Navigating Merchant Cash Advance (MCA) Lending in India: Best Practices & Tech Blueprint
Merchant Cash Advance (MCA) products have gained traction as a dynamic financing solution for small and medium-sized enterprises (SMEs). In contrast with traditional loans, MCAs provide businesses with upfront capital in exchange for a percentage of future sales revenue, which is typically deducted from POS transactions directly daily. The MCA structure offers a flexible and rapid funding option, particularly appealing to businesses with fluctuating revenues. As of March 2024, there are approximately 7.5 crore merchants in India, highlighting the substantial market potential for MCA products. Let us explore the intricacies of MCA products, their business model, and a blueprint for REs for successful MCA implementation along with proven industry best practices.
How MCAs Work?
Merchant Cash Advances are structured to align with the cash flow patterns of a business. An MCA is designed as an unsecured loan provided to a business in return for a predetermined percentage of its future POS sales (Card & UPI). This repayment model adjusts with the business’s sales volume, providing flexibility during slower periods and ensuring faster repayment during peak times.
How do the lenders get leads?
POS (Point of Sale) payment partners and Fintechs currently facilitating the day-to-day transactions of the merchants typically understand the needs of their customers & offer the product in partnership with Banks & NBFCs.
How are the leads assessed before disbursal?
Lenders assess the leads on the combination of the following parameters to arrive at the loan amount to be lent.
- Average Daily balance (ADB)
- Number & frequency of Credit count (No of times the borrower receives money)
- Fixed income to obligation ratio (FOIR).
- Cash flow Fluctuations
- Business Category
- Other Credit bureau parameters
In a top-down approach upon arriving at the loan amount, the lenders assess the daily Equated daily instalments (EDIs) that shall be payable by the customer along with the tenure.
How are the EDIs collected?
Let’s assume that a small merchant has taken an MCA loan from ABC Bank & received Rs 500 daily as an average from various customers through transactions made using a POS (Point of Sale) machine.
The total trade receivable of Rs. 500 will initially be deposited into the POS partner’s nodal account. In some instances, the lenders themselves might serve as the POS partner. From the collected Rs. 500, a sum of Rs. 100 (agreed EDI) is deducted and transferred to the lender and the remaining Rs. 400 is then credited to the merchant’s account, representing their net earnings.
Payment Aggregators (PA) and Payment Gateways (PG) also play a crucial role in facilitating this model through their split payment functionalities. These companies offer sophisticated systems that allow seamless and automated division of funds between different parties as per pre-defined rules which ensures that the lender receives their share directly, and the merchant gets their portion without any manual intervention.
Moreover, PA/PGs also offer user-friendly dashboards and comprehensive MIS reports which simplify reconciliation by providing clear insights into each transaction, enabling easy payment tracking, transaction history viewing, and financial report generation.
India’s Digital Payments Revolution and Contribution of UPI
India’s digital payments landscape has undergone a seismic shift, with the Unified Payments Interface (UPI) at the forefront. What began as a peer-to-peer transfer tool has become the backbone of India’s financial ecosystem, supporting merchant transactions, embedded finance, and cross-border payments. As of 2024, UPI commands over 84% of all digital transactions, with projections indicating a growth from 16 billion monthly transactions in December 2024 to 54 billion by 2030.
The next frontier will be defined by frictionless, embedded payment experiences that extend beyond urban centers to include rural and semi-urban populations. Features like UPI Lite for offline payments, UPI Credit for expanding access to credit, UPI Circle for secure delegated transactions, embedded payments through IoT devices, and UPI Global partnerships for cross-border transactions will drive this evolution. However, maintaining a balance between innovation and security will be key to building trust and ensuring inclusivity as technology advances.
Why Innovation in Payment Infrastructure is Essential
While the convenience of UPI is clear, the future of digital payments hinges on robust, scalable, and secure infrastructure. As transaction volumes surge, ensuring zero downtime, seamless interoperability, and real-time fraud detection becomes critical. Innovations like resilient and scalable switches and mandatory two-factor authentication are not optional—they are imperative for sustaining this growth.
At the heart of this transformation lies advanced switching technology. Every UPI transaction triggers multiple interactions with payment switches that handle authentication, routing, authorisation, and fraud checks. As UPI scales to handle billions of transactions monthly, the need for dual-core switches and cloud-native architecture becomes essential to ensure high availability and zero downtime. Future-ready switch infrastructure will be the backbone of India’s payment ecosystem, capable of handling exponential growth without compromising speed or security.
What You’ll Find in This Report
- UPI’s Unprecedented Growth & Market Dominance
Insights into UPI’s explosive growth—from 39 billion transactions in 2021 to 172 billion in 2024—and its role in democratising digital payments. - Technology & Infrastructure: Building for Scale and Security
A deep dive into the backend of UPI, with focus on future of switches including dual-core switches, cloud-native processing, and AI-driven fraud detection that ensure resilience and high availability. Understand how advanced switching technologysupports seamless transaction processing and prevents system bottlenecks. - New Use Cases Fueling Digital Payment Growth
Exploration of UPI innovations such as Credit on UPI, UPI Lite for offline transactions, UPI Circle for secure family and business payment delegation, embedded payments via IoT devices and wearables, and UPI Global for seamless cross-border transactions. - Merchant & SME Enablement
Over 30 million merchants are leveraging UPI to drive a 67% YoY growth in digital payments, supported by zero/low MDR and QR-based acceptance models.
Regulatory Insights & Global Expansion
The role of RBI and NPCI in shaping a secure, inclusive digital ecosystem, and UPI’s global footprint expanding to countries like UAE, Singapore, France, and Sri Lanka.
Why You Should Download This Report
- Gain exclusive insights from fintech leaders and regulatory experts on the future of real-time payments.
- Understand the critical infrastructure and technological advancements, including advanced switching systems, that will define the next decade of digital payments.
- Whether you’re a financial institution, fintech innovator, or policymaker, this report offers actionable strategies to stay ahead in the rapidly evolving payment landscape.
Unlock the roadmap to a cashless, seamless, and secure digital economy—download the report now and be part of India’s digital payment revolution.
MCA Business model
Blueprint for REs to Build a Successful MCA Offering:
1. Robust Technology: This entails having a technology infrastructure that can adapt to changing needs and integrate seamlessly with other systems. A modular LOS/LMS allows for customization to suit specific requirements, while comprehensive APIs ensure smooth communication between different platforms with minimal delay, enabling efficient operations.
2. Improved Customer Experience: Simplifying the customer journey involves designing interfaces and processes that are intuitive, user-friendly, and aesthetically pleasing. By making interactions with the product or service easier and more enjoyable, businesses can enhance customer satisfaction, build loyalty, and increase the likelihood of customers returning for future transactions.
3. Risk and Compliance: Both REs and Fintech must stay vigilant regarding evolving regulations
Compliance with DLG, FLDG, outsourcing guidelines, and KYC is imperative for the success of MCA products.
4. Streamlined Underwriting: The RBI emphasizes adopting a risk-based underwriting approach to enhance customer service. Utilizing alternative data sources allows for more accurate risk assessment and enables better decision-making in loan approval processes, leading to higher approval rates and improved customer satisfaction.
Product and Technology Modifications for MCA Deployment by Lenders
MCA products require minimal changes and can be a valuable addition to the RE’s portfolio. With only minor adjustments needed in the workflow, a fully digital MCA product can be developed and launched within a few weeks. Here are a few changes that are required:
1. Loan Origination System (LOS) -These stacks need to be modular, featuring APIs to support third-party integration, as lead generation in MCA typically occurs through Direct Selling Agents (DSAs) or fintech / POS partners.
2. Loan Management System (LMS) – Since repayments are made daily, the system must recalibrate the Repayment Schedule, Statement of Account and Nach & UPI mandates for EDI payments. Additionally, the logic for ROI, prepayment, foreclosure and charges need to be tweaked to ensure calculation as per the daily payments.
3. Business Rule Engine (BRE) – An MCA product can be viewed as purchasing a merchant’s future sales. Therefore, the BRE must be configurable to calculate the firm’s future cash flows daily, accounting for seasonality and any cash flow constraints faced by the firm when making decisions.
4. Reconciliation: Transaction level recon is required daily for collections across all payment modes.
How to create an End-to-end digital journey for MCA?
Launching Merchant Cash Advance (MCA) products can be achieved with minimal modifications to the current personal loan or unsecured business loan processes. Financial institutions looking to introduce MCA can seamlessly integrate this product by leveraging existing best practices.
Here are some best practices that can be easily adapted for MCA products:
2. Mandate Setting: Banks have increasingly adopted E-NACH and UPI autopay, integrating with service providers for seamless mandate setting. This approach can be extended to MCA products.
By integrating these best practices, financial institutions can launch MCA products with minimal disruption to their existing loan processes.
Looking to launch a fully digital-driven Merchant Cash Advance (MCA) product?
Here are the key drivers that can help you achieve a successful launch
Using Business KYC (BKYC) APIs for a smooth journey
What is Business KYC?
It refers to the process of validating and verifying the KYC documents of the Business.
- RBI’s KYC Master Directions necessitate the provision of two business proofs for a business loan application, emphasizing the significance of robust documentation.
- Leveraging digital verification methods minimizes customer intervention, ensuring a complete STP flow with faster processing and disbursals.
- The adoption of digital verifiable documents simplifies the application process for customers, providing clarity and ease of submission.
Creating a Video-Based Customer Identification process (VCIP) aggregation framework for preventing VCIP drop-offs
What is VCIP? It is an alternate method of digital customer identification with facial recognition and customer due diligence by authorized officials of the bank.
- While most banks are mandating VCIP for digital journeys to comply with KYC guidelines, the process is hindered by lengthy procedures and technical issues, leading to significant drop-offs.
- The solution is to implement an aggregation functionality at the LOS level, routing customers in the VCIP queue to the fastest available VCIP application
- This approach eliminates long queues and delays in disbursal, ensuring no reliance on individual VCIP applications by prioritizing the best-performing ones for maximum efficiency.
Optimizing Service Delivery with Better Alternatives for E-Mandate and E-Sign
ENach vs UPI autopay
UPI Autopay stands out due to its overall success rate of ~97% compared to Enach with ~93%. Its ease of setup significantly enhances the customer experience, allowing users to quickly and effortlessly configure their payment preferences. Additionally, UPI Autopay provides flexibility and control to users, as they can revoke, modify, or pause their payments at any time. This combination of reliability, ease of use, and user control makes UPI Autopay an attractive option for both customers and businesses.
ESign Vs Physical Signature
Esign is recommended under KYC master directions and AML norms, this solution facilitates easier auditing and compliance checks through detailed digital audit trails that meticulously record every step of the signing process. It reduces potential errors and delays associated with manual handling and offers enhanced security features such as encryption and multi-factor authentication, ensuring a secure and efficient workflow.
How can The Digital Fifth Help you in Launching MCA?
With a proven 360 degree expertise in customer journey, technology, regulatory compliance, product and programme management we can help Banks/NBFC/Fintechs in launching a completely digital MCA product in a matter of few weeks.
Brief approach: The Digital Fifth’s Plug and Play Consulting Service
Plug in our services where you are getting stuck and fastrack your product launch to a few weeks.
Market Assessment and Benchmarking:
- Market assessment to bring the industry’s best practices at the table for your disposal.
- Benchmark against top digital journeys to identify areas for improvement.
- Utilize our market connections to seamlessly partner with leading LSPs/DSAs/Banks.
Complete product and Programme Management
- Complete product Planning services which include creating journey flows, UI/UX, BRD to SOP preparation.
- End-to-end programme management which includes fintech partner onboarding & Go-Live
Regulatory Compliance Assessment and Recommendation
- Ensure compliance and security by design approach to maintain adherence to regulations at all times
Conclusion
Launching a fully digital-driven Merchant Cash Advance (MCA) product involves leveraging advanced technology, streamlining processes, and ensuring robust compliance. With The Digital Fifth’s 360-degree expertise in customer journey, technology, regulatory compliance, product, and program management, we can help Banks, NBFCs, and Fintechs launch a completely digital MCA product within a few weeks.