Embedded finance, the seamless embedding of a financial product into a non-financial space, is transforming the financial industry. Banks today have multiple new routes to market for financial products for non-financial businesses. By 2026, financial services embedded into e-commerce and other software platforms will exceed $7tn (according to Bain Capital), creating a massive opportunity for banks to reach new customers, many of them SMEs.

SME banking is particularly fertile ground for banks and financial service providers. In the UK, Europe and US, they make up 99% or more of the private businesses in operation. Plus, this is a loyal customer base. One McKinsey survey of UK banks found that as few as a quarter of SMEs switched their main bank in the five years leading up to the survey.

Despite this, most SME banking options don’t meet the specific and evolving needs of modern SMEs, where many expect their business banking to reflect their personal banking. That is, a fully digital experience that provides an ecosystem of scalable and flexible services.

To address these demands, banks primarily have two options: First, they can expand their product offerings by developing new services internally. However, this method is often expensive and time-consuming, even for larger banks. Alternatively, they can harness the potential of embedded finance to enhance their SME banking capabilities. This could involve creating entirely new SME services or integrating financial services into the user journeys of B2B businesses. The latter approach provides a more streamlined, efficient, and customer-centric solution.

The rise of embedded finance

Embedded finance has been one of the hottest trends in banking for a number of years now. By 2021, the embedded payments, lending, and banking market was already bringing in $22bn in revenue in the US alone. This is expected to reach $51bn by 2026, with US financial transactions exceeding $7 trillion. One of the most often-invoked examples is Uber. Uber delivers an end-to-end experience inside its app, from requesting a ride to paying for it with a credit or debit card on file. Embedded finance has also seen strong traction among e-commerce companies, many of which now offer one-click buy-now-pay-later (BNPL) solutions at checkout.

However, the use cases embedded finance offers go well beyond B2C. In fact, the most exciting innovations in embedded finance are now taking place in the B2B space. This is something we explored in detail in our blog ‘The 5 most transformative use cases of B2B embedded finance’. 

Embedded finance SME use cases

As the blog above shows, embedded finance offers a number of corporate banking use cases. There are two, however, which are particularly useful for SMEs.

Embedded lending

According to EY, 48% of SMEs said they want quicker access to credit. Despite this, lending to SMEs is at an all-time low. Embedded lending allows banks to meet this need by integrating their own loan offerings into the user flows of B2B businesses whose customers could require them. An example would be ING in Germany, which partnered with Amazon in 2020 to offer loans to sellers on Amazon’s sellers’ portal. The loans, a pre-approved offering by ING based on analyzing data across all SME sellers on Amazon, allow sellers to borrow between €10,000 and €750,000 without them having to supply any paperwork such as balance sheet statements. Amazon acts as a broker, presenting loan options on the lending page of its selling portal to eligible business owners selling goods through its website.

The benefits are clear. SMEs have better access to funding to help them grow, while for ING it opens the door to new customers. For Amazon, their established sellers can use this fresh capital to buy new stock to reach more customers.

Purchase Order (PO) Finance

For businesses with complex, wide-reaching supply chains, managing supplier payments can have a major impact on cash flow and procurement. PO finance helps SMEs cover the cash outflow for supplies, such as raw materials, required for delivery without having to wait for payments, ensuring that a lack of liquidity never slows down orders or inventory. By working together with big corporates, banks can leverage ERP data to offer financing to the suppliers of these corporates. These suppliers are often SMEs, who benefit from improved cash flows when they actually need it, while corporates can easily improve their supply chains’ robustness, minimizing the risks of stockouts or delayed deliveries.

Win-win for banks and SMEs

Banks that are able to offer seamless, comprehensive and convenient solutions for SMEs gain a competitive edge and increase market share. They can enter the market with an in-demand proposition and expand fast. It’s a chance for banks to diversify their revenue streams and reduce the traditional reliance on corporate and retail banking segments.

For SMEs, this also provides a number of benefits including better customer experience, increased operational efficiency, revenue diversification, competitive differentiation and increased conversion and improved cash flow management.

SME Banking and Embedded Finance with SAP Fioneer: An Innovative Fusion

At SAP Fioneer, we pave the way for pioneering banking solutions by synergizing our Embedded Finance as a Service with our SME Banking Edition. We unlock the potential of extensive SAP ERP data to orchestrate innovative SME-centric services, such as Purchase Order Financing. The key advantage lies in leveraging this wealth of ERP data to elevate your SME service offerings. With our expertise spanning both SME banking and embedded finance, we are perfectly positioned to facilitate your journey towards reshaping how SMEs engage with financial services.

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