SMEs keen on embedded finance, but more choice needed to increase take-up

More small and medium-sized enterprises (SMEs) would use financial products embedded in the platforms of non-financial services companies if they offered more choice.

Non-banking businesses, such as providers of accounting software or invoicing services, are increasingly looking to offer financial products to their SME customers.

They are embedding financial products such as business loans into their services. These are provided by fintech firms through banking-as-a-service (BaaS) platforms. They are often highly personalised offers based on customer data available from the company embedding the offer as a white-label product.

Research carried out by software supplier Finastra and the Confederation of British Industry (CBI) found that 30% of SMEs were interested in using financial products embedded in services such as accounting packages.

But for these services to take off, there needs to be more education and choice. The CBI/Finastra survey found that half of SMEs said they would be unlikely to use embedded financial products and 17% were unsure.

Jonathan McPhail, lead client partner, banking as a service, at Finastra, said one of the obstacles to wider take-up of embedded financial products in the SME business space was a lack of product choice.

“Businesses that have been successful are those that embed the financial products as a white-label product directly at the point of consumption of their SME service,” he told Computer Weekly. “These are very proactive, tailored offerings directly in the tool SMEs are using.”

Currently, embedded finance often only offers financial products from a single financial service provider, which McPhail said would need to change for interest to increase. “There will be more take-up if the SMEs get more access to proactive hyper-personalised offers, but from multiple finance providers,” he added.

To date, the most widely taken up embedded finance offerings are consumer-facing in the retail space, where consumers are offered credit when making online purchases, but McPhail said the range of offerings was widening.

“The embedded products that we see really taking off are the working capital products for small businesses. Tailored products such as short-term lending are offered to them within the business tools they use.”

He said this is an area where SMEs have struggled to access finance because there is a high cost of service for banks if they use a direct channel. “This is where we see embedded finance step into the gap.”

To embed finance, businesses need to be regulated and have access to expensive banking tech, so they are instead using financial services offered by banks and fintech providers. These are connected to through application programming interfaces and are known as banking-as-a-service platforms, which are regulated through the banks and fintechs.

Celent analyst Kieran Hines said embedded finance and BaaS were driving a lot of discussion in the industry. “We surveyed a number of banks in Europe at the beginning of last year, and 42% reported that BaaS or embedded finance was one of their leading investment priorities for last year, so it’s clearly high on the agenda for a significant minority of banks,” he added.

“We see this as part of the broader open ecosystem opportunity for the industry, in which banks can open new revenue lines, reach new customers and strengthen their connections with current ones through partnerships, and this is what drives the interest in these areas.”

To date, the adoption of financial products embedded in non-banking services has largely been in the retail space where, for example, consumers are offered credit when making online purchases.

A recent survey of 1,000 consumer-focused businesses in the UK and Benelux region, from BaaS supplier Vodeno and Aion Bank, found that 51% expected BaaS to spell the end of traditional banking, with 56% citing the cost-of-living crisis as a catalyst for its adoption.

It revealed that 39% of respondents had already implemented BaaS services and products, with another 38% considering using BaaS this year. The most common BaaS offered were foreign exchange (48%), buy now, pay later (48%), small and medium-sized enterprise lending (47%), and loyalty schemes (46%).