Europe’s banks and financial services are falling significantly behind their U.S. counterparts in the rapidly evolving embedded finance sector, according to new research from PSE Consulting and The Strawhecker Group (TSG). The study indicates that 33% of small and medium-sized businesses (SMBs) in the United States are utilizing embedded finance solutions through Software-as-a-Service (SaaS) platforms, in stark contrast to only 11% in the United Kingdom and a mere 6% in Germany and France.
This joint research marks the first comprehensive analysis of embedded finance usage via SaaS platforms among merchants, shedding light on current adoption levels. Embedded finance is poised to revolutionize the delivery of financial services across diverse industry sectors. Surprisingly, the findings reveal that the primary barrier to adoption is not a lack of demand from SMBs, but rather the inability of SaaS platforms to effectively promote embedded finance offerings and capture merchants’ interest.
The research surveyed 1,000 SMBs across the U.S., U.K., France, Germany, Italy, and Spain, uncovering a significant disparity in the use of embedded finance between the two regions. While interest levels are comparable—51% of U.K. SMBs would accept embedded finance services when offered, compared to 53% in the U.S.—the difference in market maturity is driven by the effectiveness of software platforms in promoting their products. Notably, only 22% of U.K. merchants and 16% of Italian SMBs report having received an embedded finance proposal from their SaaS providers, compared to over 60% of their U.S. counterparts.
The data also indicates a strong inclination among merchants to transition from traditional payment providers to software platforms. Approximately 70% of SMBs in both Europe and the U.S. expressed interest in utilizing a software platform’s payment solution during their next supplier change. However, this enthusiasm is more pronounced in the U.S., where over 80% show interest, compared to just 55% in Europe.
Chris Jones, Managing Director of PSE Consulting, commented on the findings: “While there has been considerable buzz regarding SaaS as a new distribution channel for financial services, this research marks the first time we have quantitatively assessed usage in the SaaS realm, excluding marketplaces and fintechs. The data clearly illustrates the maturity gap between Europe and the U.S.”
He added, “Companies like Shopify, Toast, and Lightspeed have demonstrated that it’s possible to generate substantial new revenues from payment solutions. However, European firms have encountered challenges replicating this success. Even though merchant demand is comparable in both the U.S. and U.K., European SaaS platforms require more support in crafting compelling offers for smaller businesses.”
The research further explores the existing and anticipated demand for a comprehensive range of embedded products. Payment acceptance stands out as the most developed service, currently used by 15% of U.S. merchants, while offerings like insurance and foreign exchange remain in their infancy. Additionally, the potential for embedded lending is significant, with 69% of U.S. merchants expressing interest in obtaining financing through their software suppliers. Nonetheless, this product remains underdeveloped, with only 3% of U.S. merchants currently leveraging their software providers for lending solutions.
Jared Drieling, Chief Innovation Officer at TSG, remarked, “This research underscores the critical role of software distribution channels for merchant acquirers aiming to connect with smaller and medium-sized U.S. businesses. There is substantial potential in embedded lending, but a viable model has yet to emerge.”
For banks, embedded lending represents a promising niche that can capitalize on brand trust and customer loyalty to deliver capital through innovative channels. With only a limited understanding of the possibilities, accelerating the adoption of embedded lending could allow banks to engage with new customer bases and expand into fresh markets.
Key Insights:
- Approximately 33% of U.S. SMBs currently utilize embedded financial services via SaaS platforms, compared to just 11% in the U.K.
- Only 22% of U.K. SMBs have received an embedded finance proposal from their SaaS providers, while this figure stands at 61% in the U.S.
- Although usage of embedded lending is less mature than that of payment acceptance, it holds significant growth potential.
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