Embedded Finance – an opportunity for growth for SMEs (and Financial Institutions) 🚀

Three years on from the start of the pandemic, and things are not going too badly for France’s 3.9 million SMEs. According to Bpifrance, two out of three SMEs expect to be operating at pre-pandemic levels by the end of the year. However, SMEs are not emerging unscathed from the pandemic. They understand the unequivocal need to change and adapt to the demands of the digital age and new financial challenges, to become more agile and adaptive. The Embedded Finance sector is booming. With a current global market valuation of 43 billion dollars and the potential for this to reach 230 billion dollars in 2025, it offers SMEs a significant driver for growth in the coming years. It also brings new opportunities for partnering financial institutions targeting SMEs.

First, we need to consider what Embedded Finance is and its commendable and ambitious aims in relation to SMEs.

SME – the new target market for Embedded Finance 🎯

Embedded Finance is the seamless integration of financial services into the daily life of customers. Today, powerful platforms (e.g. Deliveroo, UberEats, and Shopify) use Embedded Finance to offer SMEs financial services to support their growth, like transaction banking, payments, and loans. Nowadays, these platforms offer users a smooth, transparent experience with integrated financial services to foster a unique banking relationship. 

This new trend enables contextual opportunities to be created, providing banking services that customers and businesses need, when they need them. According to a study by Plaid, 88% of companies that have implemented embedded financial report increased engagement with their customers, and 85% say that it helps them win market share. 

For traditional banks, the new wave of Embedded Finance is a new competitive threat to the SME market. However, there is an opportunity for growth there too. Technological companies operating in different sectors (collaboration tools, accounting software, marketplaces, etc), via digital platforms, are already well-positioned on the market as they offer financial services to SMEs that bring added value to their everyday operations. 

It follows that banks have the opportunity to play a significant role in this emerging trend. Following the example of an API platform, banks can themselves become platforms allowing other businesses to plug into bank APIs and offer added value services. Banks can monetize this access to their API and also distribute their products and services through third-parties. 

The lucrative SME financial services market 💰

Although services like the Apple Card payment card, Lending on Amazon marketplace, and even the new Buy Now Pay Later services offered by fintechs like Klarna and Affirm have transformed the way consumers make purchases, Embedded Finance is also reshaping the SME market. 

Increasingly disappointed with their relationships with retail banks, because of their poor service offerings in terms of both quality and a lack of responsiveness, SMEs are on the lookout for better solutions to their needs. Many platforms have logically turned to the SME market at a time when businesses feel ready to embrace solutions that help them in their everyday operations as well as saving them time. 

According to Plaid’s survey, Embedded Finance could capture up to 26% of the global SME market by 2025, with a value of 124 million dollars. Traditional organisations opting not to react to the appearance of Embedded Finance risk eroding their revenue streams from the SME sector by up to 8%.

Despite an influx of neo-banks targeting SMEs on the European market, they have gained a little ground but inertia has set in, especially via the differentiating offerings which have persuaded customers to choose them. Today, traditional organisations want to improve their digital offers and experiences to compete with the neo-banks and platforms targeting SMEs. 

The success of digital platforms with SMEs 🚀

With Embedded Finance, financial services are not visible in applications, services and interfaces. This allows SMEs to use these services when they want, without needing to start a separate process in another interface, like connecting to another website to transfer money or complete a loan application. SMEs use a wide range of platforms: e-commerce, marketplaces payment, social media, and solutions for accounting, financial management, productivity, collaboration, and exchange that are deployed in the cloud. Platforms are thus well-placed to respond to their needs. 

More easy and efficient for SMEs, the integration of financial services onto a platform can also help value-added services like financial management or analysing tools. For example, non-banking payment processors already offer merchants analytics tools they can use to extract customer information from their transactional data. 

Currently, many platforms use Embedded Finance in the customer experiences they offer. This article provides an overview of the organisations using this model:

• Stripe created APIs for credit products that are integrated into platforms like Shopify to offer finance options to SMEs. Shopify, a platform for creating e-commerce websites, offers loan products to its 800,000 merchants.
• Square, a fintech that has long offered a payment terminal to accept card payments for SMEs, has developed towards an ecosystem of solutions and systems for SMEs. It also offers financial services like online payments, payroll management, e-commerce site hosting, and even CRM tools.
• Lyft offers drivers a debit card and a bank account, powered by Payfare and issued by Stride Bank. Drivers are able to pay their expenses instantly with their Lyft Direct account after each fare, without low-balance or account maintenance fees. Uber has implemented a similar project with BBVA in Mexico.

Facing the appearance of these non-banks and with a strong presence in consumer society, traditional organisations must react to the Embedded Finance trend to avoid their income sources being eroded in the SME market. 

New platforms – a boon for financial institutions💡

Embedded Finance also offers financial institutions an entry point into the SME market. However, they must determine in advance which platform model will be most adapted to the needs of SMEs.

• App Store offers SMEs the chance to use white label financial services, where they are needed most on a daily basis. Banks, fintechs and third parties can connect with the platform and offer their own financial services via APIs. Xero is an example of this; it offers accounting software to SMEs, offering a large number of financial services in the App Store. This model offers financial players the advantage of retaining their brand image and of influencing the user experience. However, the products offered are not as deeply embedded in the daily activities of the SME, and financial institutions run the risk of disintermediation which can damage customer relations in the long run. Moreover, platforms are in a strong position, and they will force financial organisations to charge for access to their platforms, which will impact the offers, revenue, and costs for SMEs.
• Distribution platforms integrate Embedded Finance in the framework of its overall offer. Financial services are assimilated transparently into the user experience, and the product or service price takes this into account. In practical terms, the digital platform teams up with a financial institution or a fintech company to supply financial services, offering new solutions to respond to the needs of SMEs. The advantage of this model is that it offers added value to SMEs and can be monetized by financial organisations. In fact, the smallest, most niche platforms, like financial management, car-sharing or booking platforms are ideal for this model because they wish to increase their use and customer loyalty. QuickBooks is a good example. It is an accounting platform with an integrated professional bank account that an SME can open for free with a good yield on all its sales. This integrated solution is supplied by Intuit in partnership with Green Dot Bank. However, this model is not without its cons and risks for traditional organisations. They can certainly extend access to a larger client base, but there is a risk of cannibalisation on the part of the platforms which can compete with existing offers.

Embedded Finance – the significant potential of the untapped SME market 👨‍💻

Technological advances have allowed these platforms to quickly and easily offer financial services with comparatively low integration and operating costs. This has enabled businesses to increase customer loyalty and tap into new revenue streams. 

Against this backdrop, there are opportunities for Software-as-a-Service providers (SaaS) like Skaleet. They can create partnerships with platforms to provide financial services to SMEs. Legacy business models are progressively giving way to a new order of technological players. 

Financial organisations looking to drive this change can secure strategic partnerships with key players in each market to collaborate on creating new offers. These partnerships allow them to defend their position and also stimulate significant growth through new financial service offerings that bring the overall added value platforms want to bring to SMEs. 

Embedded Finance can collectively support the local nature of SMEs in their digital transformation and help with regional economic development in France. It follows that SMEs would be well advised to allow themselves to be seduced by the advent of Embedded Finance.

Case Study: The integration of financial services into an SME's daily operations 🔍

Charles owns a specialty restaurant in Paris. During the first lockdown, he decided to sign up with Deliveroo to deliver meals to his customers. The project is a thriving success, and Charles spends his days checking orders on the Deliveroo mobile app. From regular use, he notices a new bank account feature called “Deliver Money.” Charles decides to subscribe in a few clicks and begins to use this new feature. 

Payment for each order goes straight into the Deliver Money bank account in real-time. He even has access to an overdraft of up to 50% of his weekly average income. After several months of using the account, he decides to use Deliver Money for most of his day-to-day banking operations and can move all his financial flows to Deliver Money thanks to the Change Bank feature in the Deliveroo app. 

To give more detail, Deliver Money is integrated into the Deliveroo app to deliver an intuitive, exceptional experience for users, which handles most of Charles’ business needs. 

• Real-time notification of incoming and outgoing payments. 
• An efficient, swift invoice payment service (photo capture of invoice, payment prepared, so he only needs to validate payment). 
• Integration with his accounting software. Rather than going through a bank, Charles interacts directly with his accounting software to access his monthly figures in real-time.

Welcome to the world of Embedded Finance! A trend that promises to reshape the banking landscape over the next five years, for SMEs in particular.