The largest segment of the business banking market – SMEs – has long been one of the prize opportunities for banks and financial institutions. However, building a profitable SME banking service has long been a challenge due to the sheer diversity of the space, making it harder to create scalable financial products. The advent of embedded finance has the potential to change all of this.

A McKinsey report found that top-performing banks in Western Europe generate more than 30% higher revenues per SME customer than average banks, driven both by higher lending and cross-sell revenues. Technology has a key role to play in this, with reports that embedded banking for SMEs could capture up to 26% of global SME banking revenue by 2025 and expand the overall SME banking market by up to $92 billion.

This has the potential to dramatically impact some of the key pain points that SMEs face, including capital access. Research from 2023 found that just one in eight small businesses (12%) described the affordability and availability of new finance as good, with over half (51%) saying it is poor or very poor.

As part of our ongoing research and development of innovative technological solutions for institutions, we recently hosted a webinar entitled ‘How to approach embedded finance for SMEs’. Thomas Becher, Head of SME Banking, and Vishal Shah, Head of Embedded Finance were joined by Sruba De, Senior Vice President – New Product Development, Data and Analytics Solutions at Mastercard, to discuss how the new products, routes-to-market and operational efficiencies of embedded finance are changing the scope of what’s possible for the smallest businesses and what this means for banks.

Understanding SME Needs: A Paradigm Shift

SME banking has long been due a change. The gulf between institutions that have adapted to manage the complex needs and processes behind SME servicing has been growing in recent years. Much of the gap comes down to technology.

With digital experiences becoming more common for consumers, SMEs today demand banking services that are as seamless and intuitive as personal banking. Becher emphasized, “The key is to understand that there’s no one-size-fits-all in tackling the SME challenge. Different SMEs have varied needs and preferences.”

The key for institutions is to focus on the services that make a real difference for business owners. Sruba De emphasizes the need to find the right pain points, and adapt, pointing out that SMEs seek a “single source of truth across their financial operations,” craving better cash flow visibility and a simpler administrative experience in B2B payments.

Embedded finance gives banks the ability to provide their services at the point of usage for SMEs, integrating them into their existing workflows to streamline the business banking journey.

Embedding banking services into the SME landscape

“Imagine a scenario where, at the click of a button, a small business purchasing equipment can choose to pay now, pay later, or opt for equipment leasing.” explained Vishal Shah. stressed the significance of embedding financial services into everyday business operations. These are the decisions that business owners face daily, but the ability to make them is often hampered by inadequate systems.

“There’s a lack of accessibility and context, as banks wait to react to the need, as opposed to being proactive. There’s space to actively make recommendations around cash flow, showing owners where it might be better, for example, to lease rather than buy some equipment.” he says.

With financial products embedded at different stages of a B2B trade lifecycle, banks can create a real-time data flow between parties to enable closer relationships and more effective decision making.

The new frontier of ecosystem lending

As discussed earlier, one of the most common challenges for SMEs is accessing capital.

One of the most exciting prospects for embedded finance is putting lending and financing closer to SMEs, when they need it through ‘ecosystem lending’ – embedding lending capabilities into SME ecosystems, such as marketplaces.

This approach aligns with the natural cash flows of SMEs, facilitating smarter decision-making and risk assessment. “By embedding lending in ecosystems like Amazon or Shopify, banks can access real-time, relevant data, enabling them to make more informed credit decisions,” Becher explained.

Not only does this provide a new route to market for lending services, but it also provides an expanded pool of financial data – from the integrated platform – to drive faster, more tailored underwriting and risk assessment.

“Banks can access data in a much easier and meaningful way. Data is so close to the cash flow of an SME, which will usually not happen if you only ask for balance sheet statements and financial documents.” says Becher.

Closing the technology gap

The future of SME banking is going to be increasingly dominated by the plug-and-play between contextual financial solutions and innovative financial technology. This emerging trend will add extra pressure for banks of all sizes to keep up with the proliferation of SME touchpoints & multiple channel integrations – a potentially expensive and risky project. However, partnerships can go a long way in reducing this risk.

Vishal Shah emphasized the importance of collaboration in this journey, “Partnering with fintechs can enable banks to embed their financial solutions directly into the systems and platforms that SMEs use to conduct their daily business.” By combining the inherent trust in traditional financial institutions with disruptive technology from firms like SAP Fioneer, banks can rapidly future proof their services and business models.

Collaboration of this kind is already in place between SAP Fioneer and Mastercard, bringing a new vision of payments for businesses. As Sruba De explains, “We’re bringing together our data, global network, and payment technology, to simplify and digitize B2B transaction flows end-to-end by working with SAP Fioneer.”

SMEs are increasingly becoming digital businesses which creates a compelling opportunity for banks to lower the cost to serve and unlock new ways of distributing SME banking service. Therefore, banks need to address the widening technology gap between them and SMEs by forging right partnerships.

Making your business case for embedded finance

Fioneer’s SME Banking Edition is built with embedded finance at its heart. With our deep history working with 1,200 financial institutions around the globe, from neobanks to established incumbents, we’ve developed a complete solution that banks can utilize to serve their SME clients. By leveraging our robust and market-proven technology, banks can rapidly launch flexible, competitive SME products and beyond banking services. Our approach enables banks to foster trusted, long-term relationships with SMEs by helping them grow their business profitably.

Whether you’re planning to embed financial products into SME platforms, reduce the cost to serve SMEs, or aiming to unlock new SME distribution models, SAP Fioneer is here to support you. Our team of experts can craft tailored approaches that not only address your immediate challenges but position you for long-term success in SME banking.

We understand the challenges of crafting a viable business case in the fast-changing SME banking landscape. We’re more than a technology provider, we’re a partner.

Connect with us today to find out how we can help you build a profitable value-driving SME banking business case with embedded finance.

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