Business banking is drastically different for organizations starting today. A decade ago, businesses would need to approach a traditional financial institution, submit their documents, and wait for an entire business week just to open a checking account and start accepting transactions.
This process has significantly evolved, and today the same outcome can be achieved by business owners in less than 10 minutes.
All a business needs to do is digitally apply for a checking account, electronically upload all their documents onto the online banking portal, complete their digital KYC and take ownership of their new checking account.
Now, businesses expect their banking partners to take the next leap in commercial banking and offer this experience in their native platforms without having to look elsewhere.
This demand, motivated partly by advancement in financial technology and partly by the need for convenience, has amalgamated in the formation of new opportunities for financial institutions worldwide. Embedded finance for SMEs is forecasted to become a USD 124 billion industry by 2025, and in today’s blog post, we will take a deeper dive into this emerging market.
What is SME-Embedded Finance?
Embedded finance as a standalone offering is nothing new. Establishments such as retail outlets and automotive dealers have been partnering with financial institutions for years to offer financial services in traditional non-financial environments – for example, automobile dealers offering financing at their showrooms or retail chains offering loyalty programs and discounts through co-branded credit cards. However, to date, embedded finance innovations have mostly been consumer focused.
In this next generation, embedded finance solutions are expanding their innovations to business commerce as well. Thus, simply put, SME-embedded finance is an offering which enables business owners to apply and use financial services in a non-financial environment.
A great example of this can be found in credit-as-a-service solutions, where businesses can apply for a credit line simply by logging into their platform partner profiles. In such cases, they do not leave their native platform to apply for a credit line, however, can simply achieve the same outcome in just a few clicks.
SME embedded finance thus empowers SMEs to experience increased convivence in commercial banking.
Why Do SMEs Want an Embedded Finance Experience?
Business dynamics have greatly evolved over the last 20 years.
The earlier ways of conducting business and managing its operations have long been ushered away, and modern businesses demand a holistic experience and control over their entire operation. The reason behind this is simple – increased convenience.
Earlier businesses needed to coordinate with multiple stakeholders and entities to perform one operation – reflect on the earlier example of opening a new checking account.
In contrast, today’s businesses demand the convenience of achieving the same outcome without needing to coordinate with multiple stakeholders. This can be best achieved with SME-embedded finance.
As businesses expand their offerings and scale their operations to new geographies, they increase in complexity and thus, it is only natural that entrepreneurs want to consolidate control such that outcomes can be achieved with the least resistance, and embedded finance enables this in the most economical manner.
For instance, out of the 2500 SMEs Accenture surveyed, more than 80% rely on one or more digital services for their daily operation, and at least 20% rely on digital services for generating more than half their revenue. Going by these numbers, an embedded finance experience in their native digital platforms is the logical next step.
How Big Is the Opportunity?
Now that you have a better understanding of what SME-embedded finance is and why SMEs around the world are demanding it let us analyze the potentiality of this opportunity.
Accenture conducted a global survey of 2500 SMEs across 10 different markets in 2021 and confirmed that an increasing number of small and medium-sized businesses are interested in availing an embedded finance experience in business commerce. The survey highlighted how 41% of SMEs are interested in availing a banking service from a digital service provider, 44% would want their existing digital platforms to offer financial services in partnership with a financial institution, and more than 47% would be willing to pay for the embedded finance experience.
While the above statistics might appear insignificant at first glance, an associated Accenture forecast highlighted how embedded finance for SMEs could account for almost 26% of global SME banking revenue by 2025. This essentially translates to the fact that traditional banks stand to lose close to USD 32 billion in revenue if they choose to do nothing. However, on the upside, early movers stand to benefit from the fact that SME-embedded finance would expand the global SME banking market by USD 92 billion in the same period.
In total, several studies estimate that the SME embedded finance market will be worth more than USD 124 billion by 2025.
Exploring Platform Economies
The above statistics on SME-embedded finance present a grave threat for incumbents while presenting a golden opportunity for early movers. The reason behind this is simple – as the rest of the world grapples with this newfound convenience, leaders are already emerging based on who integrates this offering first.
While at first glance this might appear like a win or lose situation, it can be quickly realized that SME-embedded finance offers a mutual win for the platform, the financial institution and definitely the end business customer.
By leveraging embedded finance for SMEs, platforms can upgrade their USP by being an early mover, significantly improve their platform stickiness and ultimately earn higher revenues by empowering their B2B customers with a seamless financing experience at checkout. Along the same lines, the financial institution can benefit by accessing a large pool of SMEs, a majority of whom are new to credit and add a new source of revenue without essentially accumulating the cost of end-to-end distribution. Lastly, the business customer benefits from the convenience of an embedded finance experience and their increased purchasing power at an affordable cost.
Conclusion
The upcoming five years will be crucial for SME-embedded finance. As traditional banks grapple with this newfound opportunity, leaders are already emerging around the world. Experts estimate that embedded finance for SMEs arrives with the opportunity of creating a SaaS moment for commercial banking by making way for a new era of business where old methods are ushered away and new convenience is embraced.
Planning to leverage embedded finance on your platform without the technical hassle? Get in touch with us today to learn more about our plug-and-play embedded financing solution.
