Micro, Small, and Medium-sized Enterprises (MSMEs) looking for embedded payments and
financing are turning to existing non-bank suppliers for answers. This shift is creating a new
breed of fintech challengers – and could provide banks with rich partnership opportunities.
Despite their status as the lifeblood of the global economy, constituting up to 90% of all
businesses and more than 70% of employment in most markets,[1] MSMEs have historically been
given off-the-shelf, undifferentiated services by banks that see them as too small or high-risk to
merit investment.
Understandably, this situation has led to MSME dissatisfaction with banks. In the UK, 60% of MSMEs feel neglected and underserved, while 59% of business owners think that services offered by banks aren’t tailored to their needs. [2] A similar picture emerges in India, where two- thirds of MSMEs say [3] they want easier and faster access to loan approvals than banks can provide, and in Nigeria, where almost half (48%) of MSMEs [4] turn to friends and family for financing, as banks are too slow and reluctant to lend. Even in Brazil, where banks are often heralded as leading the digital charge, our research finds 72% of MSME owners prefer to use personal credit facilities for financing business operations.
MSME owners have limited amounts of time and resources at their disposal. Our interviews with more than 2,000 MSMEs owners from 20 markets world-wide reveals they spend an average of 25% of their time sourcing products and materials. Allocating that time and resource makes the difference between growth and success on the one hand, or stagnation and failure on the other. Broadly, MSMEs have three basic financial needs: access to capital to sustain operations and invest in growth; access to the right supplies at competitive prices, and the ability to pay and be paid efficiently and at low cost.
In the absence of a competitive offering from banks, the best fit for MSMEs is likely a supplier with which they already have a relationship – a company they trust, have access to, and already work with. For instance, the company that provides goods, manages their payroll, manages their distribution or handles their e-commerce gateway.
Source: KoreFusion Analysis, Global SME Survey, n=2,000
Recognizing MSME needs, these suppliers are developing new financial service offerings – and becoming fintechs in the process, alongside their traditional roles. Our research shows that companies providing supplies and resources, and those assisting MSMEs with consumer sales, are trusted more than banks when evaluating new offers for value-add financial services.
Our research also suggests the provision of embedded finance solutions as a reinforcement to payments acceptance are particularly popular with MSMEs, since they reduce MSME engagement in these functions to a minimum, freeing up time to invest in the growth and management of day-to-day operations. Brazilian payments processor PagSeguro played the trust and payments service card successfully, turning its 7M MSME customers into the founding circle neobank PagBank. Similarly, super-app Grab is going beyond payments and financing to MSMEs by expanding into inventory and expense management tools, as well as assistance with employee insurance claims.
Recognizing the needs of MSMEs, traditional suppliers in sectors from ride-sharing (Uber) through to invoicing (Invoice2Go), food delivery (Doordash), and more, are partnering with Banking as a Service (BaaS) providers to offer embedded finance solutions as MSMEs adopt these platforms, their spending on business apps and collaboration tools is soaring – with embedded finance showing a corresponding rise, projected to grow by 56% by the end of 2025.
Through their partnerships with BaaS providers, suppliers to MSMEs can offer everything from full-stack banking services (including transaction processing, bank accounts and customer service) through to focused solutions such as embedded payments, lending, fraud protection, and insurance.
With the recent launch of Open Banking in the US announced by the CFPB and the acceleration of Open Banking in other over 60 other countries, we can expect MSME preference for platform- based finance to continue to grow as open APIs and data-sharing facilitate access to customers and new product innovation. In the UK, 18% of MSMEs now use some form of Open Banking service, [5] with 75% of these MSMEs accessing data confirmation services and the balance accessing Open Banking payments through a platform. Our research in Brazil last year confirms one-third of MSMEs are willing to share their financial data with non-banks.
Looking ahead, we expect MSMEs to favor a platform approach and seek financial services through their suppliers. The opportunity for banks is clear: either improve your direct relevance with MSMEs or lean into the challenge and become a partner with MSME focused suppliers and platforms. What is at stake is a fight to retain market share in the high-value, economically vital MSME segment.
KoreFusion optimizes MSME payments strategy across 80 countries. We help banks, brands, and fintechs develop embedded payment and financial services for MSMEs. For inquiries, please contact information@korefusion.com.
[1] The International Labour Organisation, “The Power of Small”: https://webapps.ilo.org/infostories/en-GB/Stories/Employment/MSMEs
[2] PYMNTS, “MSMEs: Small-ish, Misunderstood Enterprise Report”: https://www.pymnts.com/news/b2b- payments/2018/bibby-financial-MSME-banking-services/
[3] The Economic Times (India), 11 January 2022, “MSMEs lose Rs67 lakh annually due to outdated ways of managing finances” https://economictimes.indiatimes.com/small-biz/mSME-sector/mSMEs-lose-rs-67- lakh-annually-due-to-outdated-ways-of-managing-finances-study/
[4] PwC, Nigeria MSME Report: https://www.pwc.com/ng/en/assets/pdf/pwc-mmSME-survey-2020-final.pdf
[5] UK Open Banking: Impact Report, July 2024: https://www.openbanking.org.uk/insights/latest-impact- report-shows-strong-growth-and-the-power-of-payments/