Europe losing the SaaS Embedded Finance race as U.S. strides ahead

By Puja Sharma

Europe’s banks and financial services players are seriously lagging behind those in the U.S. in the embedded finance race, according to research by payment consultancies PSE Consulting and TSG (The Strawhecker Group). The research reveals that 33% of SMBs in the U.S. already use embedded finance solutions via Software-as-a-Service (SaaS) platforms, compared to just 11% in the U.K., and 6% in Germany and France.

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 a not really a lack of demand from SMBs for embedded finance solutions. Instead, the market has been constrained because SaaS platforms have struggled to promote embedded finance and capture the interest of merchants.

The research took the pulse of 1,000 small and medium sized businesses (SMBs) across the U.S., U.K., France, Germany, Italy, and Spain, and uncovered a significant gap in the use of embedded finance in the U.S. compared to Europe. Even though interest in both regions is very similar, with 51% of U.K. SMBs taking an embedded finance service when offered, compared to 53% in the U.S., what drives the significant difference in the maturity of the market is software platforms’ success at promoting the product. Only 22% of U.K. merchants and 16% of Italian SMBs say they have received an embedded finance offer from their SaaS suppliers, compared to over 60% in the U.S.

Merchants have provided a clear signal that they are interested in switching to software platforms away from traditional payments providers. 70% of SMBs across Europe and the U.S. say they would use a software platform’s payment solution when they next change suppliers. Again, there is a significant gap between U.S. interest levels which now exceed 80% versus 55% in Europe.

“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,” says Chris Jones, Managing Director of PSE Consulting. “These figures really show the gulf in maturity between Europe and the U.S.”

“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 U.S. and the U.K., European SaaS platforms need more support in making compelling offers to smaller businesses.”

The research also explores the current and anticipated demand for the full range of embedded products. Payment acceptance emerges as the most mature product (15% of U.S. merchants currently use this service) while services such as insurance and FX remain nascent. The significant potential of embedded lending is also apparent, with 69% of U.S. merchants interested in taking finance from their software suppliers. However, this product is much less mature than payment acceptance, with only 3% of U.S. 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 U.S. 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. Having only just scratched the surface of what’s possible, accelerating adoption of embedded lending will enable banks to connect with new customer bases and markets.

Key Insights:

• Around 33% of U.S. SMBs already use embedded financial services solutions via their Software-as-a-Service (SaaS) platforms, compared to only 11% in the U.K.
• The research found that only 22% of U.K. SMBs have received an embedded finance offer from their SaaS suppliers versus 61% in the U.S.
• The research also found that embedded lending usage is much less mature than payment acceptance but offers major growth potential.