How Platforms Can Revolutionize Small-Business Banking with Embedded Finance

Small and midsize businesses (SMBs) have long presented a puzzle to banking incumbents: they are too small to warrant the tailored services provided to large corporate clients, yet too diverse to be addressed in a scalable way, as retail banking clients are. This puzzle is now about to be solved through embedded finance: the integration by software platforms and marketplaces of an array of financial services into their offering. These services can be delivered to SMB users as part of their everyday workflow.

BCG and the financial technology platform Adyen conducted a comprehensive evaluation of the embedded finance potential, leveraging quantitative and qualitative data gathered from more than 50 leading platforms and marketplaces and more than 2,000 SMB users globally.

Our joint research shows that platforms and marketplaces are at the center of a revolution in the financial services industry:

• There is high demand from SMBs for embedded finance: 64% of SMBs are interested in financial services embedded within a platform.
• Platforms are uniquely positioned to address the finance needs of SMBs. Having built a central and trusted role in their users’ daily operations, platforms are well-placed to deliver financial services directly into SMBs’ workflows at the exact moment of need.
• There are three key financial services categories—cash advances, bank accounts, and card issuing—that offer platforms the quickest path to market and a potential revenue uplift of up to 70%.
• Together, cash advances, bank accounts, and card issuing represent an addressable market of approximately $110 billion in revenue in the US, Europe and the UK, which represents around 45% of the total SMB banking revenue pool.

The implications for the SMB banking industry will be far reaching. With the market for SMB embedded finance still at an early stage of development, the opportunity is too large to ignore. Platform companies are already staking out positions, supported by agile partners, and combining payments, account, lending, and card-issuance capabilities. The shifts will be profound:

• Platforms that accelerate the adoption of embedded finance will strengthen their leadership, increase relevance, improve margins, and boost growth. Slower players will lose ground.
• The payments services industry will further consolidate, with platforms becoming an increasingly important channel for SMB—which will need a full range of embedded finance solutions that can later be marketed to their own customers.
• A portion of banking revenue pools will shift from the banking industry to the software industry. Commercial banks will need to reinvent themselves and find new ways to leverage their balance sheets.

The SMB banking revolution has already begun, with platforms leading the charge. Businesses looking to seize the moment in embedded finance must act now, as the window of opportunity may close rapidly.