Bridging the gap between fintech potential and real-world challenges: Are MSMEs truly ready?

By Manish Kumar, CEO & Founder of KredX

The MSME (Micro, Small, and Medium Enterprises) segment plays a critical role in fuelling economic growth, contributing over 30% of GDP. However, despite their enormous potential, these businesses continue to face significant challenges when it comes to accessing essential financial services. While fintech companies are revolutionising the financial landscape with cutting-edge technology, the question remains: are MSMEs operationally and financially prepared to adopt and fully benefit from these advancements? More so, are fintechs fully equipped to address the grass root challenges and needs far beyond just technology?

MSMEs: High demand, limited preparedness 

The MSME sector is growing rapidly and demands tailored financial solutions, from working capital to payment systems. Yet, many MSMEs struggle to adopt and leverage fintech solutions due to operational and financial challenges. A major issue is the lack of skills, technical expertise, and resources to integrate new technologies. While some MSMEs have the means to modernise, many face limited capital, preventing them from upskilling and investing in necessary infrastructure. Consequently, many remain reliant on outdated financial practices, even as the ecosystem advances around them.

Fintechs have made strides in digital lending and payments, with efforts to educate MSMEs. However, these initiatives often overlook the daily realities these businesses face, such as limited technical capacity and the challenges of integrating new technology into their operations. To truly empower MSMEs, fintechs need to go beyond offering tech solutions and engage with the ecosystem to align their products with these unique challenges.

Beyond technology: Addressing foundational challenges 

While fintech advancements offer potential solutions for MSMEs’ financial needs, they are only part of the equation. Core issues like limited access to flexible financing, inadequate infrastructure, and low financial literacy must be addressed. For example, while digital lending platforms provide speed, they often do not address MSMEs’ hesitation to borrow due to high-interest rates or unfamiliarity with digital finance.

Fintechs must also navigate a regulatory landscape designed for stability and consumer protection, which can slow down innovation. Balancing compliance with the need for creative, adaptive solutions is essential to meet the real-world demands of MSMEs.

Digital infrastructure, physical reach, and trust: Bridging the gap

A major barrier to fintech adoption among MSMEs is the lack of digital infrastructure and trust, especially in rural and semi-urban areas. While digital solutions promise broad accessibility, their reach is limited by uneven technology spread, unreliable internet access, and limited familiarity with digital tools. Many MSMEs continue to operate using traditional business models, hesitant to adopt new technology due to a lack of understanding or confidence in its value.

This hesitancy is compounded by the issue of trust, as MSMEs often prefer their established relationships with traditional banks. To overcome this, fintechs should build credibility through transparent, reliable services and tangible benefits. Hybrid approaches with in-person training, workshops, and local support, along with partnerships with trusted institutions, can boost trust and adoption.

Breaking the problem cycle: A collaborative approach 

Addressing MSMEs’ challenges requires a holistic approach beyond technology. Here’s how the ecosystem can evolve:

1. Education and digital literacy: Fintechs, government bodies, and industry groups should invest in educating MSMEs on adopting technology. Tailored workshops and training programs can bridge knowledge gaps, making digital finance more accessible.
2. Ecosystem collaboration: Collaboration among fintechs, banks, and government agencies is essential to create a supportive environment. This can streamline compliance, improve access to capital, and equip MSMEs with the infrastructure needed to integrate digital tools.
3. Solutions beyond technology: Fintechs must shift focus from purely tech-driven products to holistic offerings that address MSMEs’ specific pain points, such as flexible credit terms, alternative credit assessments, and advisory services for financial management.
4. Regulatory innovation: Regulators should partner with fintechs to promote innovation within a compliant framework. Regulatory sandboxes, for example, can help fintechs test solutions that meet MSMEs’ needs while adhering to safety standards.
5. Partnerships for financial inclusion: Collaborations between fintechs and traditional financial institutions can blend fintech’s efficiency with banks’ trust and scale, making comprehensive solutions accessible to MSMEs.

The road ahead

The fintech revolution has the potential to transform the MSME landscape, but for this to happen, the focus must expand beyond just technology. MSMEs need a supportive ecosystem that addresses their financial and operational challenges holistically. By increasing tech adoption, fostering collaboration, and providing tailored, accessible solutions, we can break the problem cycle and ensure that MSMEs not only survive but thrive in an increasingly digital economy.

Fintechs, regulators, and the broader financial ecosystem all have a role to play in bridging the gap. The path forward requires a collective effort to ensure that MSMEs are not left behind in the wave of technological advancement but instead empowered to drive their businesses forward with confidence.