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Credit for Your Past, Capital for Your Future

December, 2018

Sanket Atal, Managing Director, Intuit India shares how they are transforming the Financial Supply Chain for small businesses in India.

Starting and keeping a small business “in business” is hard. Small businesses must manage their cash flow closely to be able to meet their needs of paying wages and buying supplies. Oftentimes, they find themselves in the position of having to cut costs or scramble to find alternative funding when they are not being paid on time and do not have adequate cash to keep things running smoothly.

Supply Chain Finance helps small businesses to better manage their cash flow challenges by helping them to streamline their collections from customers while optimizing payment cycles to their own suppliers. It is a mainstream and mature line of business for banks, with global invoice financing volumes alone estimated to be in excess of USD 3 trillion. Yet, of late, there has been a renewed interest in this space driven by advances in technology, data analytics and new underwriting models.

What has changed now?

Multiple emerging trends have motivated banks and fintechs alike to experiment with new and innovative Supply Chain Finance solutions:

  • Rise of the Cloud: Today, cloud-based platforms are mainstream for a diverse set of applications ranging from CRM, ERP to HRMs. Customers, suppliers and banks are increasingly comfortable on onboarding cloud-based platforms for a number of reasons including rapid prototyping, no software license fees, mobile solutions etc.

  • Simplification and standardization of API integration: Although integration across platforms has long existed, the rise of cloud-based platforms means that API integration has become far more standardized, limiting the IT effort involved. Some progressive banks have already set-up platforms to share their open APIs with developers.

  • Digitization and automation of processes: Over time, most steps in the cycle of order to cash and procure to pay have been digitized making automation possible for a number of processes.

  • Artificial Intelligence and Machine Learning: Due to increasing computing power, today we have the ability to process larger volumes of data from diverse sources to meaningfully draw insights. This combined with Machine Learning has meant that new underwriting models can be developed iteratively and rigorously tested to deliver credit to segments previously believed to be un-financeable.

  • Awareness leading to changing mindsets: All parties; customers, suppliers or banks, are increasingly willing to adopt third party platforms as they understand the benefits of being part of a larger ecosystem, such as greater access, lower costs and an ability to free up resources to focus on core strengths. Also, trends like bitcoin have resulted in greater awareness of the underlying technologies like blockchain which has application in Supply Chain Finance.

What is the Customer Problem we are trying to solve?

Even though there have been considerable advances in Digital Supply Chain Finance, small businesses still find it difficult to obtain funding to grow. A 2017 study by Intuit found that 70% of new businesses say that they need funds to grow and that lack of funding is one of the key reasons for business failure. The same study estimates that almost 50% of new businesses fail within the first 5 years and lack of finance is a key factor.

While Supply Chain Finance cannot solve this problem completely, there are opportunities to improve the model. Supply Chain Finance has traditionally been buyer led. It is usually initiated by large businesses who focus on reducing their own working capital needs rather than optimizing the working capital of the entire supply chain. This comes at the cost of their small business suppliers who consequently are either starved of capital or have to pay a higher cost for obtaining financing. And while banks clearly understand the issue, they are sometimes faced with a lack of high quality data in large volumes to develop and robustly back-test underwriting models.

What has Intuit done to solve this?

Intuit’s mission is to power prosperity around the world – for consumers, small businesses and the self-employed. We do this by innovating our flagship products to deliver awesome product experiences. Intuit QuickBooks, is the World’s No.1 accounting software used by over 5 million customers across 192 countries. These customers have generated more than 26 billion data points, which is a rich data set to build underwriting models. Leveraging insights from our customer data; Intuit launched QuickBooks Capital in the US in 2017. Our vision here is: “Credit for your past, Capital for your future.” The breakthrough underwriting model of QuickBooks Capital takes into account:

  • Open invoices and cash flow forecasts

  • New projects

  • Profitability

  • Growth dynamics and seasonality

Many small businesses have multiple supplier-customer relationships with other small businesses on the QuickBooks platform, making it possible to discover the complexity of the supply chain as well as the pattern of cash / credit flows. The large small business base also makes it possible to compare the relative performance of a business against its peers to finesse the underwriting model over time. This model, combined with an ability to offer a simple and fairly priced product at the right time, has reinvented lending for our small business customer base. Almost 90% of our customers said that this funding has helped their business grow, while more than 60% of them said they were unlikely to get a loan elsewhere. Early trends also suggest that the credit health of the portfolio is good.

Why are we excited about the opportunity in India?

Banks in India have been challenged with obtaining good quality underwriting data to make credit decisions. With over 60 million small businesses in the country, India has clearly emerged as one of the hottest startup destinations worldwide. All the players in the ecosystem, whether it is the Government, the Reserve Bank of India (RBI), banks, Fintechs or Industry Associations have worked to address the issue of small business lending through policy and technology interventions. However, historical problems such as the lack of access to formal credit, lack of standardization and inconsistent quality of financial statements have made it challenging to address this problem quickly.

The introduction of Goods & Service Tax (GST) promises to change the status quo. Despite initial resistance, both small businesses and accountants are coming to terms with digital compliance. From a lender perspective, GST has resulted in a wealth of data becoming available to lenders (with consent), including:

  • Invoice level data (sales and purchases) of a potential borrower in a standardized format

  • Harmonized System of Nomenclature classification which results in accurate classification of goods / services and comparability across businesses

  • Seller and Buyer location (as GST numbers are a composite of entity and state)

  • Invoice validation (as GSTN reconciles buyers and sellers invoice level data)

Our initial discussions with banks suggest that there is considerable interest in “Flow Based Lending.” Many are actively building products, underwriting models and delivery channels to roll out these products to small businesses. However, apart from GST data, banks need much more information, such as:   

  • Credit period for sales and purchases. While banks can derive this by combining GST data with account transaction data of customers, they do not have the full picture due to multiple banking relationships and cash transactions.

  • Budgets and forecasts that will provide insight into liquidity requirements, especially in a highly seasonal business.

  • Payroll costs and other key overheads which are out of the GST ambit, but which impact operating margins.

This is where Intuit QuickBooks helps derive insights from data. In India, Intuit is working to partner with banks who have strong market knowledge and expertise to roll out Digital Supply Chain Finance products to our shared small business customers. This would vastly improve the borrowing experience for small businesses as they could access timely finance options at the click of a button. The possibilities are limitless and enable Intuit and our banking partners to collectively help small businesses in India to make their aspirations of prosperity come to life.

References

  1. World Supply Chain Finance Report by BCR Publications (2018)

  2. Leveraging GST data for Flow Based Lending by ISpirt (2017)

  3. Reinventing Small Business Lending by QuickBooks Capital (2017)

 

Opinions expressed in the article are the author’s own.

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