Adopting FinTech Solutions in Financial SMEs: From Opportunity to Imperative

India’s rapidly expanding financial services ecosystem is no longer confined to large banks and NBFCs. A growing number of financial SMEs, ranging from regional NBFCs and microfinance institutions to wealth advisory startups and digital lenders now form a vital part of the broader financial inclusion and intermediation landscape. For these firms, technology is emerging not just as a value addition, but as a foundational capability.

As regulatory expectations rise, customer expectations evolve and cost pressures intensify, FinTech adoption is becoming an operational necessity. Yet, technology penetration across the SME segment remains uneven. While some firms have embraced end-to-end digital workflows, many continue to operate with fragmented systems or manual processes.

The opportunity lies in bridging this gap ensuring that small financial firms are not left behind in India’s digital financial services transformation.

Digital Tools to Enable Core Business Functions

FinTech, in practical terms, refers to the application of technology in delivering financial services. For SMEs, this spans a wide spectrum from client onboarding and credit assessment to payments, risk management and regulatory compliance.

Several firms have already begun integrating API-based solutions for digital KYC, real-time loan decisioning, automated collections and AI-led fraud monitoring. Tools that were once considered the preserve of large institutions are increasingly available in modular, subscription-based formats suitable for smaller players.

Customer onboarding has seen some of the fastest digital adoption. Paperless KYC tools, offered by platforms such as Signzy, Karza, and IDfy, are now widely used by fintech-enabled NBFCs and MFIs. These reduce turnaround time, lower drop-offs and improve data accuracy especially in tier-2 and tier-3 locations.

In credit underwriting, the shift from traditional balance-sheet-based assessment to alternate data models including GST filings, utility bill patterns or social media footprints is enabling small lenders to serve previously unbanked or thin-file customers. This is particularly relevant for MSME-focused NBFCs and fintechs operating in the informal economy.

Payments, Collections and Liquidity Management

Payment digitisation has become more than a customer convenience it is a core driver of operational efficiency. UPI integrations, auto-debit mandates and collections management tools are helping firms bring more predictability to their cash flows.

Platforms like RazorpayX, Cashfree and RevPay now offer SME-specific dashboards for managing payouts, tracking receivables and reconciling transactions across channels. For firms dealing with recurring payments such as MFIs or subscription-led advisors automated reminder systems linked to WhatsApp or SMS have shown a measurable impact on collections.

Equally important is the adoption of digital lending management systems, which provide visibility across disbursements, EMIs and delinquency patterns. These systems also help in early warning detection and better credit control.

Improving Compliance Through RegTech

With increasing scrutiny from regulatory bodies particularly after the surge in digital lending complaints and NBFC mismanagement cases compliance has moved to the top of the SME agenda. This is where RegTech has stepped in.

Real-time audit trails, automated KYC refreshes, exposure limit tracking and configurable reporting tools help smaller firms manage regulatory requirements with fewer resources. Cloud-based offerings from RegTech players like Signzy, Fintso and Finbox are now being adopted by smaller players in wealth management, lending and insurance distribution.

Moreover, upcoming frameworks like Account Aggregator (AA) and Open Credit Enablement Network (OCEN) driven by the government and supported by RBI are creating rails for secure, permissioned data sharing. Financial SMEs that build compatibility with these systems will likely gain a competitive edge in credit delivery.

Constraints in the Path of Adoption

Despite the visible benefits, several structural barriers remain. The first is digital readiness. Many firms still operate on legacy core systems or do not have in-house tech capabilities to integrate APIs or manage upgrades. Second, change management continues to be a challenge, especially in family-run firms or those with decentralised operations.

Cybersecurity concerns also inhibit adoption. Smaller firms often lack formal IT policies, leaving them vulnerable to phishing, data leaks or ransomware attacks. While FinTech platforms typically offer bank-grade security, adoption depends on trust, awareness and risk appetite.

Finally, the fragmentation of the vendor ecosystem means that SMEs face difficulty in choosing between competing solutions with few benchmarks to compare reliability, scalability or post-sale support.

Emerging Models: Platformization and Embedded Finance

Going forward, a significant trend to watch is the platformisation of financial services for SMEs. Increasingly, fintech enablers are bundling multiple tools onboarding, lending, reporting, collections into a unified dashboard. This reduces integration friction and allows SMEs to manage operations more effectively.

Another shift is toward embedded finance, where financial services are integrated into non-financial platforms. For instance, lending products embedded into ERP or payroll systems or investment products integrated into tax-filing tools. This offers SMEs both convenience and stickiness, while allowing fintechs to scale distribution more efficiently.

For example, NBFCs lending to MSMEs via B2B marketplaces or accounting platforms are already seeing improved underwriting outcomes and lower CAC (customer acquisition cost).

Policymakers and industry associations have a role to play in accelerating FinTech adoption among financial SMEs. This includes:

• Incentivising digital adoption through subsidised onboarding or tax rebates
• Standardising data-sharing protocols under AA and OCEN
• Expanding digital literacy and tech-readiness programs for NBFCs and MFIs
• Encouraging co-lending partnerships where small players can integrate with banks through tech rails

Ultimately, FinTech adoption is not just a technological upgrade it is a shift in how financial SMEs operate, compete and deliver value in a fast-evolving market.

Conclusion

India’s fintech ecosystem has matured significantly, but its full potential will only be realised when financial SMEs not just large incumbents are meaningfully onboarded. The transition will require investment, upskilling, and strategic alignment, but the long-term payoffs in terms of reach, resilience and regulatory readiness are compelling.

For small financial firms aiming to scale sustainably in a digital-first economy, the future is not just FinTech-enabled it is FinTech-dependent.