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

August 8th, 2023

Embedded finance

For several years now, SMEs have had to cope with a succession of crises and have realized that they need to become more agile and flexible. They must adapt to the digital imperative and the new challenges an ever-changing financial environment poses. Embedded Finance seems to be the ideal solution!

Embedded Finance has been estimated to be worth $43 billion worldwide by 2022 and should reach $230 billion by 2025. In the coming years, this booming market could provide a significant growth lever for SMEs and thus open up new opportunities for the financial institutions that partner with them. Here's how it works…

What is Embedded Finance?

Embedded Finance: Definition

Embedded Finance consists of integrating financial services into the applications and platforms of non-financial companies: payments, loans, insurance, transaction accounts, etc. For example, the user can no longer leave the site and go to his bank's application to initiate a payment.

This integration of services is made possible by APIs or application programming interfaces. They acts as bridges between the platform and other software.

Read also: Why APIs are essential to the growth of Embedded Finance.

Embedded Finance is an emerging trend in the Finance world. It leads SMEs to offer new services to their customers and encourages financial service providers to rethink their offerings to enable them to do so. Financial institutions must position themselves as partners to SMEs, helping them integrate financial functionalities into their value proposition.

Open Banking and Embedded Finance: what are the differences?

You've likely heard of Open Banking if you're interested in Embedded Finance. But beware: although similar, these terms do not refer to the same concept. Open Banking means "open bank" and initiated Embedded Finance.

Open Banking also aims to promote secure financial data sharing between financial service providers (banks, PSPs, insurance companies, fintechs, etc.). In concrete terms, consumers and businesses can authorize banks or financial institutions to access their banking data and share it with third parties via secure digital channels. For example, these third parties can exploit this data using APIs in Embedded Finance. In this way, financial services are made more accessible, fluid, and affordable.

The different uses of Embedded Finance

Embedded Banking

More generalized, Embedded Banking can take various forms: account opening, loan simulation, Buy Now Pay Later (or BNPL)... These are all Embedded Banking services, which the user can access directly without leaving the platform or application on which they are browsing.

Embedded Payment

Embedded Payment is the most widespread example of Embedded Finance. It enables the user to make a payment without leaving the application by integrating a payment solution directly into it. The act of purchase is then reduced to a simple click directly in the application without the user having to enter their credit card details.

Embedded Insurance

Embedded Insurance allows you to take out insurance from within an application. This use case is particularly widespread in the rental or travel industry. For example, users can ensure their rental car or vacation without ever leaving the booking site.

Embedded Finance: examples

More concretely, what does Embedded Finance look like? Here are a few examples to give you a clearer idea:

  • You pay for an e-commerce purchase using Apple Pay or Google Pay: you use Embedded Finance ;
  • You book your vacation and choose to pay in installments on your travel agency's website: Embedded Finance ;
  • You order your dinner on UberEATS and pay the restaurant owner, the delivery driver, and Uber in a single payment: here again, you're using Embedded Finance!

Without knowing it, you've probably already used an embedded finance feature. And with good reason, Embedded Finance is becoming an increasingly important part of our daily lives.

Case study: integrating financial services into the day-to-day running of an SME

Charles is the owner of a specialty restaurant in Paris. During the first confinement, he decided to join Deliveroo to have his meals delivered to his customers. The project is flourishing, and Charles spends his days checking orders in the Deliveroo mobile app. Using Deliveroo regularly, he noticed a new bank account feature called "Deliver Money." Charles decided to sign up with just a few clicks and started using the feature.

Payments for each order are deposited directly into the Deliver Money bank account in real-time. He even has access to an overdraft of up to 50% of his average weekly earnings. After several months of experience, he used Deliver Money exclusively for most day-to-day banking transactions. He can now transfer all his financial flows to Deliver Money thanks to the Change Bank feature in Deliveroo.

For more details, Deliver Money is integrated into the Deliveroo app and provides a unique and intuitive user experience that covers most of Charles' business needs :

  • Real-time notification of incoming and outgoing payments;
  • Fast, efficient bill payment service (invoice photo taken, payment prepared, and transaction validated);
  • Direct integration with his accounting tool: instead of going back through a bank, Charles goes directly into his accounting tool to access his monthly results in real-time.

The emergence of Embedded Finance

Innovation in integrated financial services has been made possible by four factors: technology, compliance, culture, and strategy and business model. These factors are interdependent and play a unique role in defining the future of integrated financial services.

Technology

Technology is the primary driver of innovation in integrated Finance. Advances are also facilitating the integration of financial services with non-financial products. Through the use of APIs, companies are able to connect their services to financial offerings, creating a seamless user experience. This technology enables the creation of innovative services that meet customers' evolving needs and thus generate new sources of revenue.

Strategy and business model

Innovation in strategy and business models is driving change in integrated financial services. Companies are developing new strategies and business models focused on offering innovative integrated financial services to differentiate themselves in a crowded market. This leads to new products and services designed to meet the needs of specific customer segments.

Compliance

Compliance is also the driving force behind innovation in integrated Finance. Companies must comply with current laws and regulations as the financial sector becomes increasingly regulated. This has led to new technologies and compliance processes that enable companies to more easily offer integrated financial services while complying with regulations.

Culture

The final factor is culture. Culture plays a key role in innovation in integrated financial services. As companies recognize the potential benefits of integrated Finance, they increasingly adopt a culture of innovation and experimentation. This leads to new products and services designed to meet changing consumer needs.

  • To maximize the potential of Embedded Finance, non-financial companies need to partner with financial companies to deliver seamless, personalized customer experiences. By leveraging their respective strengths and working together, they can capture the full potential that Embedded Finance represents.

What are the benefits of Embedded Finance?

Embedded Finance: many advantages

Embedded Finance offers many competitive advantages.

Optimized user experience

Thanks to smooth navigation and direct access to banking services, Embedded Finance offers an optimized user experience. Their needs are properly addressed, leading to higher satisfaction and customer loyalty!

Marked differentiation

Embedded Finance is also an excellent way to stand out from the competition. It enables companies to improve their offering and differentiate themselves from the crowd through innovation by providing an adapted response to new needs.

A growth perspective

Embedded Finance helps develop revenues and customer portfolios, which are fundamental to revenue growth by promoting customer satisfaction and acquisition. In this way, integrating financial solutions helps improve a company's economic profitability.

SMEs, the new target for Embedded Finance

Embedded Finance means integrating financial services into customers' everyday lives. Today, very powerful players based on digital platforms (Deliveroo, UberEATS, Shopify, etc.) are using Embedded Finance to offer financial services to SMEs to support their growth: transaction accounts, payments, loans, and so on. Today, these digital platforms provide seamless user experiences that incorporate financial services to create a privileged banking relationship.

This new trend creates contextual opportunities that deliver the banking services customers, and businesses need when they need them. According to a study by Plaid, 88% of companies implementing Embedded Finance report increased customer engagement, and 85% say it helps them win market share.

For traditional banks, the new wave of embedded Finance represents a new competitive threat in the SME segment and a real growth opportunity. Technology players from various sectors (collaboration tools, accounting software, marketplaces, etc.) offering digital platforms have already positioned themselves in this market, offering SMEs financial services to add value to their daily lives.

Banks, therefore, have the opportunity to play an important role in this emerging trend. Like an "API platform," banks can become platforms, enabling other companies to plug into bank APIs and offer value-added services. Banks can monetize this access to their APIs and distribute their products and services through third-party players.

The lucrative SME financial services market

While offerings such as the Apple Card payment card, the Lending solution on Amazon's marketplace, and the new Buy Now Pay Later services offered by fintechs such as Klarna and Affirm have entirely transformed the way consumers make their purchases, Embedded Finance is also reshaping the SME market.

Less and less satisfied with their relationship with retail banks, pointing to the poor quality and speed of services, SMEs are looking for better solutions to meet their needs. Many digital platforms have logically turned their attention to the SME market at a time when businesses have felt ready to adopt solutions that help them in their day-to-day operations and save them time.

Based on Plaid's survey, Embedded Finance could capture up to 26% of the global SME market by 2025, worth $124 billion. Traditional players who fail to respond to the emergence of Embedded Finance risk eroding their revenue streams from the SME segment by up to 8%.

Despite the influx of neo-banks targeting SMEs in the European market, these players gained some ground. Still, inertia got the better of them, notably through differentiating propositions that encouraged customers to choose them. Today, the incumbent players are looking to improve their offerings and digital experiences to compete with these neo-banks and digital platforms targeting SMEs.

The success of digital platforms with SMEs

With Embedded Finance, financial services disappear into applications, services, and interfaces. This enables SMEs to use these services whenever they want without initiating a separate process in another interface, such as logging on to another website to transfer or complete a loan application. SMEs use a wide range of platforms: e-commerce, marketplaces, payment, and social networks, and include accounting, financial management, productivity, collaboration, and exchange solutions hosted in the cloud. Digital platforms are, therefore, logically well-placed to meet their needs.

Easier and more efficient for SMEs, integrating financial services into a digital platform can also be accompanied by value-added services such as financial management and analysis tools. For example, non-banking payment processors already offer merchants analysis tools that they can use to extract customer information from their transactional data.

Today, many digital platforms include Embedded Finance in their customer experiences. Let's take a look at some of them:

  • Stripe has created APIs for credit products integrated into platforms like Shopify to offer financing options to SMEs. Shopify, a digital platform that facilitates the creation of e-commerce sites, provides loan products to its 800,000 merchants.
  • Square, a fintech offering a payment terminal to facilitate card payment acceptance for SMEs, has evolved into an ecosystem of solutions and services for SMEs. It also provides financial services such as online payments, payroll management, e-commerce site hosting, and customer relationship management tools.
  • Lyft offers drivers a Lyft debit card and bank account powered by Payfare and issued by Stride Bank. Drivers can pay their fees instantly into their Lyft Direct account after each ride, with no balance or maintenance fees. Uber has also set up a similar project with BBVA in Mexico.

Faced with the emergence of these non-banking players with a strong footprint in the consumer society, traditional players need to react to the Embedded Finance trend to avoid an erosion of their revenue streams in the SME segment.

New digital platforms: a boon for financial institutions

Embedded Finance also offers financial institutions a gateway to the SME market. However, they need to determine in advance which platform model is best suited to the needs of SMEs.

  • The "App Store" platform allows SMEs to use white-label financial services wherever they need them most in their day-to-day activities. Several banks, fintechs, and third parties can connect to the digital platform and offer their financial services via APIs. Take the example of Xero, an accounting solution provider for SMEs, which provides a wide range of financial services in an App Store. This model offers financial players the advantage of retaining their brand presence and influencing the user experience. However, the products offered are not as deeply rooted in the day-to-day activities of SMEs, and financial institutions risk becoming disintermediated in this model, which can damage customer relationships over the long term. What's more, digital platforms will find themselves in a position of strength, forcing financial players to charge for access to their platforms, with a consequent impact on offerings, revenues, and costs for SMEs.
  • For its part, the distribution platform integrates Embedded Finance as part of its global offering. Financial services are seamlessly assimilated into the user experience and factored into product and service pricing. In practice, the digital platform partners with a financial institution or fintech to provide financial services, offering new solutions to meet the needs of SMEs. The advantage of this model is that it gives added value to SMEs and is monetizable for financial players. In reality, smaller, targeted digital platforms, such as financial management, car-sharing, or booking platforms, will likely choose this model, as they will be keen to increase their usefulness and build customer loyalty. QuickBooks is a good example. It's an accounting management platform that integrates a business bank account that SMEs can open free of charge, with a high return on all balances. Intuit provides this integrated solution in partnership with Green Dot Bank. However, this model has challenges and risks for traditional players. While it can provide access to a broader customer base, there is a risk of cannibalization by digital platforms that can compete with existing offerings.

Embedded Finance: a tremendous opportunity for SMEs

Technological advances have enabled these digital platforms to offer financial services more quickly and easily, with lower integration and operating costs. For businesses, this has helped them to strengthen customer loyalty and tap new sources of revenue.

This is a real opportunity for Software-as-a-Service (SaaS) players like Skaleet, who can partner with these digital platforms to provide financial services to SMEs. The old business models will gradually give way to this new order of technological players.

Financial players who want to lead this change can forge strategic partnerships with leading players in each market to co-create new propositions. These partnerships enable them to defend their position and generate significant growth by offering new financial services as part of the overall added value that digital platforms aim to bring to SMEs.

Embedded Finance can collectively support local SMEs in their digital transformation and contribute to the economic development of French regions. SMEs have every interest in being seduced by the advent of Embedded Finance.

Embedded Finance represents a significant opportunity for financial and non-financial players. It enables them to innovate and offer their customers new, more fluid, transparent, and accessible experiences.

Skaleet has developed a Core Banking Platform to respond to new practices, enabling financial and non-financial institutions to rapidly launch new banking products and experiences at a competitive price. Would you like to find out more? Contact us now!

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  • #embeddedfinance

  • #platforms

  • #smes

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