Airwallex: Embedded financial services demand soars among European SMBs as traditional banks fall short

A new report from global payments platform Airwallex in partnership with consultancy firm Edgar, Dunn & Company, Embedded finance: The opportunity for software platforms and marketplaces, highlights the growing demand for embedded financial services among European small and medium-sized businesses (SMBs). The businesses surveyed had annual revenue between USD$1million - US$50million, 10-250 employees and 25% or more of all transactions are made internationally.

The research indicates that 80% of the continent’s SMBs want access to payments, foreign exchange (FX), accounts, cards and more directly through their business software platforms. And only 44% think traditional banks can effectively meet their financial needs. 

By incorporating embedded financial services, software platforms have a significant opportunity to increase customer retention, loyalty and lifetime value and drive revenue. The report found that 75% of European SMBs would readily change providers for a comparable embedded finance solution offered by their business software platform. Notably, 72% are willing to pay more for the convenience of integrated one-stop financial services accessible through a single vendor interface.

With 60% of European SMBs stating that streamlined cross-border payments are very or extremely important to them, there is a clear gap in the market as less than half believe banks can deliver on this priority. 

The challenges European SMBs face

European SMBs face several pain points in financial management – especially cross-border payments – from lengthy processing times to forced currency conversions. A lack of automation and difficulties reconciling and tracking payments also hampers efficiency and saps time.

The top challenges highlighted by SMBs in Europe include:

• Delays processing and settling cross-border payments (cited by 48%)

• Forced currency conversion leading to high transaction fees (41%) 

• Complexity managing multiple currencies and payment methods (40%)

• Lengthy processing times for overseas transfers (39%)

• Lack of payment options for international customers (37%)

These kinds of inefficiencies stifle SMBs’ ability to operate and grow globally. Yet, traditional banks are falling short in providing tailored solutions to smooth cross-border financial workflows. 

Untapped market for software platforms

SMBs seek more automated, streamlined and flexible financial services that meet their specific needs as they expand internationally. When choosing a vendor, convenience, ease of adoption, and integration take priority over price. This provides a window of opportunity for software platforms that can offer both financial and operational services on a single platform, and will therefore have an immediate competitive advantage over banks offering the same services. 

The Airwallex report shows that 83% of European SMBs want to access embedded financial services such as payments, FX, accounts and cards through their existing platforms. Yet only 9% currently do so, indicating an untapped market.

Software platforms are well positioned to fill the gap left by traditional banks for several reasons.

Vertical expertise 

Niche software platforms understand the nuances of their verticals and can tailor financial services accordingly. For example, an eCommerce platform can offer high credit limits to accommodate large upfront vendor payments to their merchants.

Data-driven insights 

Platforms often have access to rich customer data that allows them to accurately assess eligibility for financial products and surface recommendations at the right moments.

Convenience and familiarity 

SMBs value being able to access financial services through software they use daily. Over three-quarters (76%) say they would pay more for the convenience of one-stop solutions from a single vendor.

Key opportunities in embedded finance

To understand the opportunities around embedded finance, it’s worth considering the nine use cases listed in this Airwallex article, published in August. The appetite among European SMBs is especially strong for specific financial services offerings, including:

• Foreign exchange trading – 82% are likely to use FX services from a software platform

• Payment processing – 80% likely to adopt

• Multi-currency accounts – 80% likely to use

• Business cards – 76% likely to adopt

Payments: a gateway to expanded services

Accepting payments is often the first embedded finance offering explored by software platforms, and for good reason. Integrated payments allow SMBs to manage operational and payment workflows through one interface. This provides a fast, convenient and compliant global payment experience from a brand to which they entrust their specific vertical needs.

Once payments are embedded, platforms are well-positioned to unlock additional services like multi-currency accounts, cards, lending, FX and more. 

The Airwallex research shows that 82% of European SMBs would switch payment providers for an integrated payment solution from their software platform.

Overcoming barriers to embedded finance

In the past, regulatory requirements, high costs, and slow integration times deterred some software platforms from offering embedded financial services. However, the emergence of application programming interfaces (APIs) is removing these barriers.

Platforms can now integrate pre-built financial solutions into their product via APIs in a fraction of the time and with lower upfront investment than building in-house from scratch. Rather than partnering directly with banks, they increasingly leverage fintech enablers with an API-driven Banking-as-a-Service (BaaS) model.

APIs and BaaS providers have been game changers, allowing platforms to embed financial services quickly and cost-effectively at different stages of pre-built configurability and modularity. This enables software providers to meet customer demand and accelerate speed to market.

The research clarifies that embedded financial services present a sizable revenue opportunity for software platforms across Europe. As competition intensifies in the software landscape, embedded finance can provide a differentiation point by addressing unmet customer needs.

SMBs are signalling a preference for integrated financial services over piecemeal bank offerings. Software providers that expand beyond their core product into payments, FX, cards, accounts and lending stand to gain loyalty and uncover new income streams. By leveraging turnkey solutions from fintech enablers, platforms can overcome technical barriers and get embedded finance products to market faster.

The time is now for software platforms to embed financial services and provide the all-in-one experience today’s SMBs expect. The winners will be those who act quickly to provide the financial tools SMBs need to sell and scale globally.