In recent years, embedded finance has rapidly become a new norm for small and medium-sized businesses (SMBs) in payments and banking. With the integration of financial services into non-financial platforms, SMBs can easily access financial services, making it easier for them to grow and thrive. According to research, this segment is expected to generate revenue of $230 billion USD in 2025. In this article, we will explore the growth of embedded finance for SMBs, alternative options available, the shifting relationship with traditional banks, tailored solutions, the role of banks, and the importance of utilizing data.
New Options for Small and Medium-sized Businesses (SMBs)
Small and Medium-sized Businesses (SMBs) now have many options available to them in terms of financial services. Many are finding alternatives that serve them better, even at a higher cost. For example, e-commerce marketplaces such as Amazon and Shopify are offering real-time credit products in the form of Buy Now Pay Later (BNPL) at the point of purchase, using finance providers such as Klarna, OpenPay, and Afterpay. While these options may come at a higher cost, they provide SMBs with the necessary capital to scale their businesses without going through the lengthy process of acquiring loans from traditional banks.
Shifting relationship with SMBs
Many are now questioning whether the relationship between SMBs and traditional banks is shifting towards alternative providers. Alternative providers, such as fintech startups, are offering tailored products for SMBs to meet their demands and satisfy requirements in the areas where they operate. While traditional banks still serve SMBs, they are missing out on opportunities to expand the services they provide. However, it’s worth noting that the finance market for SMBs is large and, while more challenging to serve, it can be a lucrative market.
Tailored solutions through embedded finance
Embedded finance options often utilize the data available on platforms to provide SMBs with tailored solutions that better suit their situations and needs. By understanding the data on the platform’s activity such as payment flows and transaction history, embedded finance providers can offer services that meet the SMB’s unique requirements. This can include providing access to credit, automated bill payments, and even simplified tax management. Embedded finance for SMBs enables business owners to concentrate on their core operations while the financial side of things is handled by experts.
The role of banks
While banks are still serving SMBs, they are mostly focused on providing lending options to these businesses. Banks are missing out on expanding the services they provide to SMBs. As a result, alternative providers are increasing their market share significantly by offering banking services that traditional banks don’t. It is critical that traditional banks find ways to provide banking services that utilize data to understand the real risk they are taking and enable them to respond faster. By embracing technology, banks can leverage finance as a service (FaaS) or banking as a service (BaaS) platforms to serve SMBs better.
Embedded finance is here to stay, and it is critical that SMBs and traditional banks embrace it. Utilizing the data available on these platforms empowers SMBs to make informed financial decisions that will benefit their businesses. It’s worth noting that traditional banks still have a role to play in serving SMBs, but they must adapt and expand the services they provide to meet the demands of these businesses. In conclusion, the future outlook of embedded finance in the banking industry is poised to continue its growth trajectory, and SMBs should be at the forefront of this change as they embrace the benefits it offers.