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Commercial Banking

Embedded finance for SMEs: Banks and digital platforms

December 15, 2021

5-MINUTE READ

In brief

  • Embedded finance sees some of the world’s most powerful digital platforms taking aim at the small and medium enterprise (SME) banking market.
  • A global Accenture survey of 2,500 SMEs in 10 markets confirms that SMEs are interested in embedded finance solutions from digital platforms.
  • An associated Accenture model forecasts a revenue uplift of up to $92 billion from embedded finance by 2025.
  • Digital platforms and banks that move first will be able to secure partnerships with the prime players and unlock significant growth opportunities.

Banking embedded into the SME’s flow of life and work

With embedded finance—which includes embedded banking—SMEs and consumers can access the banking services they need, when they need them, within the platforms and interfaces they use in the day-to-day flow of life and work. An Accenture analysis forecasts that embedded banking for SMEs could capture up to 26% of global SME banking revenue by 2025.

What embedded finance for SMEs means for…

For incumbents, this marks the arrival of a significant new competitive threat, and a major growth opportunity.

↓$32B

if banks do nothing, new embedded finance offerings could claim up to $32 billion of SME banking revenue by 2025.

↑$92B

at the same time, embedded finance could expand the overall SME banking market by up to $92 billion.

For incumbents, this marks the arrival of a significant new competitive threat, and a major growth opportunity.

85%

of SMEs state they are using digital services in their day-to-day operations...

20%

rely on digital services for at least half of their revenue

SMEs benefit from access to an array of services that meet their day-to-day banking needs, provided on the platforms where they conduct much of their business.

The total market for embedded finance for SMEs could be worth up to $124 billion by 2025.

Leading banks and platforms are already thinking about how best to position themselves in this emerging sector, and which partners can help them deliver innovative propositions at scale. Those that are not yet moving into this market are at risk of missing a multi-billion dollar opportunity.

SMEs are eager to sample banking services from digital platforms

Despite the influx of neobanks and fintechs into most financial markets worldwide, SMEs haven’t rushed to switch from incumbent banks to new digital players. However, Accenture’s global SME survey indicates that this may change in the near future as digital platforms target SME customers with embedded finance offerings.

Digital platform players range from e-commerce, gig economy, marketplace, payment and social media platforms through to cloud-based accounting, financial management, productivity, and collaboration solutions. Not only do these platforms have high levels of SME market penetration, they also have earned high levels of trust among small business owners.

From an SME’s perspective, the beauty of embedded finance is that they can access financial services when they’re wanted, without needing to log into another app or website to make a bank transfer or fill in a loan application. Plus, a platform’s embedded finance offering may also come with value-added services such as financial management and analytics tools.

SMEs are interested and willing to consider paying for platform-provided solutions

Banking services are disappearing into the other digital apps and services that SMEs use to run their day-to-day business.

Embedded finance—growing the SME banking market through platform economics

Based on the results of the survey, Accenture estimates that embedded banking for SMEs could capture around a quarter of the SME banking market by 2025, representing nearly $124 billion in value.

The survey suggests that transactional banking product revenues are most at risk from embedded finance players. SMEs are more interested in transactional embedded finance products (accounts, cards etc.) than in financial products that represent a material financial decision, such as overdrafts and loans. Banks may not, at first, lose the primary transactional relationship to platforms, but rather see a steady erosion of share of wallet.

A breakdown of the banking services, offered by digital providers, which SMEs may be interested in utilizing.

There is also the exciting possibility that embedded finance for SMEs will grow the SME banking market through platform economics. Embedded finance may create new opportunities by making SMEs more inclined to pay more for value-added banking services, reaching under-banked SME populations, and delivering new product offerings.

Banks can partner with digital platforms to reach massive pools of SME customers, potentially creating significant revenue streams without incurring the costs of end-to-end distribution.

Leading banks are thinking about where to compete under their own brand with their own products and services, and where to collaborate with digital platform players to solve SME challenges and reach new customers.

Platforms can offer customers easy access to bank-branded financial services where they need them most in the flow of business activities, or offer an embedded finance service as part of their own branded offering.

In either case, the digital platform will usually need to partner with a bank or fintech to deliver the financial offering, often co-creating new solutions that solve SME pain points.

Over the next five years, embedded finance for SMEs could create a software-as-a-service (SaaS) moment for commercial banking, where old business models will give way to a new order. Now is the time for each bank, fintech, and platform to decide where and how it will participate in a fast-changing landscape. Read our report to explore the strategic options for banks and platforms in this emerging market.

Watch the video to hear clients describe their experiences working with our more than 2,500 global commercial banking professionals.

View Transcript
Thomas Merry

MANAGING DIRECTOR – STRATEGY, BANKING

Bina Rajput

MANAGING DIRECTOR – SMB & COMMERCIAL BANKING

Matthew Ross

SENIOR MANAGER – STRATEGY, BANKING

Jared Rorrer

Managing Director – Global Commercial Banking and North America Banking Lead

Frequently asked questions

Embedded finance for SMEs delivers financial services at ​the right contextual moment, reducing friction and opening new customer engagement possibilities. Accenture anticipates that two major models will emerge among digital platforms that move into the embedded banking for SMEs: pass-through services, where the platform serves as an established gateway to third-party financial services, and platform-branded financial products offered under the platform’s own name.

Our research shows that SMEs are interested in embedded banking products that lubricate the wheels of day-to-day commerce, such as accounts and cards. Banks may leak significant SME revenue to embedded finance players as their small commercial customers begin to use platforms for day-to-day transactional banking. The risk isn’t necessarily the loss of the primary account, but that banks will leak share of wallet as their customers use embedded finance offerings for more of their banking needs. Accenture’s 2020 Global Banking Consumer Study demonstrates how consumers build custom product bundles by mixing and matching the best from multiple providers. The same pattern is likely to emerge in SME banking.

Convenience is one major factor. Embedded banking for SMEs enables business owners to use financial services on a digital platform without needing to initiate a separate process in a new interface, such as logging into another website to make a bank transfer or fill in a loan application. A digital platform’s embedded finance offering may include value-added services such as financial management and analytics tools. For example, non-bank payment processors already offer merchants analytics tools they can use to drive customer insights out of their transactional data. Pricing does not appear to be a primary driver. Around 31% of respondents in our research said the pricing for banking services on platforms must be the same as their bank’s fees, while 16% said they would be willing to pay a premium.

Now is the time for each bank to decide how it will play in embedded banking for SMEs. Incumbents will need to decide where they can compete most effectively under their own brand with their own products and services, and where they could benefit from working with digital platforms to solve SME problems in new ways, reach new customers and grow the market. In the platform-branded model, banks could partner with digital platforms to reach new SME customers, potentially generating new revenue without absorbing the costs of end-to-end distribution. Given that platforms play in winner-takes-all markets, banks will need to act quickly to secure partnerships with the most attractive players in each sector.

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