Organizations are developing an appetite for embedded fintech

In fintech, we see a growing intersection between the software that SMEs use to run their businesses and the financial services that are fundamental to their operations. A majority of organizations that use mission-critical verticalized software say that they are either already using financial services embedded in the software (e.g., payment processing) or are interested in such a service. As more organizations begin to use verticalized software packages as the operating system for the businesses, adoption of embedded financial services will likely grow as well.

Summary of findings

More than two in five respondents (41%) believe they could not run their businesses without the software their organization uses. Another 40% say that while not critical, the software their business uses is important to their operations. The proportion of respondents that believe software is “mission critical” to their organization is higher among respondents with a digital transformation strategy in place (57%) or in the process of implementation (61%).

About one-third (32%) of SMEs employing software that is mission critical to their operations indicate they are already using payment processing services offered by their organization’s primary software provider. Another 29% would be interested if their organization’s primary software provider began offering payment processing.

Three in five organizations with a digital transformation strategy are using payment processing services that are embedded into software.

Software providers have a clear opportunity to embed financial services. Nearly three in five (57%) SME respondents agree that their organization would run more efficiently if the financial services they use were better integrated with their business software and applications. A similar percentage (54%) agree that they would like to see their software partners offer integrated financial products and services.

To win in embedded finance, software providers must go beyond competitive rates and fees. Top factors that organizations say will encourage them to use to use more financial services from software providers than from traditional financial services providers include lower rates/fees (29%), enhanced fraud prevention capabilities (23%), better customer service (19%) and better integration with business software/applications (19%).

The smallest businesses show the greatest openness to use financial products from non-bank tech companies, with more than three in five (61%) businesses that generate under $1 million in annual revenue expressing willingness to use services from fintechs, dropping to 49% of those with $100 million or more in annual revenue.

Fintechs can appeal to larger businesses through automation. Respondents from businesses with over $1 billion in annual revenue were more than 3 times more likely to strongly agree that their business relies too much on manual, non-automated processes for managing financial tasks (20%) compared with those businesses with under $1 billion in annual revenue (6%).

Despite significant interest in fintech, banks are entrenched among SMEs. Nearly nine in 10 respondents (86%) indicate they are very or somewhat satisfied with their organization’s primary financial services provider, including banks and credit unions. However, the satisfaction rate varies by the age of the organization. Organizations less than 10 years old report lower satisfaction (79%) compared with organizations 25 years or older (91%).

Nearly four in five SMEs (78%) anticipate traditional banks and credit unions will be their organization’s most preferred provider of financial products and services in the next five years, compared with 63% of large enterprises.

Anecdotal data shows that younger organizations are more open to fintech vendors (e.g., Stripe, PayPal) as primary providers of financial products and services in the next five years.

However, only 24% of respondents strongly agree that their business’s bank meets all their organization’s financial needs, meaning there is a clear opportunity for non-bank providers such as software companies and fintechs to make inroads by differentiating in areas where banks are struggling to keep up, like digital payments.

In SME payments, banks are still king, but tech-forward payment providers are gaining traction. While 69% of respondents indicate that a payment processing service offered by their bank is the primary way for their organization to accept and process customer payments, 10% pick “embedded payments,” or payment processing service offered by their primary software partner (e.g., Square, Clover, Shopify), as their primary mode of accepting payments. Another 13% pick direct integration with a payment service provider (e.g., Stripe, PayPal, Global Payments).

SMEs with a digital transformation strategy (34%) and organizations younger than 10 years (31%) show far greater affinity for tech-forward payment providers, including embedded payments at 13% and 15%, respectively, and direct integration with payment service providers at 20% and 15%, respectively.

Challenging macroeconomic conditions are putting further pressure on digital lenders. Just 7% of respondents say their organization is likely to open a new line of credit or increase an existing line of credit from a digital lender over the next 12 months. No single digital lender has attained a significant lead with SMEs; PayPal Working Capital is out in front, used by 3.4% of SME respondents, followed by Lending Club (2.6%) and Kabbage (1.7%).

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