Foreword
In the vibrant tapestry of our economy, small and medium-sized enterprises (SMEs) weave threads of resilience, creativity, and progress. They transcend mere business entities; they are the heartbeat of our communities, architects of shared prosperity. At Rabobank, we recognize the transformative power of embedded finance and its profound impact on SMEs.
Embedded finance, the seamless integration of financial services into non-financial applications, is not just a trend, but a paradigm shift. It is redefining how businesses operate, enabling them to offer financial services directly to their customers, thereby enhancing customer experience, increasing revenue streams, and fostering deeper customer relationships.
In today’s dynamic economy, SMEs are the backbone, driving innovation and creating employment opportunities. By leveraging embedded finance, SMEs can transcend traditional boundaries, availing financial services that were once the exclusive domain of banks. This not only democratizes access to financial services but also empowers SMEs to play a more significant role in the economy and society. As a leading financial institution, Rabobank is committed to supporting this transformation, providing the necessary infrastructure and partnerships to enable SMEs to harness the full potential of embedded finance.
Introduction
Embedded finance means offering financial services on the customers’ terms and through their desired platform. It has huge potential. It promises to reshape the landscape of SME banking as we know it. The banks and platforms that accelerate the adoption of embedded finance will strengthen their leadership, increase their relevance, improve their margins, and boost growth.
But let’s be clear: embedded finance comes with significant challenges – and that means that slower players will lose ground. Banks cannot take their success with this approach for granted. Many banks are not culturally or structurally prepared to participate in, orchestrate, or monetize this new way of doing business. Establishing a bank’s role in a dramatically changed business model is commercially, operationally, and technically complex.
That said, there’s no question that embedded finance is here to stay. Banks that can address the challenges are set to enhance accessibility, efficiency, and innovation and give SMEs the seamless integrated finance offerings that they’ve long been seeking.
In this paper, we will unravel the key challenges that banks need to address to not only navigate the upcoming shift in SME banking dynamics, but to unlock the significant opportunities that embedded finance promises to deliver. Banks considering this imminent transformation will find practical advice on how to move forward in this journey.
We hope you find it a useful resource.
What is embedded finance, and how will it transform SME banking?
Traditionally there has always been a direct relationship between a FSI and the SME clients. However, embedded finance represents a paradigm shift via an intermediated model. Unlike the direct relationship, where the bank manages customer acquisition and services, embedded finance introduces a shift in control. The platform, rather than the bank, takes charge. This suggests that the traditional role of the bank will be complimented and augmented by external platforms. SMEs love this because it is so easy and convenient. Banking happens in the background as they go about and conduct their business
Zubair Ahmed, Managing Director, MEA, VeriParkEmbedded finance integrates financial services within the platforms and interfaces SMEs use daily. Retail is an obvious example, but it also expands to many other industries such as automotive, healthcare, and telco.
“Traditionally there has always been a direct relationship between a FSI and the SME clients. However, embedded finance represents a paradigm shift via an intermediated model. Unlike the direct relationship, where the bank manages customer acquisition and services, embedded finance introduces a shift in control. The platform, rather than the bank, takes charge. This suggests that the traditional role of the bank will be complimented and augmented by external platforms. SMEs love this because it is so easy and convenient. Banking happens in the background as they go about and conduct their business,” said Zubair Ahmed, Managing Director, MEA, VeriPark.
Meeting SMEs’ unmet needs
The seamless integration of financial services into our daily lives is something that we, as consumers, not only appreciate, but have come to expect. SMEs are no exception: research suggests that almost three quarters (64%)1 of SMEs are interested in financial services embedded within a platform.
According to EY, financial services providers will embed themselves into the value chains of other marketplaces and points of interaction with SME clients. This allows SMEs to access banking services contextually in the daily work, operations and their daily value chain.
it’s easy to see the appeal. 75%2 of SMEs are worried about the long-term impact of the cost-of-living crisis. This unstable economic environment, teamed with inflation and supply chain disruption, has not only increased SMEs’ financing needs, but made optimized cashflow ever-more necessary. Embedded finance provides the opportunity for banks to address SMEs’ critical financing needs at a time when traditional financing is falling short.
It’s no wonder that embedded finance is here to stay. It is estimated that the market size of global embedded finance across the entire value chain will almost treble in the next few years, growing from US$264 billion in 2021 to US$606 billion in 2025. In fact, 70%3 of respondents to an EY survey say that the majority of financial products will be offered via non-financial platforms in the future and that traditional products will diminish. 45% of those surveyed believe that the most significant opportunity for embedded finance is in the B2B context.“
We are looking at the banking industry a bit differently,” says Rinse Jacobs, head of group business development and commercial analytics at Solaris – Europe’s largest embedded finance platform. “We don’t believe that banking products themselves are very exciting. They are just a means to an end. You get excited about the car you might need to buy with a loan, but you don’t get excited about the loan itself. By plugging in our banking capabilities where the SMEs are already naturally engaging, we have been able to grow. Today, we support around five million customers. Our rapid growth is a direct result of the integration of a financial service into a non- financial product value chain.”
CASE STUDY: Stripe Capital U.S.
Stripe Capital in the USA provides leading software platforms like Jobber & Goodshuffle Pro with an end-to-end lending API that enables them to offer access to fast and flexible financing to help SME customers grow their business. This includes lending, customized and integrated payments, fraud and risk management, and linked financial data.
The benefits of embedded finance
By seamlessly integrating financial services into non- financial platforms, embedded finance can unlock unprecedented benefits for SMEs and banks alike.
Our conversations with analysts and financial services professionals have highlighted nine clear benefits:
1. Seamless integration
SMEs can now access financial services seamlessly within their existing business applications, eliminating the need for separate banking interfaces. This makes life much simpler for small business owners, for whom time is precious.
“We realize that business platforms are integral for the future; that’s why we are focusing on embedded services. We want to be everywhere that our clients are, when they need us most,” said Remco Timmerman, Lead partner management, Rabobank.
2. Timely advisory on the state of business
SMEs go through cycles of less or more cash. Embedded finance provides SMEs with on-point solutions – such as financing to combat the upcoming (forecasted) cashflow crunch or to move excess cash into profitable deposits.
3. Enhanced accessibility
Embedded finance extends banking capabilities to businesses, allowing them to manage transactions, payments and financial insights within daily workflows – all fostering efficiency.
4. Innovated offerings
The integration of banking services within platforms allows SMEs to access a range of innovative offerings, such as tailored lending solutions and real-time financial analytics. Financial services providers can separate themselves from competitors and reach new segments by offering these innovative solutions and process integrations.
5. Cost efficiency
SMEs benefit from streamlining processes which also leads to more economical banking operations and a reduced cost to serve.
6. Data-driven insights
The amalgamation of financial and non-financial data provides SMEs with valuable insights, enabling more informed decision-making and strategic planning – something that is particularly useful for small business owners who don’t have the time or capacity to manage finances in the way that larger corporations do.
7. Customization
Embedded finance allows SMEs to customize their financial solutions based on their specific needs instead of a one-size-fits-all approach, promoting flexibility and helping them to better manage the financial aspects of their business.
8. Improved risk management
Financial services companies may get more information from an SME by embedding into their business journey. By partnering with a platform, they have the potential to leverage past transaction data, payment history, or even the metadata of an interaction.
9. The ability to test new ideas
Rather than having to build their own systems, financial services providers can use the existing infrastructure provided by platforms to quickly test new ideas and reach new markets.
The advantages of embedded finance don’t stop here. “The benefits extend to the platform provider too,” says Rinse Jacobs. “There are three reoccurring reasons why companies want to work with embedded finance solutions: to get new revenue streams; to extend their ecosystem; and to really boost their core business. It’s a win-win approach.”
However, establishing a bank’s role in a dramatically changed business model is commercially, operationally and technically complex. It will require several obstacles to be navigated, and fast. Read on to explore these challenges.
Unpicking the challenges
While the implications of embedded finance for the SME banking industry are far-reaching, a transformation of this stature won’t happen without profound shifts.
“This is a new way of doing business. Embedded finance requires cross-organization and cross-ecosystem collaboration, a better understanding of what’s happening in the market, having an innovative mindset and having a risk appetite,” said Remco Timmerman, Lead partner management, Rabobank.
If they want to succeed, then financial services businesses need to adapt. Their ability to pivot towards a more dynamic operating model will impact their market share and their potential for growth. To do this, there are several hurdles that need to be cleared. These include:
A complex regulatory environment
Access to data plays a crucial role in a bank’s success when it comes to embedded finance, especially when it comes to offering SMEs exactly the right product at exactly the right time. However, banking remains a highly regulated industry – and rightly so. There are tight controls around data acquisition, ownership, usage, retention, and disposal, as well as security risks such as unauthorized access, data breaches, and data misuse.
Internal regulatory and compliance challenges can slow down the time to market and make it challenging to compete with the rapid market developments made by fintechs. The upcoming Financial Data Access Regulation (FIDA), however, will undoubtedly benefit European financial services companies. It will require data holders to share customer data with financial information service providers if the customer gives permission – unlocking tremendous opportunities around embedded finance as a result.
A shift in revenue pools
We’re going to see embedded finance gain a significant share of the future financial services revenues.
In fact, 37% of new loans are expected to be embedded in four years’ time, and 39% of new payments are expected to be embedded.
This means a portion of banking revenue pools will move from the banking industry to the software industry – and traditional banking providers will have to take that on the chin. Commercial banks are going to need to reinvent themselves and find new ways to leverage their balance sheets.
The need for a new organizational structure
Collaboration both across a bank and across an ecosystem is required for successful embedded services. Breaking down barriers and removing silos is key to a cohesive story.
The need for new infrastructures
Third-party platforms have rarely been part of traditional banks’ strategies in the past. Banks will have to invest in eco-system related new roles to understand and execute strategies necessary for embedding solutions into existing transactions or to create new financial structures that aid the SME needs. Developers need to learn how to create API journeys and build out new partner frameworks.
A loss of control
Many banks are used to having direct contact with their customers and may find it difficult to relinquish control to partners. “It is our partners that decide on the proposition, the go-to-market strategy and the target customers,” says Jacobs. “We are very conscious of the fact, as a bank, are effectively just providing the plumbing in the background to make sure everything stays compliant and stays stable and secure. Our partners provide the front ends – and that is where the magic really happens.”
CASE STUDY: Rabobank Netherlands
Rabobank has created a lending widget for embedded lending partners who can connect through an API. This allows Dutch e-commerce platform bol.com resellers, for example, to apply for a loan within five minutes and pay it back based on their revenue.
“Entrepreneurs no longer have to wait for payment from their customers; they can have invoices between €1,000 and €100,000 pre-financed online without an annual figure,” says Remco Timmerman, team lead for partner management at Rabobank. “What’s more, they access funds in 48 hours.”
Because the lending widget is delivered through an API, the entire customer journey is managed by Rabobank. It’s customizable to the client, who can embed it within their platform in as little as 24 hours.
Unlocking the embedded finance opportunity: Five steps for success
As we have seen in previous sections, embedded finance for SMEs is set to make up a significant proportion of future product sales and, as a result, it’s an opportunity that banks cannot ignore.
To win in this domain, financial services companies need to develop new capabilities and enhance existing offerings. They must:
1. Find the right partners
This is critical. It’s important to work out who can sell your services best and what’s in it for them to do so. An important part of this involves working out whether your offering is a suitable fit for the primary product that the potential partner delivers.
“We’ve found that the partners we work best with are those who work closely with us to ensure our offerings tie up really well,” says Timmerman. “We provide a partner incentive in form of kickback fees, but we get better results when our products actually add value to the partner delivering our services because we help them sell their primary product. That topline growth is far more valuable to them than any kickback they receive.”
“I would also really look at your diversification of the portfolio of partners,” adds Jacobs. “At Solaris, we are very heavily initially focused on the fintech world. We have a much better chance of being successful with them because they have an existing customer base they can tap into.”
2. Go niche
Financial services organizations that develop an offering for a very specific line of business are better placed for success.
“We are partnering with 90 companies. We get the most customer engagement through the companies that offer a very niche and very targeted product. Here we don’t just offer vanilla checking accounts or credit cards; we create something very bespoke. This really appeals to SME customers,” said Rinse Jacobs, Head of group business development and commercial analytics at Solaris.
3. Build and enable a modern infrastructure
Many traditional banks are not yet equipped to externalize their processes and workflows to allow distributors to seamlessly integrate embedded finance products into their journeys or distribution platforms. Banks wanting to scale up quickly will need to build new digital channels and APIs. What’s more, they will need leading-edge computing to streamline the process.
4. Harness real-time analytics capabilities
Partners and end-customers are not prepared to wait a week for a credit decision. It must be real-time. With that in mind, banks will reap significant rewards if they can access real-time information and deploy digital credit strategies to make real-time decisions.
5. Be organizationally agile
Embedded finance requires internal departments that may traditionally operate in silos to start working together. This demands a new level of agility. It’s important to get the various departments working together on a shared goal and it’s necessary to communicate the shared priorities effectively.
“We’ve had to work hard to change the mindset of our colleagues who have traditionally focused on selling our products through our own platforms through our own channels,” adds Remco Timmerman. “We are working together with all departments within the bank and making that vision a reality.”
Success in practice
The potential for embedded finance stretches across the entire financial services value stream, from embedded payments to lending, insurance, and wealth management.
• Embedded lending
Getting access to loans directly where they need it – and specifically through non-banking platforms – is particularly valuable for SMEs. Not only does it mean they don’t have to go to back to their bank for credit, but also the risk is managed more effectively based on how they transact in the platform.
For example: A point-of-sale system for retailers that offers financing based on the retailer’s sales data, enabling instant access to capital for inventory or expansion.
• Embedded payments
Payments have been embedded into journeys for more than a decade, facilitating seamless transactions within business platforms.
For example: An e-commerce platform that processes payments and automatically reconciles them with the SME’s ledger simplifies accounting.
• Embedded insurance
We are seeing embedded insurance moving into more complex environments, offering very tailored coverage within niche service platforms.
For example: A freight platform that provides in-transit insurance to SMEs automatically calculates premiums based on shipment value and risk.
• Embedded wealth
This integrates investment services within business tools.
For example: A business banking app that offers automated investment advice and portfolio management based on the SME’s cash flow patterns and financial goals.
Best practice examples of SME-focused embedded finance
• BANXWARE
Banxware is a Berlin-based fintech that specializes in embedded lending technology. It primarily targets platform-based sellers and SMEs to simplify and secure their financial transactions. It offers quick, digital loan approvals tailored for SMEs, enabling efficient access to financial resources. Revenue-based loans are determined by the business performance of the platform sellers, offering flexible financing solutions.
• Pile Capital
This treasury service app for high-growth startups and venture capitalists offers the management of multiple business accounts across various banks with a single dashboard overview, aiming to grow, manage, and keep capital safe for clients.
Using embedded finance to offer its merchants a range of financial services, Shopify Balance allows merchants to manage funds, pay bills. and track expenses, providing easier access to financial products and greater control over their business operations.
• Airwallex
This APAC-based fintech provides a global financial infrastructure platform, offering multi-currency accounts, international money transfers, and foreign exchange services.
It simplifies cross-border financial transactions, making it easier for SMEs to manage international payments and currency exchanges efficiently. It is especially beneficial for SMEs expanding globally, as it streamlines financial operations and reduces the traditional barriers associated with international trade.
• Square
Offering a comprehensive suite of financial tools designed for SMEs to seamlessly manage sales, payments, and capital needs within Square’s ecosystem, including payment processing, point-of-sale solutions, and small business financing.
ING in Germany partnered with Amazon in 2020 to offer loans to sellers on Amazon’s sellers’ portal. It provides pre-approved loans based on analyzing data across all SME sellers on Amazon, allowing them to borrow without needing to supply extensive paperwork.
Final thoughts
There is a real opportunity for banks and financial services firms to stay ahead of rapidly growing competition. To do this, they must disrupt themselves and provide support for SMEs through a seamless digital experience and delivery of timely access to credit. Banks can also drive new revenue streams by addressing the changing needs of SMEs. This can be achieved by transforming their own business models, embracing digital ecosystems, optimizing relationship management models and the opportunity of embedded finance. Internalizing and understanding the five maturity levels of SME Banking and building an actionable roadmap is a critical step in that journey.
The five maturity levels of SME Banking: A journey from digital transformation to disruption
The Five Maturity Levels of SME Banking report was published in June 2023 and, since then, both Qorus and VeriPark have noticed much adulation within the banks focused on SMEs. Several banks have used it already to self-assess their current maturity and are now advancing their internal strategies to aim for higher maturity.
Are you ready to do the same? Learn more about how you can revolutionize your approach to the SME segment and multiply your customer base? Download The Five Maturity Levels of SME Banking report.
