Modernising access to credit in a SaaS environment

For India’s MSMEs to set sail on the path to better economic progress, they need better access to capital in the form of credit. Even with market reforms, liberalization and deregulation of many sectors over the last three decades, about 50 million small businesses in India continue to be underbanked or unbanked according to the World Bank. India’s 150 banks and roughly 900 large non-banking finance companies (NBFCs) have been unable to lend to these small businesses owing to a variety of legacy factors.

Meanwhile, cloud-based software-as-a-service (SaaS) business models have become the default option that nearly all enterprises prefer over any kind of on-premise installation or infrastructure. The ubiquitousness of the SaaS business model and the availability of tools via APIs or web portals is changing business rapidly. An August 2021 SaaS Bhoomi-McKinsey study estimates $50-70 billion in revenues from SaaS offerings in India by 2030. If investments in India’s fintech sector are anything to go by - $2.7 billion in 2020 and already $2 billion in H1 of 2021 - it is likely that the enterprise SaaS model adopted by many fintech startups will deliver massive value.

The key takeaway from the growth of SaaS business models is that it is dramatically easing the access to capital for businesses. There’s a lot to unpack in this emerging business trend - the subtext of which is that business lending, which had suffered setbacks due to scandals and stricter regulations, has returned in a big way. Let’s take a look into the main reasons this is happening.

Firstly, small businesses have now become big consumers of SaaS-based services - ERP, CRM, finance and accounting software (eg: Tally, Khatabook, Quickbooks). Each of these softwares is accelerating the speed of digitisation of MSMEs in India. Small and micro-enterprises such as sole proprietorships, partnerships, one-person companies and similar-sized entities have started to develop a digital footprint. This is because SaaS is being built for them and being accessed by them - a hitherto unseen phenomenon. Furthermore, either through the small businesses themselves or the enabling SaaS-based service - lenders can now get high-quality visibility into borrowers’ businesses. This is increasingly helping lenders understand small and medium businesses better, giving them more confidence to lend and grow their portfolios. This creates a greater likelihood that lenders will provide small businesses with access to capital.

The second major driver of access to credit in a SaaS environment is the way lending institutions are perceiving revenues from SaaS-based products or businesses. Unlike older business models for software that included a perpetual license or a time-bound contract, SaaS-based businesses have smoother cash flows. They could also have higher lifetime customer value and customers usually pay upfront for future use of products. This is making lenders look at these businesses afresh, not to mention the massive interest among venture debt funds in early stage businesses. Getting credit based on revenues or future cash flows (flow-based lending) has become a mainstream mode of accessing capital. This is when the borrower pledges a portion of future revenues to the repayment of principal and interest. And with the projected growth of SaaS companies in India, it is likely that many businesses will dip into financial services than before.

The third factor is that the banking and financial services industry, which was long seen as a flag bearer of business conservatism, is itself taking to SaaS offerings well. Dissuading factors such as information security, customer data protection and online fraud have reduced in significance. This is causing the cost (and risk) of doing business with smaller corporate borrowers to drop dramatically for lenders. It is also enabling lenders to grow their loan portfolios, particularly with businesses that they wouldn’t have considered suitable. Some of India’s top lenders are aggressively positioning themselves and their financial products for lending to small businesses. It has opened a world of possibilities for banking and lending to small businesses, democratizing access to credit.

Now, let’s take a look at an ‘X’ factor that is possibly contributing to all the above reasons in varying measures. Traditionally, financial institutions as well as professional service firms and even peer companies would not think of using alternative data to assess the overall health of a business. For starters, it was not considered relevant by financial institutions. And even it they were interested in it, it required too much manual effort and in some cases was considered beyond the realm of data science and information technology. But insights and analytics that are leveraging the power of alternative data have become available through low risk SaaS models, allowing end users to experiment and test products.

The explainability of these technologies is another crucial aspect in encouraging their use by lenders. A better understanding of technologies such as neural networks, deep learning, Python, natural language programming, machine learning and computer vision programming as well as the availability of highly skilled talent in these fields is seeing a sharp rise in their adoption. Expert Systems are being developed for use cases that had previously been executed only by highly skilled professionals with domain expertise in areas such as risk management, loan disbursal, underwriting and collections. Many of these functions can now be executed entirely through technology or augmented with it.

The SaaS revolution, especially in business data, insights and analytics holds immense opportunity. It provides greater visibility into the Indian business ecosystem than ever before. To be sure, much of this data, although considered a part of the public record, was not previously accessible, searchable or ingestible for analytics. However, it is now possible for artificial intelligence and machine learning tools to scourge insights from data repositories such as India’s byzantine courts and tribunal system, Employee Provident Fund Organization, government departments and regulatory agencies such as the Ministry of Corporate Affairs, Directorate General of Foreign Trade and so on. With this, we are witnessing the rise of alternative data for business insights and decision making.

The emergence of a SaaS environment for financial services has opened up access to capital for small businesses. As we get deeper into the twenty-first century, the emergence of concepts such as digital ledgers and highly scalable risk analytics is changing the ground below our feet. It makes one wonder if it would have been possible to modernize access to credit without the emergence of a SaaS environment.

The article has been written by Meghna Suryakumar, founder and CEO, Crediwatch