Point-of-need financial services boosting growth for SMEs

Embedded finance — the process of integrating financial services into non-financial processes — is helping small and medium-sized enterprises (SMEs) to grow through improving their customer experience and delivering payment, insurance and banking services at the point-of-need.

It first rose to prominence with the rise of digital payments, regulatory changes such as Open Banking, and consumer demand for more seamless experiences. The market will be worth $251 billion by 2029, according to research from MarketsandMarkets.

At the Innovate Finance Global Summit (IFGS) in London last week, a panel of speakers from Airwallex, LocalGlobe, ClearBank, Tink and YouLend discussed Embedded finance in focus: Boosting business growth. According to Ciaran O’Malley, enterprise commercial director, UK, at Airwallex, embedded finance is all about control.

Historically, businesses — especially those structured as marketplaces, such as car dealerships — have handed financial elements, including lending, over to banks. These companies usually “obsess” over their own customer “journeys” yet find they have no control over the financial section of that journey, he said.

O’Malley pointed out some banks allow international payments but some don’t — with the result “companies just don’t have control”. He added: “Imagine you’re selling cars. You’ve got your onboarding dealerships, and the most important moment for those dealerships is when the money gets transferred. Embedded finance allows them to actually control that in the marketplace.”

Embedded finance is now used within non-regulated companies across various sectors including retail, transportation and real estate. By accessing user data, preferences, and behaviours, together with more contextual information, companies can offer a personalised financial experience and create bespoke products and service offerings.

Most consumers will have first encountered embedded finance as co-branded cards and banking services for marketing purposes. Today, many companies can integrate multiple financial products to address business needs without necessarily offering or excluding external products, referred to as making financial services available “at the point of need”.

Supporting SMEs

The rise of finance at the point of need is crucial to the support and growth of SMEs in the UK, said Andrew Crocombe, head of embedded banking propositions at ClearBank. As a result of the Banking Competition Remedies (BCR) initiative introduced in 2017, around 20 per cent of UK SMEs are now relying on new entrants such as ClearBank, he added.

The BCR is a UK initiative designed to improve competition and support the growth of SMEs by injecting new businesses into the banking landscape, and has included programmes such as the Incentivised Switching Scheme (ISS) and the Capability and Innovation Fund (CIF). 

Fintech companies aimed at SMEs can now partner with entities with a banking licence, such as ClearBank, to offer fully regulated accounts and savings products, without incurring the cost of becoming a bank themselves. This support “in the back end” allows businesses to spend less time focusing on administration, such as chasing payments, and more time on product development and customer service, added Crocombe.

“It’s a combination of the back-end infrastructure that’s specifically there to serve customers with the right partnership, and the front end is the secret sauce behind embedded finance, embedded banking, embedded payments, whichever way you want to go,” he said.

Yvonne Bajela, a partner at venture capital firm LocalGlobe, said SMEs have been “very underserved”. However, with embedded finance, they can now access finance via their existing platforms.

“For example, we’re investing in a construction tech company. They’re able to extend the marketplace services of procuring the materials to providing access to finance.” This provides a seamless experience, a productivity gain, and increased customer stickiness, and experience, she added.

Compliance

However, while removing friction from user experiences is “critical”, some friction has a place, allowing providers space to comply with regulations and combat fraud, said Crocombe.“Friction is good in this process,” he says. “The compliance aspects that underpin the finance are absolutely critical to the success of how embedded finance operates. Ultimately, the consumer — the end user — has the right protection because they’re dealing with something they can trust through regulation.”

While embedded finance enables non-financial enterprises to access and offer regulated financial services, technology underpins and enables this process. O’Malley describes embedded finance as a world full of regulatory capabilities, banking licences, and facilities, which takes “all of that complexity and then makes it simple”.

In addition to enabling this simplicity with application programming interfaces (APIs), O’Malley said, artificial intelligence (AI) offers a great opportunity to improve services and propositions. For example, it can support SMEs by finding database errors that would be difficult for humans to catch. AI enables companies such as Airwallex to train their systems to identify errors and assist with processing, as well as supporting fraud prevention efforts.

Crocombe said another key aspect, from a regulatory perspective, is resilience. “You’ve got that ability to continue providing services even when something goes wrong.”

Embedded finance providers need to balance innovation, customer experience, resilience, and stability on the front end, and resilience and stability on the back end, to provide scalable solutions that consumers and businesses can trust, he added. “In the embedded finance world, regulation is a really positive thing. Embedded finance providers then take that complexity and just expose it as very simple APIs.”

He said the idea that regulations hinder business growth is “a bit lazy”.

“In reality, great businesses engage with regulators. They deal with all of these things, they optimise, and then they make it extremely simple for the end customer to get the benefits from the regulation stability of the financial sector without necessarily having to do all of the hard graft themselves,” says Crocombe.

“The challenge for the embedded finance sector is to take all that complexity and hide it from our customers.”