Embedded finance for SME businesses

Eppo Heemstra
Connective Payments, April 2023

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Embedded finance

At a time when banks are becoming more cautious about lending to small and medium-sized businesses, opportunities are emerging for non-banks to offer banking services to these customers. Accountancy software suppliers have begun leveraging their customer data to offer financial products and payment services to their portfolio, thereby competing with traditional retail banks. Indeed, ’embedded finance’, a big theme at fintech conferences last year, is disrupting the banking industry and forcing traditional banks to adapt and innovate to remain competitive. In a recent survey of the market, Adyen states that 64% of SME businesses are interested in integrated financial services. In Europe and the United States, the potential market size is estimated at €104 billion, accounting for a market share of 45% in the SME market. A study on the US market by Future Market Insights expects the number of SME loans through fintechs to increase by $32.5 billion over the next ten years.

Examples of embedded finance for SMEs

Here are a few examples of embedded finance:

  • Moneybird, a Dutch SaaS company that provides invoicing, bookkeeping and other financial services to SME businesses, has recently included Adyen’s lending as well as payment processing service to its suite of financial solutions.
    Entrepreneurs who take care of their administration via Moneybird will see a block with the available credit line in their dashboard. No credit check, no long forms, no customer survey or entering a bank account number. CEO Edwin Vlieg states he prefers this technical solution over PSD2, with its often glitchy and error-prone interface to banking APIs.

PSD2 was a process of a thousand and one frustrations. The gateways to the banks often do not work, and balances are not up-to-date

Edwin Vlieg, CEO Moneybird

  • Xero is a cloud-based accounting software provider that has developed a suite of financial products that are aimed at small businesses. These products include Xero Payroll, which allows businesses to manage their payroll processes, and Xero Expenses, which helps businesses manage their expenses.
  • QuickBooks is another cloud-based accounting software provider that has expanded into the financial services space. They have developed a suite of financial products that includes QuickBooks Payments, which allows businesses to accept payments from customers, and QuickBooks Capital, which provides loans to small businesses.
  • Stripe has expanded its offerings to include financial products. Stripe Capital provides loans to businesses that use Stripe’s payment processing platform. Stripe also offers Stripe Billing, which allows businesses to manage their recurring payments.
  • Square has developed a range of financial products for small businesses. These products include Square Capital, providing loans to businesses that use their payment processing platform, and Square Payroll, which allows businesses to manage their payroll processes.

Embedded finance disrupting traditional banking?

As said, the integration of financial services into non-financial products and services, has the potential to disrupt traditional banking. By embedding financial services within other products and services, companies can offer their customers a seamless and more convenient experience, potentially reducing their reliance on traditional banks.

While embedded finance represents a significant challenge to traditional banks, it also presents an opportunity for them to evolve and adapt to meet changing customer needs and preferences. Some ways that traditional banks can meet this challenge are:

  • Collaboration: traditional banks can collaborate with fintechs and other non-financial companies to offer embedded finance solutions. For instance, BBVA has partnered with Uber to offer a credit card that provides cashback rewards for Uber rides and Uber Eats purchases. Another example is Mastercard’s partnership with Microsoft. This collaboration resulted in an embedded finance solution that enables SME businesses to access credit directly within Microsoft Dynamics 365.
  • Innovation: obviously banks can -and will- continue to invest in technology and innovation to create and enhance their finance solutions. By offering their customers a seamless and convenient experience, they can compete with fintechs and other companies.
  • Customer-centricity: just like accounting software suppliers, traditional banks can focus on delivering exceptional customer experiences, leveraging their existing customer base. By understanding their customers’ needs and preferences, they can develop finance solutions that meet those needs. With a solid reputation for security and reliability as extra asset.
  • Regulatory compliance: with established regulatory frameworks in place, banks may have an advantage over fintechs when it comes to regulatory compliance. This advantage may be one of the main reasons, next to technological issues, why many open banking offerings by non-banks are still not a resounding success. Who do you entrust your money to?

Lending is complex, both for banks and non-banks

Overall, embedded finance is a potentially major risk for traditional banks because it implies a form of disintermediation. An entrepreneur who purchases credit and other banking services directly from his accounting software supplier may no longer need contact with a bank. Speed and a “seamless” customer journey when opening an account or line of credit can be big advantages. Adyen claims it facilitates the financial services speed particularly required by SMEs, who are often slowed down and under served by traditional institutions. Both SaaS platforms such as Moneybird and Fintechs with a banking license, such as Adyen, Stripe and Mollie, are looking to expand their service portfolio to become the one-stop-shop for their customers.

However, whether this development will really take off depends on many factors. The uncertain market conditions make offering credit to SMEs more complex and risky. Traditional banks have lending in their DNA, and years of experience in assessing credit risk. Some banks will not regret if SME clients turn to third parties for credit offers, given the limited benefits and high (compliance) costs.

Fintechs and accounting software companies may know a lot about their clients, but the question is whether they have all the experience and sufficiently trained algorithms to make quick and accurate risk assessments – and create new healthy and sustainable revenue streams.

Connective Payments is here to help you

Are you looking at embedded finance as a possible solution? We are “Connective” because we bring together the right expertise to help our customers grow and we leverage our network to help shape alliances and create fruitful customer and vendor relationships. We are helping scale-ups grow, and help established names excel at operations, improving profitability and customer satisfaction.
Want to know more? Check our services, such as product innovation, strategic partnerships and interim payments professionals, and let’s talk business!

Picture of Eppo Heemstra

Eppo Heemstra

Connective Payments
Partner, PSD2 lead & Compliance
+31 620 352 007

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