Embedded financial services: seizing the opportunities

SMBs are recognising the significant benefits to be gained from accessing financial services via the platform they currently use to run their business operations, a new study reveals
SMBs are recognising the significant benefits to be gained from accessing financial services via

For too long small-and medium-sized businesses (SMBs) have suffered from sluggish financial processes and have often been overlooked by business banking services. This is because they’re not perceived to present the same scope of opportunity as enterprise businesses. And yet, SMBs, which number over five million, had a combined turnover of around £2.3bn last year, according to government figures, representing a huge potential market.

As a result, these businesses, which are often digital-savvy, if not digital-first, are currently underserved, and are therefore failing to make the contribution to the UK economy that they could, partly because of inadequate access to financial services. But a rapidly emerging technology promises to meet this challenge. Embedded finance enables platforms and marketplaces to integrate an array of financial services into their suite of solutions and deliver them directly to SMB users via their everyday workflow.

It’s a logical progression for the platform-user relationship, since the platform that many SMBs’ have chosen forms the digital foundation of their business – it’s their flagship store, inventory, back office, mission control – and now it can be their bank, too. Adyen, the global financial technology partner of choice for leading businesses recently created a report alongside Boston Consulting Group (BCG) which identifies three key areas in which platforms could unlock a potential revenue uplift of up to 70%. These are: lending which can be offered and approved on the spot; bank accounts to streamline finance management; and card issuing to speed up settlement and pay-outs.

The increasing cost of living is hitting SMBs hard and optimised cashflow is more important than ever. Embedded finance can help both by streamlining the payments process; enabling SMBs to increase conversions and get paid faster, and unlocking access to pre-approved capital. This is made possible since the financing, payments, and treasury services are embedded into the platform on which the SMBs do business day-to-day. This gives platforms access to data, which makes it simple for them to quickly authorise loans for instance.

It should come as no surprise then, that Adyen’s research found that nearly two thirds (64%) of SMBs are interested in financial services being embedded within a platform. Payments is also seen as the bedrock on which platforms will grow embedded financial services. Nearly a third (30%) of responding platforms already offer embedded payments services and nearly three quarters (74%) of SMBs are interested in embedded payments.

Platforms have built trust through consistently strong performance and a deep understanding of their SMB users’ specific industry, challenges and needs

Adyen recently announced its expansion beyond payments to build embedded financial products. “By building our banking infrastructure, as a part of the single platform, from the ground up, we remove the limitations of legacy financial systems, enabling Adyen to deliver the power of a bank combined with the adaptability of a fintech,” says Thom Ruiter, VP of banking and financial products at Adyen. “This unique approach means we can offer our platform customers unparalleled flexibility to meet the evolving needs of their user base without the barriers of regulatory complexity, lengthy product development, or sponsor bank restrictions.”

With an addressable market across the UK and Europe of some £46bn, according to Adyen’s BCG report, SMB demand has opened up an exciting opportunity for platforms and marketplaces to better serve their users, grow loyalty and drive revenue. But the time for platforms to act is now.

Adyen research identifies three strengths and three products that platforms should build upon for a higher share of SMB banking and payment revenue pools. It also reveals the importance of leveraging the right partnership model to ensure effective go-to-market and long-term success.

The first is the capability for integrated services. According to the Adyen report, nearly seven in 10 (69%) of SMBs say they would change their payment processor if the solution were more integrated into their business process. The key differentiator of embedded finance will be its ability to become part of an SMB’s usual workflow, enabling features such as pre-approved capital, one-click provisioning, and dynamic repayments at the point of need. The central premise of embedded finance – a single interface without referrals to other pages, fast resolution, and a simple user journey – will be crucial to realising its full potential.

Second is detailed, timely data. From real-time payment flows and cash positions to inventory levels and point of sale activity, platforms have access to a broad range of relevant user data, at a higher level of granularity than traditional financial institutions. Centralised, accessible data sets will ensure that platforms can deliver a superior financial service offering. This includes greater accuracy of underwriting and risk models to make rapid financing available to SMBs.

The third factor is the development of in-depth user relationships. Platforms have built trust through consistently strong performance and a deep understanding of their SMB users’ specific industry, challenges, and needs. This is evidenced by the fact that around 85% of those SMBs surveyed were satisfied with their platform. Platforms can now leverage these strong relationships in order to differentiate themselves from traditional banking players. They can also use this good will to develop highly tailored solutions for users.

Adyen’s report cites three products that will drive embedded finance adoption. The first is cash advances. Liquidity has never been more important for SMBs and it’s hardly surprising that a whopping 94% of them states that pre-approved cash advances are a product they would benefit from. The second product is similar - there’s an opportunity for platforms to provide SMBs with accounts offering unique features such as accelerated settlement, a single and integrated interface and ultra-fast opening. Moreover, SMBs are also showing interest in services such as treasury management or cross-border payments with FX, providing a basis for further cross-sell. Third is card issuing. Platforms can complete their payments offering by enabling their SMB users to spend their funds on platform-issued debit or credit cards. This presents a compelling revenue opportunity for platforms to not only monetise incoming payments but outgoing payments as well by receiving a share of the interchange revenue from each transaction completed on a platform-issued card.

Their close relationships with SMBs, thanks to their integration into day-to-day operations and their deep market penetration, will enable platforms to build on their unique capabilities and transition into banking services. These might include real-time data that can improve risk processes, and vertical-specific knowledge for more tailored services.

The market for SMB embedded finance is still at an early stage of development, with less than 5% of penetration – but it’s now poised to develop rapidly. “The opportunity is simply too big, and too synergetic with their core business, for platforms to ignore,” says Ruiter. “Frontrunners are already building positions, supported by agile partners bringing together payments, account, lending and card issuance capabilities.”

The SMB banking revolution has already begun, with platforms leading the charge. For those businesses looking to seize the opportunity of embedded finance, now is the time to take action and realise the full potential of their platforms.

The opportunity for rapid growth

Hundreds of thousands of SMBs rely on platforms such as software as a service (SaaS) providers or ecommerce platforms to run their businesses. These niche boutiques and businesses run from kitchen tables can find themselves on an equal footing with long established household names.

“Our customers tend to do anywhere from a hundred thousand to ten million in annual turnover” says Nathan Gill, chief product officer of Epos Now, cloud-based software provider, specialising in the design and manufacture of electronic point of sale. “So it’s important we provide a lot of flexibility because no two businesses are alike. We need to make sure that the corner cafe, which is different from the bike shop, which is different from a multi-location franchise, has the tools it needs to efficiently run its business.”

Epos Now powers businesses in the retail and hospitality sectors. “We’re a point-of-sale software solution that allows companies to manage their customers, their supply chain and their product deliveries as well as marketing the financial aspects of the business,” says Gill. “It’s essentially everything that they need to operate day-to-day.”

The ubiquity of the service puts Epos Now in a strong position to expand into new financial offerings, as Nathan explains: “Our software is really the operating system that these merchants use to run their business. We already know a lot about their businesses and we can make much more informed credit decisions than a traditional financial institution can.”

Looking to the future, Gill says the sector will see consolidation among providers. “There will be fewer players but competition will still be intense, as demand grows and SMBs look for a full banking solution from their platforms,” he says. “Cloud technology will drive innovation and platforms will have to invest heavily to ensure that they’re offering their SMB clients the kind of services that they need not just today but for tomorrow and beyond.”

For more information, please visit adyen.com