Embedded finance has moved from a niche concept to a growth lever. Non-financial platforms are enhancing their digital experiences by integrating payments, lending, and other banking functions. After gaining traction in consumer markets, embedded finance is gaining momentum in the business-to-business (B2B) space, especially among small and medium-sized enterprises (SME).
Two forces are driving this shift. First, more SMEs are running operations on industry‑specific software, including inventory management, scheduling, procurement, payroll, and invoicing. Second, traditional financial institutions have limited ability to offer flexible, context‑specific services tailored to sectors such as hospitality, professional services, beauty and wellness, healthcare, and construction. Still, adoption is uneven.
SME adoption of embedded finance and the opportunity for ISVs
Roughly 30% of SMEs actively use embedded finance, according to our recent survey of more than 150 companies in France, Germany, and the Netherlands. Even in advanced European markets, embedded finance accounts for only one-third of SME payment volumes, compared to two-thirds in the United States.
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This presents a significant growth opportunity for independent software vendors (ISVs). 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. 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. Many SMEs see limited incentive to move away from traditional banking relationships, and awareness of embedded finance options remains low.
Providers that succeed will make the value tangible by bundling software and financial services into integrated solutions, offering clearer insights from operational data, and explaining how these tools directly improve cash flow and simplify operations. And our survey, which included SMEs in retail, hospitality, and beauty and wellness, suggests that the growth opportunities are real: 69% of SMEs are interested in using embedded finance products and 64% plan to use new or additional embedded finance products through their software provider in the next 12 months.
Survey shows strong SME demand for embedded finance solutions
More than 44% of SMEs we surveyed already use a form of embedded payment, primarily to accept payments. 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.
Instead of relying on a narrow snapshot and fixed repayments, providers can use real‑time operational data to promote pre‑approved offers when they are most relevant and allow repayments that flex with sales. Other products including cards, business accounts, insurance, and investments are early in the adoption curve as demand and interest from SMEs gradually picks up.
While certain vertical-specific ISVs are strongly positioned to lead, SMEs are gravitating toward existing platforms as entry points. More than half (53%) of survey respondents identified accounting and enterprise resource planning software as their preferred platform for accessing embedded finance products. In fact, 79% of SMEs consider embedded finance a key buying criteria for their software solutions.
E‑commerce platforms drew the next‑highest interest, at 45%, underscoring their role as a gateway for embedded finance. As one B2B e‑commerce general manager noted, “We’d like instant loan decisions and lending offered directly through our e‑commerce platform.”
Across survey responses, SME executives emphasized the need for software providers to know their industry. “The provider must have a deep understanding of our company's operations and needs,” wrote one e-commerce head of sales and marketing. This, they said, “will make subsequent collaboration and related services more beneficial.”
They also want tailored recommendations and simpler, more flexible tools that integrate with their financial processes. Without those improvements, SMEs are struggling to find the value proposition to justify switching from traditional financial solutions.
Key strategies for financial institutions and ISVs in Europe
To map out a strategy for Europe, financial institutions and ISVs should start by examining the market and determining which customer segments they want to serve.
A competitive analysis will be required to determine which products already exist in that market. Then, they should assess their strengths, the role they can play in embedded finance, and what success looks like. Financial institutions, for instance, might act as a regulated entity, or they could develop their own software solution, which is far more challenging.
The next step is to identify internal capability gaps. That means figuring out which capabilities to build in-house, when to partner with a vendor, and when to pursue an acquisition. As embedded finance matures over the coming decade, the relationships between software vendors and financial institutions will evolve. We foresee four scenarios:
- Banks will try to keep payment flows and customer relationships by building or buying software solutions, but acquisitions are costly and in‑house development sits outside most banks’ core strengths, so this path seems unlikely.
- More likely, software platforms will expand payment capabilities while banks defend relationships through customer‑centric innovation. Banks can build service moats by tailoring offerings to SMEs and by making their value tangible.
- The most likely scenario is a split model — vendors own the front end; banks run the regulated back end. Software vendors lead on user experience, payments, and distribution while banks provide capital, licenses, and infrastructure through partnerships. Vendors capture much commercial value but rely on banks for regulated services.
- Some vendors may pursue full banking licenses, but that requires deep risk and financial management expertise and changes return profiles, making it an unlikely route.
Embracing a strategic approach for financial institutions and ISVs
The key to success will be a strategic — not an opportunistic — approach. This applies to both financial institutions and ISVs. 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.