European banks and financial services players have fallen significantly behind those in the US in the embedded finance race, according to new research by payment consultancies PSE Consulting and The Strawhecker Group (TSG).
While 33 per cent of small and medium-sized businesses (SMBs) in the US already use embedded finance solutions via Software-as-a-Service (SaaS) platforms, compared to just 11 per cent in the UK, and six per cent in Germany and France.
The findings come from a survey of 1,000 SMBs across the US, UK, France, Germany, Italy, and Spain. The payment consultancies found a significant gap in the use of embedded finance in the US compared to Europe. Only 22 per cent of UK merchants and 16 per cent of Italian SMBs say they have received an embedded finance offer from their SaaS suppliers, compared to over 60 per cent in the US.
The joint research is the first time embedded finance usage via SaaS platforms by merchants has been tracked to assess current levels of adoption. Embedded finance is set to transform the delivery of financial services as more use cases are explored across a wide range of industry verticals.
Surprisingly, the research finds that one of the big adoption hurdles is not really a lack of demand from SMBs for embedded finance solutions. Instead, the market is constrained because SaaS platforms have struggled to promote embedded finance and capture the interest of merchants.
“There has been lots of excitement about the potential for SaaS as a new distribution channel for financial services, but this is the first time we have seen levels of usage in the SaaS world stripping out the role of marketplaces and fintech,” said Chris Jones, managing director of PSE Consulting.
Seventy per cent of SMBs across Europe and the US say they would use a software platform’s payment solution when they next change suppliers.
Embedded finance products have clear potential
Jones added: “Players like Shopify, Toast, and Lightspeed have shown the SaaS market that it’s possible to drive significant new revenues from payments, but it has proven much harder for European-based firms to repeat their success. While there is a similar level of latent merchant demand in the US and the UK, European SaaS platforms need more support in making compelling offers to smaller businesses.”
The research also explores levels of demand for the full range of embedded products. Payment acceptance emerges as the most mature product (used by 15 per cent of US merchants) while services such as insurance and FX are still developing.
The potential of embedded lending is also apparent, with 69 per cent of US merchants interested in taking finance from their software suppliers. However, this product is much less mature than payment acceptance, with only three per cent of US merchants currently using their software suppliers to source their lending.
“This research shows the vital importance of software distribution channels for merchant acquirers to reach smaller and medium US merchants. We think there is a lot of opportunity in embedded lending, but no one has cracked the model yet,” says Jared Drieling, chief innovation officer at TSG.
For banks in particular, embedded lending represents a ready-made niche where they can leverage their brand trust and customer loyalty to offer capital through new channels.
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