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This is a sponsored article by Jesper Petersen, CTO, 9Spokes

SMBs have long been a challenge for banks to serve well. They are often too small to offer a tailored service that they may need during times when there is opportunity for growth or when their business is suddenly challenged.

Embedded finance is rapidly becoming a new norm for SMBs in payment and banking. The segment has expanded rapidly and is expected to generate revenue of $230 billion USD in 2025. This a 10-fold increase from the $22.5 billion generated in 2020.

At the same time, the SMBs are too diverse to address in a scalable way that makes sense for the banks. Whilst there are still dependencies between the SMB and the bank, many new options are also available for the SMB, which means many find alternatives that serve them better even if the cost may be higher.

Finance is one of those areas that is rapidly evolving and embedded financial options are becoming available in applications such as point of sales and marketplaces. An example of this is e-commerce marketplaces offering real-time credit product in the form of BNPL (Buy Now Pay Later) at the point of purchase using finance providers such as Klarna, OpenPay, and Afterpay.

The funding behind these solutions in some cases come from the traditional banks but the bank has no relationship with the SMBs the service is offered to. Therefore, the bigger question here is if the relationship with SMBs is shifting away from the traditional banks to alternative providers. Alternative providers with tailored products for the SMBs to meet the demand when it emerges and to satisfy requirements where they operate.

The SMB landscape is also changing, and their skillsets are becoming stronger. People leave corporate functions and take their skills and understanding with them into the new businesses they start. A big driver for many is the desire to be self-sufficient which is the key decision point for almost 30% of new business starts in the U.S.

Most SMBs are back operating at pre-pandemic levels again. However, SMBs are not emerging unscathed from the pandemic. They know that they need to change and adapt to the demands to be able to overcome financial challenges when they emerge either through own choices or through societal challenges like Covid.

The finance market for SMBs is large and whilst more challenging to serve, it can be a lucrative market. The embedded finance options often utilize the data available in the platforms to provide SMBs with tailored solutions, to better meet their situation and need. The data they have access to means they have a better risk profile closer to real-time than a traditional bank would have.

A new range of services is also emerging embedded into the software utilised by SMBs instead of through the traditional banking route. Klarna is an example that offers lending services to its 250K customers through partners such as Liberis as an alternative to their own BNPL service.

The benefit of these services is that they are fast to access as they can make the evaluation largely with the data they access. It makes the experience of signing up and utilizing the service superior and significantly faster to access compared to traditional banking products. Furthermore, being rejected for a service has fewer consequences than a traditional bank rejecting a loan or credit card for a business.

Where does this leave us as the embedded banking services are expanding and alternative financial providers are increasing their market share significantly? Banks still have a role to play and are still serving SMBs, but they are missing out on expanding the services they provide. It is critical that they find ways to provide banking services to SMBs that utilize data to understand the real risk they are taking and enable them to respond faster.

SMBs still need their banking relationship but they seek alternative options as they struggle to get access to the financial services, they require to both survive and expand their businesses. Hence the need to find ways to facilitate better relationships using the data available and enable a real conversation about the business challenge.