Vishal Shah/SAP Fioneer
Embedded finance can help banks give SMEs the service they deserve
For too long, SMEs have been short-changed by their banks. Embedded finance is making that a thing of the past
Embedded finance, the seamless embedding of a financial product into a non-financial space, is transforming the financial industry. Banks today have multiple new routes to market for financial products for non-financial businesses. By 2026, financial services embedded into e-commerce and other software platforms will exceed $7 trillion (according to Bain Capital), creating a massive opportunity for banks to reach new customers, many of them SMEs.
SME banking is particularly fertile ground for banks and financial service providers. In the UK, Europe and US, they make up 99 per cent or more of the private businesses in operation. Plus, this is a loyal customer base. One McKinsey survey of UK banks found that as few as a quarter of SMEs switched their main bank in the five years leading up to the survey.
Despite this, most SME banking options don’t meet the specific and evolving needs of modern SMEs.
SMEs often require quick access to credit yet, according to EY, 48 per cent of SMEs said they want quicker access to credit. Despite this, lending to SMEs is at an all-time low. Embedded lending allows banks to meet this need by integrating their own loan offerings into the user flows of B2B businesses whose customers could require them. An example would be ING in Germany, which partnered with Amazon in 2020 to offer loans to sellers on Amazon’s sellers’ portal. The loans, a pre-approved offering by ING based on analyzing data across all SME sellers on Amazon, allow sellers to borrow between €10,000 and €750,000 without them having to supply any paperwork such as balance sheet statements. Amazon acts as a broker, presenting loan options on the lending page of its selling portal to eligible business owners selling goods through its website.
For businesses with complex, wide-reaching supply chains, managing supplier payments can have a major impact on cash flow and procurement. Embedded purchase order (PO) finance helps SMEs cover the cash outflow for supplies, such as raw materials, required for delivery without having to wait for payments, ensuring that a lack of liquidity never slows down orders or inventory. By working together with big corporates, banks can leverage ERP data to offer financing to the suppliers of these corporates. These suppliers are often SMEs, who benefit from improved cash flows when they actually need it, while corporates can easily improve their supply chains' robustness, minimizing the risks of stockouts or delayed deliveries.
These are just two of the use cases embedded finance can provide to banks and their SME clients. Banks that are able to offer seamless, comprehensive and convenient solutions for SMEs gain a competitive edge and increase market share. They can enter the market with an on-demand proposition and expand fast. It’s a chance for banks to diversify their revenue streams and reduce the traditional reliance on corporate and retail banking segments.
For SMEs, this also provides a number of benefits including better customer experience, increased operational efficiency, revenue diversification, competitive differentiation and increased conversion and improved cash flow management.
Until recently, meeting these needs required immensely costly and time-consuming development work. With embedded finance, banks can now simply integrate a suite of SME-specific solutions into their own customer flows.
SMEs have always been tricky clients to serve. With the complex needs of a large corporation, but the budget of a wealthy personal client, they have been mostly overlooked in the fintech revolution, with banks prioritizing consumer clients. As a result, SME customers have been left short changed by their banks.
Thanks to embedded finance, however, there’s now no excuse for banks to continue short changing their SME customers.
To find out more about embedded finance and SME banking, sign up for SAP Fioneer’s upcoming webinar How to Approach Embedded Finance for SMEs. Tuesday 7 November at 9am and 4pm CET