Embedded finance is the innovation SMEs need for 2024

Digital transformation is revolutionising every aspect of our lives, and the financial services industry is experiencing the impact daily. Embedded finance, a term often used to describe the integration of financial services into non-financial platforms, is causing a seismic shift in how end users interact with money. 

Despite the change, fintechs and incumbent banks alike have focused predominantly on the consumers. As a result, we have seen a wave of neobanks with niche propositions targeting individuals. 

The current government says it is committed to putting small and medium-sized enterprises (SMEs) at the centre of its economic policy to revive Britain. Yet, SMEs and their loyal customers continue to face a lack of digital banking and other financial services tailored to their ever-evolving needs. 

The role 5.6 million SMEs play in the UK economy means the disconnect could cause missed opportunities, hinder growth, and lose the nation’s competitive position. As inflation still weighs, the need for innovative solutions is more urgent than ever.

Recent estimates suggest that UK brands stand to gain a staggering £230bn windfall from embedded finance. Here’s how else the project could support SME growth in the next 12 months.

Flexibility in an uncertain environment

SMEs have struggled to access a wide range of financial services that meet their unique needs compared to larger businesses. They are overlooked by traditional financial institutions and face complex, time-consuming finance processes, high fees, and limited access to credit.

Embedded finance is a game-changer for SMEs. It bridges the financial services gap by offering SMEs access to products and services directly within their existing business tools and platforms. 

Imagine a small retailer seamlessly processing payments, applying for a business loan, and managing payroll all from a single platform. Merging services simplifies financial management, reduces costs, and enhances overall efficiency.

Furthermore, embedded finance solutions can be designed with the specific needs of SMEs in mind. They offer scalability, flexibility, and affordability – results which are critical for smaller businesses with fluctuating financial demands. 

Whether handling everyday transactions or planning for expansion, SMEs are empowered by these solutions to make informed financial decisions and grow with confidence.

Recession-proofing

SMEs have long fought against a lack of support from their banks, with almost three in four saying they struggle to secure a meeting with their bank or financial manager, leading to delays in their business plans. 

Embedded finance can automate the routine steps when engaging with banks by integrating financial tools seamlessly into operations. Users can set up automated invoicing, track expenses, and reconcile accounts in real time. These automation features save time and reduce the likelihood of costly human errors.

Moreover, embedded finance solutions provide SMEs access to sophisticated data analytics tools. SMEs can gain deeper insights into their financial performance, customer behaviour, and market forecasts. 

For instance, they can analyse sales trends, identify loyal customers, and optimise inventory management. With this knowledge, SMEs can make data-driven decisions, optimise their strategies, and respond more effectively to changing market conditions.

Smarter financial planning

Embedded finance isn’t just about making existing financial services more accessible. Beyond the basics of payments and loans, embedded finance solutions can offer value-added services that transform financial planning and forecasting.

With 82% of SMEs saying the cost of living is negatively impacting them, embedded finance can help create a robust financial plan. With forecasting tools, SMEs create realistic budgets, set achievable financial goals, and track progress. This proactive approach to financial management empowers SMEs to make strategic decisions that align with their long-term vision.

Additionally, embedded finance solutions offer personalised recommendations based on the financial data of SMEs. These can cover everything from cost-cutting strategies to investment opportunities, enabling SMEs to optimise their strategies and spot new growth opportunities. 

Access to capital and the cost of borrowing

Access to capital has long been a major pain point for SMEs and impeded growth. Traditional lending institutions often demand extensive paperwork, collateral, and impeccable credit histories. Historically, this approach has excluded many SMEs from accessing the funds they need to succeed. 

Embedded finance disrupts this status quo by providing alternative funding sources that are more accessible and flexible. SMEs can tap into a broader range of lenders, including peer-to-peer platforms and fintech companies with embedded finance solutions. 

These platforms leverage data-driven algorithms to assess creditworthiness, making borrowing decisions faster and more inclusive. Additionally, embedded finance solutions can democratise and scale innovative lending models for SMEs, such as revenue-based and invoice financing. 

These models provide SMEs with options that align with their cash flow and revenue patterns. Revenue-based financing allows SMEs to repay loans based on a percentage of monthly revenue, making it easier to manage repayments during periods of fluctuating income.

The road ahead

With almost 20% of new businesses failing in their first year, SMEs need value-added services and improved access to capital more than ever.

Embedded finance has the potential to reshape the financial services landscape for SMEs similarly to what it has done for consumers. As it continues to evolve, SMEs that embrace the solutions will not only adapt but also thrive and defy the odds in a fiercely competitive business environment. 

Ivo Gueorguiev, co-founder of e-money service provider, Paynetics

Gueorguiev is a seasoned investor and banker who co-founded а pioneering retail banking group in Central and Eastern Europe. Before that, he helped establish a new financial era in post-Cold War Central & Eastern Europe. A business builder rooted in financial services, he is currently on a mission to redefine payments and built from scratch a group focused on retail banking in CEE and was previously a senior banker at the EBRD.