Small and Medium Enterprises (SMEs) are at the heart of the UK economy. They contribute significantly to local employment and revenue across a wide array of sectors. However, the current economic landscape and consistently high inflation are inhibiting them from reaching their full potential.
Three key challenges which prevent SMEs from investing in growth are tight cash flow, poor access to capital and the late payments crisis. With over £32 billion in late payments plaguing them, SMEs need longer-term, meaningful policy action from the government, alongside better Working Capital solutions.
Investing in Embedded Finance
With a growing SME market needing better support than ever from lenders, banks are rapidly investing in IT adoption. Particularly, Embedded Finance tools, to better serve this sector. Indeed, analysts have forecast a staggering 148% growth in the Embedded Finance market. It is predicted to reach a revenue of $228 billion by 2028.
Banks have been quick to offer flexibility to consumers in the business-to-consumer (B2C) Embedded Finance space. Offering lots of options for flexible finance in response to high demand. However, the business-to-business (B2B) market has in many ways been slower.
There are certainly challenges here – but the opportunities are huge for the lenders that get this right to go on and serve the SME space. So, what can the B2B space learn from how Embedded Finance has succeeded in the B2C sector? And what are some of the benefits and new challenges that this investment could pose?
The role of Embedded Finance in supporting SMEs and founders
Embedded Finance emerges as an innovative approach to bolster SME support. It integrates financial services directly into non-financial platforms. This integration empowers SMEs to seamlessly access critical financial services. These include instant credit, streamlined payments processing, and optimised cash flow management. This enhances operational efficiency and financial resilience.
When we look at B2C financial services, we can see traditional banks working hard to catch up with challenger banks. These competitors have presented consumers with entirely new means to access digital banking, improve their visibility on financial information, and manage their funds and savings with secure API access.
This has forced traditional banks to digitise quickly in the B2C space to remain competitive and keep up with customer expectations. Embedded tools have become a key part of this. While the B2B financial services industry hasn’t traditionally faced the same level of market pressure to innovate – this is now starting to change. We will start to see the impact in a couple of ways.
I predict we will begin to see rapid growth in the number of partnerships between FinTech companies and B2B lenders. Where banks such as Barclays have already been partnering with the likes of Amazon on the consumer side for a long time to offer flexible payment capabilities, we will see a lot more similar partnerships starting to take place in the B2B space, to support the growing SME market. As a result, I anticipate a rise in the number of online marketplaces dedicated to the B2B lending space. We will also see increasingly niche market areas – such as agriculture and dedicated equipment manufacturers, for example.
The opportunities and challenges with Embedded Finance
There are several opportunities to be capitalised on via Embedded Finance in the B2B space. Lenders that have been held back by legacy systems in the past will now be able to offer a more flexible suite of digital finance options to customers, especially SMEs. SMEs, which may be run by a single founder or a small group of stakeholders, are likely to be used to an agile structure. They can take big decisions quickly and will be keen to be able to flexibly access financial tools. Through integration with expert providers, lenders can also benefit from new origination channels and access new pools of customers for bank accounts, financial consultancy and more.
For the fintech partners and integrators, including those providing white-labelled products to banks, there’s a chance to take advantage of the trust customers have in their banking providers. And the lenders’ brand reputations can increase their own revenue and future opportunities for sale.
Meanwhile, SMEs are set to reap the benefits of being able to offer better user and payment experiences to their own customers further up chain. They too, will benefit from better cash flow management, improved financial visibility and increased flexibility via different working capital tools. Just like consumers are able to – all of which will be facilitated by better digital tools.
However, it is worth acknowledging that as the B2B space grows, heightened concerns around fraud risk associated with financial transactions are also likely to emerge. Going forwards, we’ll see more analytics and artificial intelligence built into Embedded Finance. This will feed into underwriting models and support fraud checks. With more complex transactions and shared financial data via Embedded Finance partnerships, the risks of non-compliance could become more perilous. Therefore, there are certainly challenges ahead.
A competition for innovation in the B2B space
For SMEs to thrive, sustained and reliable access to cash flow is essential. Collaborative efforts between the government and the financial services industry are critical. Establishing robust regulatory frameworks and fostering innovation in Working Capital solutions will be vital.
The Embedded Finance market in over the next year and beyond can expect to see significant emphasis on B2B players, such as banks and corporate lenders. They are looking to catch up with the consumer market and serve SME customers with the most secure – and flexible – lending options.
Consumers have realised the benefits of seamless, digital financial services for themselves. We’ll now see demand growing as SMEs expect the same innovation and experience when it comes to their B2B financing. Lenders and banks that want to satisfy this growing pool of customers hungry for flexibility and sustainable lending support, will need to be willing to evolve and digitise, or risk missing out on the competition.
Satago is a leading fintech that enables lenders and corporates to streamline operations, boost revenue, and enhance their business customer experiences. This is achieved through cloud-native Working Capital and Cash Flow solutions, powered by real-time data, Open Banking, and API technology.
- Embedded Finance
