Digitization and Digital Payments Delivering Greater Trust For Indian SMBs

Smartphones have rapidly become ubiquitous across the developing world, and hundreds of millions of Indians have come online in the past decade.

Now, a startup called Khatabook is looking to leverage that connected base to bring more inclusive financial services to the millions of micro-, small- and medium-sized enterprises (MSMEs) that dot the country.

It’s also helping those MSMEs increase their resiliency at a time when many face unprecedented challenges in the wake of pandemic, building greater trust between them and their customers as it does.

“Digital solutions have helped MSMEs change their business models from offline to online, resulting in reduced in-person handling of business functions,” Khatabook Co-Founder and CEO Ravish Naresh told PYMNTS in an interview.

The MSME space was ripe for innovation even before the pandemic. Naresh told PYMNTS there are an estimated 63.4 million such businesses, including shopkeepers, tailors, hairdressers, cattle traders and so on, within India, accounting for more than 30% of its gross domestic product (GDP). Yet the vast majority of these businesses continue to rely on paper-based “khatas,” or ledgers.

See also: India Jumps On CBDC Bankwagon With Digital Rupee Trials

So Long Paper Khatas

Naresh and his co-founders, Ashish Sonone, Dhanesh Kumar, Vaibhav Kalpe and Jaideep Poonia, realized in 2016 those paper ledgers are not only a hassle to keep up-to-date, but they are also extremely prone to errors and, therefore, the source of a lot of conflict between businesses and their customers.

“The physical ledger notebook entries in India are maintained only by the seller, and customers often don’t remember the transaction that took place on a specific date in the past,” Naresh explained. “With Khatabook, merchants add their customers to the app, bringing real-time visibility of all the transactions to both parties. The app drastically reduces the back-and-forth conversations around past transactions between sellers and buyers.”

While it may be hard to quantify, the trust that merchants are able to build with their customers is one of the most significant benefits realized, Naresh said.

The app reduces a lot of effort on the part of merchants too. With paper-based ledgers, they typically must spend hours chasing after customers who owe them money. Now, they don’t have to.

Read also: Facebook Launches SMB Loan Program With India’s Indifi

“In an offline scenario, the collection of receivables is a daunting task,” Naresh said. “Merchants have to check their bookkeeping notes on how much is pending by whom, [and then] call them for payment reminders. With Khatabook, this is digitized, and the app sends an automated reminder to the customer. If the payment is accepted digitally, the customer can make a payment online.”

Naresh said the pandemic has helped Khatabook by increasing awareness of the benefits of digitization in bookkeeping and payments.

“Digital payment adoption was growing at a steady rate, but the pandemic really accelerated this growth as MSMEs saw how they helped to manage their business in a socially distant way,” Naresh said. “Smart cash flow management with a real-time understanding of finances will become a defining factor for MSME business health.”

Investors Pour In

MSMEs seem to agree. Since its launch in January 2019, the main Khatabook app has been downloaded more than 40 million times, while the company counts an active monthly user base of more than 10 million MSMEs. It was this growth that helped convince investors to back the company in its latest, oversubscribed $100 million Series C funding round led by Tribe Capital and Moore Strategic Ventures, bringing its valuation to more than $600 million.

Read more: Indian FinTech Khatabook Closes $100M Series C At $600M Valuation

Naresh said another key to Khatabook’s growth is its focus on providing tools that meet user’s expectations.

“Rather than expecting users to change their behavior to adopt digital solutions, we need to build as per their requirements,” he explained. “So, we were mindful not to change the style of offline bookkeeping.

Ease of use is just as important, and to that end Khatabook has made its app available in 13 of the most widely spoken Indian languages, including Urdu and Arabic with a right-to-left app layout.

“Language inclusion is a major factor for scaling our app,” Naresh said. “User empathy is critical in achieving growth.”

Empathy with users is one of the main concerns for Khatabook going forward as it looks to provide lending services to small merchants, Naresh said. Online lending services have grown substantially in India over the past decade, but very few of the big banks in the country, which account for 90% of loans, are interested in extending credit to MSMEs.

“The demand for loans that’s unmet through formal financial channels in the MSME sector is nearly $340 billion,” Naresh said, citing data from the Reserve Bank of India.

See also: Barclays To Invest $400M+ In Indian Arm

Khatabook is keeping quiet on the nature of those plans, but Naresh said he believes that if small merchants are connected to digital infrastructure, they can increase their access to credit services. That’s one of the reasons why Khatabook has been so focused on growing adoption.

“Now that we have created a widely accepted digital platform, the next step will be digitally-enabled financial services for small businesses,” he said. “We will leverage the distribution of our app to reach MSMEs that may not be covered by formal financial channels.”