where banks and fintechs collaborate instead of competing to create viable solutions for the end customer and sustainable models for the participating stakeholders.  The model combines banking services, trust and distribution with a fintech’s seamless experience and delivery to create compelling platforms for the end customer and strong moats for the principals involved.
Platform-as-a-Service (PaaS)- Paving the way for creating optimal collaboration models for the Financial Inclusion of SMEs
The new generation of fintech players compliment the banks’ infra with their agile tech platforms to make them smart. Offering Platform-as-a-Service (PaaS), such models create cost efficient integrated offerings that link the success of fintechs directly to banks’ business growth. Merchant payments present an interesting use case to demonstrate the power of such collaboration.
Merchants’ payments or payment acceptance is a door opener to establish a relationship with SME merchants. Always challenged for profitability, this business however has remained one of the most seamless and successful strategies for penetrating the financially underserved SME segment. While payments kickstarts the relationship, it needs to be supplemented with engagement and cross sell of financial products to create a sustainable profitable model. 
India with its high cash penetration (~80% of Personal Consumption Expenditure) and large underserved SME base presents one of the most fertile opportunities to leverage merchant payments for solving SME financial inclusion. This combined with a supportive regulatory regime and favourable pricing policy (for the merchant) has led to the space witnessing massive participation and significant innovation in the recent years. India is possibly the only country where you have the largest tech companies like Google, Amazon, FB (Whatsapp) jostling for relevance alongside banks to solve for merchant payments. As a result, the merchant til today is crowded with multiple QRs, smartphone loaded with multiple payment apps (the Pes’ and Khatas) and life complicated with tedious reconciliation. On the other side, the payment platform providers are struggling for profitable models because fragmented til means no one gets comprehensive enough data to deliver meaningful financial services. All this is leading to an ecosystem where merchants are indifferent to payments, continue to be financially excluded and the platform players pursue a struggle for relevance. Consolidation of payments at merchant til is one likely way forward that can ease the merchant’s pain, solve for their financial access and create sustainable profitable models for platform providers. 
While banks riding on the trust factor (they own the current account) are best placed to ride the consolidation wave, their propositions are not the most seamless. The Small Business Payment needs to be reimagined. An Omni Channel Payments platform for the merchant, designed by a fintech, powered by a bank using a PaaS model appears to be a potent solution. It can make payments easy and accessible for small businesses and creates a comprehensive financial profile that can be leveraged to underwrite the lending needs. The bank’s credit engine uses the digital footprint to create pre-approved loan options for the merchant. These loans can then be accessed through the same omni channel platform by the merchant when they need and not when the sales person wants to sell. Similar approach combining the respective strengths of the bank and fintech can be used for creation and delivery of other financial services.
For banks, subscription pricing, a key ingredient of the PaaS model turns out to be pocket friendly, whereas the scale makes this proposition viable for their fintech partner.
Clearly, banks and fintech players can no longer afford to operate solo. A collaboration-driven approach can usher in a vibrant new era of modern digital banking that can drive SMEs towards financial inclusion and transform developing countries into true economic powerhouses.
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Views expressed above are the author’s own.
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