European SMEs trade traditional banking for embedded finance solutions
Embedded finance is shifting from a niche digital trend to a major growth engine for small and medium enterprises (SMEs). In Western Europe, nearly half (46%) of all small businesses now use financial tools integrated directly into their non-financial infrastructure, according to analysis from Oliver Wyman.
This shift is transforming how businesses handle money, moving banking functions away from traditional branch offices and directly into the apps used for daily operations.
A survey from Oliver Wyman of over 150 companies across France, Germany, and the Netherlands reveals that, along with the growth in embedded finance in Europe, independent software vendors (ISVs) are also seeing opportunities for expansion.
Understanding embedded finance
Embedded finance is the integration of financial services – such as payments, lending, or insurance – into a non-financial platform. One common example is ‘buy now, pay later’ (BNPL), a feature that many retailers now offer consumers that allows third-party loans at the point of sale.
In other examples: Rather than logging into a separate portal for a bank, businesses can manage payroll, accept customer payments, or apply for a loan within their existing inventory or accounting software. This seamless connection allows financial services to function as a natural part of the business workflow rather than a separate administrative burden.
Why growth is accelerating
The rapid adoption of these tools is driven by two primary factors. Modern SMEs increasingly rely on industry-specific software to manage everything from beauty salon appointments to construction site procurement.
“More than 44% of SMEs we surveyed already use a form of embedded payment, primarily to accept payments,” according to Oliver Wyman.
“Lending is emerging as a popular option, with over 40% of SMEs indicating interest in directly accessing lending options through their software platform. This is a key area of innovation.”
Traditional banks often struggle to provide the flexibility or sector-specific data that these businesses require. Because software providers see real-time data on a company’s sales and health, they can offer more relevant, pre-approved financial products exactly when the business needs them.
Primary use cases
Payments remain the most common entry point, accounting for 44% of innovation in the world of embedded finance. Instead of rigid monthly repayments, embedded lending allows for flexible structures that fluctuate with a company’s sales volume. Beyond these, there is growing interest in integrated business accounts, corporate cards, and insurance tailored to specific industries like hospitality or healthcare.
The Oliver Wyman survey shows 69% of SMEs are interested in these products. Notably, 64% plan to increase their use of embedded finance within the next year. Accounting software and e-commerce platforms are the preferred gateways for these services, as they already hold the most critical financial data for the business.
Growth potential for software vendors
For Independent Software Vendors (ISVs), the rise of embedded finance offers a massive opportunity to create new revenue streams and improve customer loyalty. By providing a ‘one-stop-shop’ for both operations and finance, these vendors make their software indispensable. The most successful vendors will be those that provide deep industry insights and simplify complex reporting, helping SMEs manage their cash flow more effectively.
“By embedding payment solutions, working capital products, and other daily banking tools into their platforms, ISVs can deliver quicker access to payments; consolidate the number of providers an SME uses; improve the customer experience; and simplify operations, data management, and reporting,” reads the report.
“It also adds new revenue streams, bolsters customer retention, and offers significant access to data and insight into the customer base. Still, significant barriers to adoption exist.”
The future of partnerships
As this market matures, the relationship between software companies and traditional banks is expected to move more towards a partnership model. In this scenario, software vendors will manage the user experience and customer relationship, while banks provide the necessary licenses and regulated infrastructure behind the scenes.
This type of collaboration allows both parties to play to their strengths, ultimately providing small businesses with faster, more intuitive financial tools.
“The key to success will be a strategic – not an opportunistic – approach. This applies to both financial institutions and ISVs,” the report concludes.
“Successful providers will bundle services and create a user experience tailored to key workflows in a targeted industry segment. To achieve this, they should evaluate the competitor and partner landscape. They will also need to assess their own capabilities and ability to stay ahead of the competition, and figure out the most suitable operating model.”
