The next frontier – bringing the benefits of embedded finance to the SMEs 

6 minutes

On the 7th of July, we held our fourth Money 2030 event. We invited speakers from across the financial services sector to discuss the future of embedded finance and the opportunity for SMEs.

The theme for our most recent event was “The next frontier – bringing the benefits of embedded finance to the SMEs”

Co-chaired by our CEO Mike Peplow and Co-founder Ivo Gueorguiev, our expert panel of speakers included:

  • Laura McCracken – Managing Director, eCommerce & Payments at Accenture.
  • Arif Babayev – Founder of DNA Payments Group.
  • Emma Mills – Vice President Enterprise Partnerships at Mastercard.

This week we’ll look at the first three questions directed at our speakers. Our co-chair and UK CEO at Paynetics, Mike Peplow, kicked off the event with the question, why will SMEs be an attractive segment for Fintech? Is it new banking customers or is there a larger opportunity?

Emma Mills, Vice President of Enterprise Partnerships at Mastercard, started our discussions by stating that SMEs are a large and diverse group and products currently on the market are unsuitable for their needs. Emma referenced the rising number of SMEs right now, with a 27% rise in the US and 14% in the UK since the pandemic.

So, the question is, how do we provide products and services to the SMEs that also serve their customers?

Emma highlighted working capital is the lifeblood of SMEs. It’s projected there’s potential to unlock 140 billion in value-added growth in the UK economy. This is the same as 3.2 million jobs in the UK. We’re massively under-serving SMEs, as 82% don’t have the working capital they need, and 45% are rejected for loans. Embedding card payments into the journey allows SMEs to access the worldwide population anytime, anywhere.

Laura McCracken, Managing Director, eCommerce & Payments at Accenture, agreed. SMEs are digital, and Accenture predicts the opportunity for embedded finance will be $124 billion by 2025. This will be made up of 32 billion moving from traditional banks, but the other 92 billion will be a new incremental opportunity – this is the underserved market.

Arif Babayev, Founder of DNA Payments Group, said he believes that the incumbents will have a tough time changing their mentality in order to retain the SMEs. That’s where the niche is open for fintechs.

He elaborated on Emma’s point around working capital, stating that fintechs can help SMEs get the level of capital to scale by analysing their cash flow on a daily basis, and then predict their cash flow gaps – it’s impossible for incumbent banks to do this. Fintechs and SMEs are a match made in heaven! It’s the agility and flexibility of the fintech world meeting the needs and simplicity of the SME world. Arif closed our first question by saying SMEs lack support from the big players and absolutely need fintechs.

Moving on, our second question was first directed at Laura McCracken, what are the requirements of SMEs compared to larger corporate and consumer bank accounts? And where can FinTechs provide a better experience?

Laura began by saying smaller merchants want their funds quicker – merchant cash advances are a big area of need. We need to work on how they can get their funds faster and more seamlessly to grow with a company that knows their needs and also understands their cash flow and revenue.

First, you get them with your lending proposition, and they find that your proposition is so good that they use you for other things like insurance, banking, and credit cards. Arif continued discussions by saying there’s no “one size fits all” in this market. It’s hard to for traditional banks to change their corporate approach, and he believes the problem is they won’t be able to change their mindset.

Emma echoed the comments of Arif and Laura, adding that SMEs need access to financial services in a simpler way than they have today. High numbers of SMEs rely on personal financial products to run their business. This has created a vicious circle of not being able to access financial services due to having no business financial footprint.

The power of open banking will allow Fintech to access a wider range of data sources which they will use to help SMEs identify alternative forms of finance. This will lead to innovative forms of finance specifically focused on the needs of SME businesses. As Laura mentioned, the market opportunity here is not new but is not yet being fully exploited.

Our CEO, Mike Peplow, then directed an additional question, “If this is an opportunity for fintechs, is it a threat to the banks? How do you think they’ll react?”, to Paynetics Co-Founder, Ivo Gueorguiev, who responded promptly by saying this is definitely a threat to the banks.

Ivo said that if you look at the payment market in Europe, embedded finance is chipping away at parts of it. The same will happen with SMEs. The reason is, as the others have said, traditional banks find it difficult to reach SMEs.

It’s very difficult to ensure fast onboarding across the whole of Europe. It becomes challenging for providers to offer this on a scalable basis. SMEs expect things done quickly with no hassle, they want simple products and so you have to have a focussed approach for the SME segment.

It’s definitely a threat for banks and a huge opportunity for fintechs.

Mike then moved us on to the third question: can you give an example of the type of use case that embedded finance is allowing SMEs to exploit? And asked Arif to kick off the discussion with the other panellists.

Arif began by stating if SMEs provide loyalty cards, additional discounts etcetera, they will create a community with people they already work with. Using this data, we can help them sell more, forecast their earnings and give them insights into their customers. Integrating sources of data and allowing the SME to see in real life where the demand is, enables them to scale. There’s an infinite story you can build for the SME, the key is data.

Emma agreed with integrating data sources. Open banking is useful, it doesn’t require the consumer to do anything they aren’t familiar with. Open banking for payments, in particular, is starting to get traction. Bank transfers are very inconvenient, paying via a link speeds up this process.

Laura continued the discussion by pointing out that SMEs are struggling with compliance and reporting, so if this can be embedded within the financial services platform too, that’s a real win.

Ivo also answered, saying that embedded finance use cases are always increasing. Looking at the big picture, there are 50,000 providers that claim to service SMEs in Europe. If 10% of these find a way to embed a financial product, there will be the same number of providers with better knowledge of SMEs than traditional banks.

Our next post will dive into the last few questions put to our panellists. Will SMEs be able to deploy their consumer propositions on an international basis? Is this a global market?, How can we increase the adoption of embedded finance and raise awareness among SMEs?

And our final question, do you think Fintechs can help make BNPL a payment method for SMEs?