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Rising penetration of "Merchant Cash Advance" daily instalment loan offering

Updated: Jan 31

A merchant cash advance (MCA) was originally structured as a lump sum payment to a business in exchange for an agreed-upon percentage of future credit card and/or debit card sales.

The term is now commonly used to describe a variety of small business financing options characterised by short payment terms (generally under 24 months) and small regular payments (typically paid each business day)

A company's remittances are drawn from customers' debit and credit-card purchases on a daily basis until the obligation has been met.

With rising penetration of UPI QR Code, the MCA has found its place with UPI merchants too.

How large is the opportunity?

Market size and growth:

  • How big is the current market for MCAs in India? (Estimated around INR 10,000 crore)

  • What are the projected growth rates in the coming years? (Expected to grow at a CAGR of 30-40%)

  • What are the factors driving this growth? (Rising SME sector, increasing adoption of digital payments, etc.)

Key players and trends:

  • Who are the major players offering MCAs in India? (Bajaj Finserv, Axis Bank, Indifi, RazorpayX, etc.)

  • What are the emerging trends in the market? (Focus on technology, data-driven underwriting, flexible repayment options, etc.)

How UPI QR code is fuelling growth of daily instalment based merchant cash advances?

  • There are 300 million UPI merchants in India

  • There are nearly 8 million POS touch-points in Indian

  • Daily instalment (EDI) with weekly holiday has become a popular product amongst merchants due to following reasons

    • Reduced stress: Repaying in small amounts on a daily basis reduces the pressure on your finances as no lump sum payment needs to be made for EMI.

    • Auto recovery everyday from settlement amount, implies less worries about missing out on instalment dues.

    • Less Total Interest Payable - as daily retained amount also acts as a prepayment / amortisation of principal amount

  • FinTech players like BharatPe, PayTM, Razorpay have found good success with EDI through their banking and NBFC lending partners

Popular loan product constructs for Merchant Cash Advances?

  • #1 Daily instalment billing: Generate EDI schedule similar to EMI with weekly holiday

    • Instalment is billed on a daily basis

    • There is a concept of grace period

    • Any breach beyond the grace period results in penalties and DPDs

  • #2 Daily pre-payment(Fixed amount) but monthly EMI billing: Consider daily retention of some amount as pre-payment of the EMI loan

    • Instalment is billed on the monthly basis

    • Everyday pre-defined amount is deducted from the settlement amount and considered as payment received for pre-payment

    • DPD computations and penalties happen as per monthly schedule

  • #3 Daily pre-payment(Variable amount) and bullet repayment billing : Bullet loan with daily pre-payment as share of receipts

    • Certain pre-agreed percentage of daily receipts in the POS machines / merchant accounts is considered as repayment towards the loan

    • Principal reduces by a variable amount everyday

    • Interest is computed daily based on outstanding principal amount

Deduction from settlement amount is the key for this product's success

  • This product can work successfully only in scenarios when the lender has control in the payment settlement process.

  • Hence most lenders can't offer it without partnerships with the platforms

  • Which platforms should the lender tie up with? Below is the list of possible platforms where settlement can be controlled

    • UPI QR code merchant acquirers

      • FinTechs - PayTM, PhonePe, BharatPe,

      • Banks having their own merchant acquisition - ICICI, HDFC, AU Bank, SBI

    • E-Commerce platforms

      • Marketplaces like - Amazon, Flipkart, Meesho

    • BNPL enablers

      • Like snapmint

    • Payment aggregators

      • PGs like Razorpay, Billdesk, Worldline

    • POS machines providers

      • Like Pinelabs

How can Synoriq LMS help lenders manage MCA daily deduction loans?

Synoriq is world's best loan management system with widest possible product coverage. Synoriq offers a complete LMS solution to help you get quickly started

  • Support for all possible product constructs

  • #1 Daily instalment billing:

    • Native capabilities to generate EDI schedules

    • Ability to accommodated weekly/monthly holidays when the installment should be skipped in the RPS

    • Ability to specify custom holiday schedule for any loan

    • Sample repayment schedule of EDI is pasted below

    • Receipt allocation of dues in FIFO for all the installments dues

    • Ability to define receipt allocation sequence IPC or CIP etc

    • Define grace period

    • DPD calculation on daily basis

    • Bounce charges configurations - immediately on bounce or after grace period

    • Asset classification as per DPDs

    • Ability to redraw repayment schedule on lump-sum payment (Part payment)

    • Ability to manage limits and allow further drawdowns

    • Ready download of repayment schedule with daily principal amortisation for the customer

  • #2 Daily pre-payment(Fixed amount) but monthly EMI billing

    • Repayment schedule is generated as per monthly instalments

    • Daily retention amount is specified in the LMS

    • Everyday daily retained amount is considered as part-payment and repayment schedule is redrawn such that the impact comes only on the next EMI amount and not on the rest

    • Ability to handle lump sump part payments

    • Instalment billing happens on monthly basis, dues are generated only on EMI due dates

    • If all retained amount is serviced then ideally EMI amount should be close to zero i.e. same as daily retained amount

    • No penalties on missing daily retention amount

    • Penalties only on missing the monthly payment date

    • Overall interest costs are lower as outstanding principal is adjusted every day

  • #3 Daily pre-payment(variable amount) and bullet loan

    • Create a bullet loan with repayment of principal and interest on the maturity date

    • Compute the variable payouts on a daily basis and upload them as receipts in the LMS, system would auto reduce the POS on a daily basis

    • Interest accrual on a daily basis

    • Possibility of monthly billing of interest amount

    • Ability to adjust receipts against interest billing

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