In the ever-evolving world of finance, the paradigm shift towards embedded banking presents a revolutionary trajectory for small and medium-sized enterprises (SMEs). This seamless integration of financial services into everyday platforms, known as embedded finance, empowers SMEs to access essential banking tools within their daily digital workflows.
An Accenture analysis projects that by 2025, embedded banking for SMEs could seize up to 26% of the global SME banking revenue. SMEs are poised to leverage an assortment of banking services aligned with their routine needs, directly delivered via the platforms integral to their business operations. This not only provides convenience but also optimizes their financial processes.
With the total market for embedded finance for SMEs projected to reach $124 billion by 2025, it is an epoch-making opportunity that banks and platforms should not overlook.
Established banks and burgeoning platforms are already strategizing their ingress into this emerging sector. Selecting the right partners to introduce innovative solutions at a scale will be critical to their success. Those reticent to venture into this market may inadvertently forego colossal financial prospects.
Digital innovation for SMEs with embedded finance
Interestingly, SMEs appear enthusiastic about exploring banking services offered via digital platforms. Despite the recent proliferation of neobanks and fintechs, SMEs have not entirely migrated from incumbent banks to these digital innovators. Yet, according to Accenture’s global SME survey, this trend might experience a sea change as digital platforms engage SME customers with their compelling embedded finance solutions.
Digital platforms extend across diverse domains, including e-commerce, gig economy, payment and social media platforms, and cloud-based accounting and collaboration tools. Given their substantial SME penetration and high trust quotient, these platforms have a unique advantage.
SMEs, through embedded finance, can conveniently access these financial services without having to navigate to other apps or websites, adding an extra layer of efficiency to their operations. Moreover, these platforms also offer valuable services like financial management and analytics tools.
Growth of SMEs through digital platforms
Embedded finance could considerably transform the SME banking market through the ingenious application of platform economics.
As per Accenture’s survey, transactional banking revenues could face the highest risk from embedded finance players.
The interest of SMEs leans more towards transactional embedded finance products, such as accounts and cards, than significant financial decisions like overdrafts and loans. Consequently, banks might not immediately lose the primary transactional relationship to these platforms, but may face a gradual attrition of their share.
However, the silver lining is that embedded finance may open up new revenue streams, enticing SMEs to invest more in value-added banking services, accessing underserved SME segments, and introducing novel product offerings.
Scope for banks
Banks stand to gain significantly by collaborating with digital platforms, tapping into vast SME customer pools. This could unlock substantial revenue prospects without bearing the costs of end-to-end distribution. Banks should judiciously assess their unique capabilities and decide on areas of competition and collaboration with digital platforms.
Scope for leveraging digital platforms
Simultaneously, digital platforms can leverage this opportunity to offer customers access to banking services right within their business processes or introduce their branded embedded finance services. They will typically need to partner with a bank or fintech to deliver these services, often co-developing innovative solutions that alleviate SME pain points.
With embedded finance poised to revolutionize SME banking, we are on the cusp of a software-as-a-service (SaaS) era for commercial banking. This imminent transformation mandates banks, fintechs, and platforms to define their roles in this rapidly morphing landscape. Now is the time to seize the opportunity and shape the future of SME banking.
