Imagine a small business owner managing daily operations through a single software platform, seamlessly handling not just inventory or customer relations but also payments, loans, and business accounts without ever stepping into a bank. This is the transformative vision of embedded finance, a trend that integrates financial services directly into vertical Software-as-a-Service (SaaS) platforms, turning them into indispensable tools for small and medium enterprises (SMEs) across North America and Europe. As these businesses increasingly rely on specialized software for efficiency, the opportunity to embed financial solutions within these ecosystems represents a shift from traditional banking models. While embedded payments have already carved a strong foothold, the broader spectrum of financial products remains largely unexplored, offering both immense potential and significant hurdles for SaaS providers aiming to bridge the gap between promise and practical implementation.
The scale of this shift is evident in recent data, which shows that in 2024, 59% of US SMEs adopted vertical software, a notable jump from 50% just two years earlier. SaaS platforms integrating payment solutions now account for 36% of SME acquiring revenues, with projections suggesting this share will rise to 45% by 2028. Such figures highlight how these platforms are becoming central to SME operations, positioning them uniquely to expand beyond basic transactions into a wider array of financial services. However, despite the clear traction of payments, the adoption of other offerings like merchant cash advances or business accounts lags, constrained by both external resistance from SMEs and internal challenges faced by providers. This evolving landscape sets the stage for a deeper exploration of how SaaS platforms can fully realize the potential of embedded finance.
Current Landscape of Embedded Finance
Embedded Payments as a Foundation
The rise of embedded payments within vertical SaaS platforms marks a pivotal development in how SMEs manage their financial transactions, establishing a robust foundation for broader financial integration. These payment solutions, now a standard feature in many software offerings, allow businesses to process transactions directly within the platforms they use for daily tasks, eliminating the need for separate banking interfaces. This seamless approach not only streamlines operations but also significantly boosts customer retention, with embedded payments showing a 2.5 times lower attrition rate compared to non-embedded alternatives. The growing reliance on these tools is clear, as SaaS providers have captured a substantial share of SME acquiring revenues, reflecting their increasing importance as trusted operational hubs for smaller businesses seeking efficiency and simplicity in a competitive market.
Beyond retention, the financial impact of embedded payments for SaaS providers cannot be overstated, as they represent a key monetization lever in an increasingly competitive software market. With over half of relevant independent software vendors in North America already offering such services, the trend is set to deepen over the coming years, driven by SMEs’ growing preference for integrated solutions. The data underscores this momentum, showing that the adoption of vertical software by SMEs has surged in recent years, creating fertile ground for further financial service expansion. This success, however, also raises the stakes for SaaS providers to build on this foundation, pushing them to explore additional offerings that can replicate the stickiness and revenue potential of payments while addressing the unique needs of their SME clients in diverse industries.
Untapped Potential Beyond Payments
While embedded payments have gained significant ground, the market for other financial products within SaaS platforms, such as merchant cash advances, business accounts, and card issuing, remains largely untapped, presenting a vast opportunity for growth. The total addressable market (TAM) for embedded finance across North America and Europe is estimated at $185 billion across these core products, yet current penetration stands at just $32 billion. This substantial gap signals room for expansion, as many SMEs have yet to consistently adopt non-payment solutions, with usage rates for offerings like cash advances lingering in the single digits. The potential to fill this void is clear, but it requires SaaS providers to overcome significant barriers to convince businesses of the value these additional services can bring to their daily operations and long-term financial health.
This lag in adoption is not merely a matter of awareness but is tied to deeper structural challenges that prevent SMEs from fully embracing these broader financial tools offered through SaaS platforms. Many businesses remain tethered to traditional banking relationships, often due to the convenience of bundled services that cover a wide range of needs under one roof. Additionally, the current offerings from SaaS providers often lack the tailored appeal or seamless integration necessary to compete with established financial institutions. For SaaS providers, unlocking this potential means not just expanding their product suites but also redefining how these solutions are presented and integrated into the SME workflow, ensuring they address specific pain points and deliver measurable benefits that justify a shift away from conventional banking options.
Challenges in Adoption and Implementation
SME Stickiness and Product Gaps
One of the most formidable barriers to the widespread adoption of embedded finance beyond payments is the inherent stickiness of SME relationships with traditional banks, which often provide a comprehensive suite of bundled services that foster loyalty. Many SMEs find comfort in the familiarity and trust built over years with their financial institutions, making the prospect of switching to SaaS-provided financial products less appealing, even when offered through familiar software platforms. This reluctance is compounded by the satisfaction levels with existing banking services, where the perceived hassle of transitioning to new providers often outweighs the potential benefits. As a result, SaaS platforms face an uphill battle in convincing SMEs to rethink their financial partnerships, requiring a clear demonstration of superior value and ease of use to disrupt these entrenched ties.
Compounding this challenge is the current state of many embedded finance products, which often fail to offer the distinct value or polished user experience necessary to stand out in a competitive market. Unlike embedded payments, which have benefited from years of refinement and integration, non-payment offerings like loans or accounts frequently appear as generic solutions lacking customization for specific SME needs. The user experience can also fall short, with clunky interfaces or disjointed processes that frustrate rather than facilitate business operations. For SaaS providers, addressing these product gaps means investing in design and functionality that rivals or exceeds traditional banking offerings, ensuring that SMEs see these tools as not just alternatives but as essential components of their operational toolkit.
Internal Hesitations and Regulatory Burdens
Beyond external barriers, SaaS providers themselves grapple with significant internal hesitations that slow the rollout of broader embedded finance solutions, particularly when weighed against the more predictable growth of core software and payment services. Developing new financial products involves venturing into unfamiliar territory, where the risks of failure or missteps are high, especially for companies accustomed to focusing on operational software excellence. The shift requires substantial investment in resources and expertise, often diverting attention from areas with more immediate returns. This cautious approach is understandable, as many providers prioritize stability and proven revenue streams over the uncertainty of pioneering untested financial offerings in a crowded and complex market.
Additionally, the regulatory and risk burdens associated with financial product development pose a daunting challenge for SaaS platforms, often deterring them from fully committing to this space. Unlike software development, financial services are subject to stringent compliance requirements, including Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, which demand specialized knowledge and robust oversight. The potential for reputational damage or financial penalties in case of non-compliance further heightens the stakes, making many providers wary of taking on such responsibilities. To navigate this landscape, SaaS platforms must balance innovation with caution, often relying on partnerships with established financial entities to mitigate risks while still pushing forward with offerings that can transform their role in the SME ecosystem.
Strategic Advantages of SaaS Providers
Unique Positioning for Financial Solutions
SaaS platforms hold a distinct edge over traditional banks in the realm of embedded finance, largely due to their unparalleled access to real-time cash flow data that enables more precise and inclusive underwriting for SMEs. This data, gathered through daily interactions on their platforms, provides insights into business performance and financial health that banks often lack, particularly for underserved niches like higher-risk small businesses. Such granularity allows SaaS providers to offer tailored financial products, such as merchant cash advances, with terms that better reflect the actual needs and capacities of their clients. This capability positions them as agile competitors in a space where traditional financial institutions often apply broader, less personalized criteria, missing out on segments of the SME market hungry for accessible solutions.
Another critical advantage lies in the efficient distribution channels SaaS platforms naturally possess, thanks to their daily usage by SMEs for core business functions. Unlike banks, which often rely on separate touchpoints or physical branches, SaaS providers can embed financial offers directly into the software environment where businesses already operate, ensuring contextual relevance and immediacy. This integration enables targeted messaging and promotions at the point of need, significantly increasing the likelihood of uptake. By leveraging this constant engagement, SaaS platforms can bypass many of the outreach challenges faced by traditional financial providers, creating a seamless pathway for SMEs to discover and adopt financial services as part of their routine software interactions.
Vertical Expertise and Tailored Offerings
The deep understanding of specific industry verticals further sets SaaS providers apart, allowing them to design financial solutions that resonate with the unique challenges and workflows of SMEs in those sectors. Whether it’s a retail business needing point-of-sale financing or a construction firm requiring flexible cash flow tools, SaaS platforms can craft offerings that integrate directly into industry-specific processes, something banks often struggle to achieve with their one-size-fits-all approach. This vertical expertise not only enhances the relevance of the financial products but also strengthens the overall value proposition of the SaaS platform, making it an indispensable partner rather than just a software vendor in the eyes of SME clients.
Moreover, this ability to tailor solutions extends to value-added services (VAS) that can be woven into financial offerings, further differentiating SaaS providers from traditional banking competitors. Features like automatic settlement transfers to checking accounts or real-time financial dashboards tailored to a specific industry can significantly enhance the utility of embedded finance tools for SMEs. Banks, with their less integrated digital user experiences, often fall short in delivering such nuanced, workflow-aligned services. For SaaS providers, capitalizing on this advantage means doubling down on customization, ensuring that every financial product feels like a natural extension of the operational support they already provide to their SME user base.
Pathways to Practical Implementation
Building Product-Market Fit and Scalable Strategies
To transition embedded finance from a promising concept to a practical reality, SaaS providers must prioritize achieving product-market fit by anticipating and addressing SME needs across different stages of their business lifecycle. Early-stage businesses might require accessible merchant cash advances to fuel initial growth, while more established firms could benefit from point-of-sale financing or business accounts to manage expansion. Leveraging real-time data to recommend specific products—such as suggesting insurance over extended warranties based on vertical-specific consumer purchase patterns—can significantly enhance both adoption and customer stickiness. This tailored approach ensures that financial offerings are not just add-ons but integral tools that evolve with the SME, fostering long-term loyalty and driving monetization for the platform.
Equally critical is the development of effective go-to-market strategies that master the art of bundling, pricing, and targeted outreach to maximize the impact of embedded finance products. SaaS providers can draw inspiration from banks’ expertise in holistic pricing models, such as linking deposit account balances to favorable loan terms, while using customer data for highly personalized offerings. The integration of emerging technologies like agentic AI holds promise for further customization, guiding SMEs through complex financial decisions with intuitive navigation and tailored purchase pathways. By combining these strategies, SaaS platforms can create compelling value propositions that not only attract SMEs away from traditional banking solutions but also embed financial services deeply into their daily operational fabric.
Scaling Through Partnerships and Technology
Scaling embedded finance capabilities requires a delicate balance between maintaining control over customer-facing elements and outsourcing complex backend operations to mitigate risk and regulatory exposure. SaaS providers should focus on owning the user experience, marketing, and partner oversight, ensuring that the interface SMEs interact with remains seamless and branded to the platform. Meanwhile, functions like underwriting, funding, and compliance can often be handled more effectively through partnerships with specialized embedded finance platforms or banks that possess established risk models and regulatory expertise. This phased approach allows SaaS providers to enter the market with lower initial risk, testing and refining their offerings before considering more in-house capabilities that could enhance long-term profitability.
Over time, evolving toward greater internal control while still prioritizing partnerships for critical areas like funding mechanisms can help SaaS providers improve their economics and competitive stance. Starting with simple third-party outsourcing for lending products, platforms can progress to more sophisticated models like warehouse loans or capital market access as they build expertise. Additionally, embedding servicing features—such as account balance access and bill payments—directly into core platforms, potentially supported by AI for basic customer queries, enhances user engagement. Robust partner oversight through test-and-learn approaches ensures continuous improvement and risk mitigation, allowing SaaS providers to scale sustainably while maintaining the trust and satisfaction of their SME clients.
Reflecting on Transformative Steps Forward
Looking back, the journey of embedded finance within SaaS platforms revealed a landscape ripe with opportunity, where embedded payments had already proven their worth by driving retention and revenue for providers while offering SMEs newfound efficiency. The vast untapped market for non-payment products, despite its challenges, stood as a testament to the potential for growth, held back by sticky banking relationships and immature product ecosystems. SaaS providers had navigated these hurdles with unique strengths in data-driven underwriting and vertical-specific tailoring, setting them apart from traditional banks in a competitive arena. The actionable path forward crystallized through strategic focuses on product-market fit, innovative marketing bolstered by AI, and scalable partnerships that balanced risk with ambition. These steps, taken with precision, positioned SaaS platforms to redefine their role, transforming from mere software tools into comprehensive financial hubs that met SMEs’ evolving needs. As this evolution unfolded, the emphasis on tailored solutions and seamless integration paved the way for capturing a growing segment of the SME market, promising a future where embedded finance became a cornerstone of business operations.