While there is a $5.7 trillion MSME financing gap, SMEs remain underserved — not just because of risk or cost, but because banks continue to apply models designed for retail or corporate customers. These approaches fail to reflect the realities of small businesses. More importantly, banks often treat SMEs as a homogeneous segment, rather than recognising the diversity of their needs.
To address this, banks must move beyond a one-size-fits-all approach. The article outlines how SMEs can be segmented based on their primary banking dependency and explores how banks can employ three transformative business models to serve these customers to everyone’s advantage.
Hundreds of millions of businesses, and just one segment?
SMEs span a wide spectrum, from street vendors and seasonal exporters to technology firms scaling globally. Each operates with distinct cash flows, risk profiles and financial needs.
Grouping them together leads to undifferentiated strategies and average solutions that fail to fully meet any one need. Instead, banks must segment SMEs more precisely, much like retail customers, and align offerings accordingly.
One effective way is to assess SMEs based on their primary banking dependency at a given point in time. While most businesses have multiple needs, one typically dominates and the provider that meets this need at the right time captures disproportionate value.
Five-category SME typology based on primary banking dependency
- The liquidity-anchored SME relies heavily on working capital and cash flow management. Businesses such as distributors, manufacturers and traders often struggle with rigid overdraft facilities and collateral requirements. In 2024, cash flow and working capital shortages hindered the growth of one in four UK SMEs.
- The credit-anchored SME seeks term finance to invest and scale. Many viable businesses face barriers due to limited access to long-term funding and reliance on collateral that does not reflect intangible assets. Examples include healthcare providers, logistics companies, and technology-enabled businesses, whose intangible assets (such as customer relationships or intellectual property) do not sit well with traditional collateral-based lending.
- The settlement-anchored SME depends on efficient payments infrastructure. Retailers, e-commerce sellers, and exporters require fast settlements, cost-effective transactions, multi-channel reconciliation, and cross-border capability.
- The risk-anchored SME focuses on mitigating exposure to risks – FX volatility, delayed payments or regulatory obligations. Yet, risk solutions for SMEs remain underdeveloped. In a 2025 survey, just 13 percent of US small businesses with insurance believed they were fully prepared to face potential risks.
- The ecosystem-anchored SME operates within digital platforms. Revenue, creditworthiness and financial interactions are deeply embedded in platform ecosystems, making embedded financial services the most natural delivery model.
Many SMEs move across these categories over time, or operate across them simultaneously. This typology is therefore not rigid but helps identify the most pressing need at a given moment, enabling banks to deliver relevant value when it matters most.
Matching typology to model
Different SME archetypes require different banking approaches. While digital-only, embedded and marketplace banking are all relevant, their applicability varies by need.
Each of the three models is characterised by a particular set of capabilities, data access mechanism, distribution economics, partnership infrastructure and product specialisation that align better with some SME categories. Before allocating investment, a bank should clearly understand the affinities between business model and SME archetype.
Type 1: Digital-only and embedded banking support liquidity seeking SMEs
For liquidity-anchored SMEs whose survival hinges on working capital, both the digital-only and embedded banking models are relevant: digital-only banks use live transaction data for cash-flow based underwriting, rather than collateral. Dynamic credit lines flex with trading cycles. Time-to-credit takes minutes rather than weeks.
Banks can also use embedded finance as a primary model to assess and serve credit-anchored customers by leveraging data available and embedding offerings in procurement and ERP systems. This makes credit available as soon as a purchase order is raised. For example, suppliers can access early payment against confirmed orders on buyer platforms. Goldman Sachs supports Amazon’s small business credit line, extending business financing to eligible sellers in a fully digital application process. Small businesses selling on the platform can avail revolving credit lines from Amazon, powered by the Bank.
Marketplace banking serves as a secondary model with sector-specific platforms, for example, wholesale and construction platforms surfacing invoice data that enables working capital products in context.
Type 2: Digital-only banks and marketplaces ease long-term financing
Credit-anchored enterprises are primarily dependent on term finance and capex investment for growth. Digital-only banks can fill that need by using alternative credit scoring (based on accounting software data, tax records and payment history) to establish creditworthiness without traditional collateral. At the same time, multi-lender credit marketplaces offer choice and transparent pricing, enabling SMEs to choose the most competitive capital provider.
Zand Bank UAE, which identifies itself as a fully digital SME bank, embeds financial services directly into the platforms SMEs already use, for example, invoicing tools and payroll systems. The Bank is changing SME banking from a parallel activity to an in‑workflow experience.
Type 3: Digital banking and embedded finance models serve up payment infrastructure
Digital-only banking and embedded banking are the best options for settlement-anchored SMEs’ need for strong payment infrastructure. The former offers near-zero FX margins, instant settlement, virtual IBANs and unified multi-channel dashboards, making it the first choice. Banks may also embed payment services within POS systems and e-commerce checkout to streamline reconciliation and enable real-time merchant cash advances triggered by settlement flows.
Malaysia’s Maybank embeds real-time banking data into SME accounting platforms, eliminating reconciliation friction and reducing manual reconciliation effort by ~80%.
While payment aggregator marketplaces play a secondary role, those that bundle acquisition, settlement and FX services serve SMEs in this category well at volume.
Industry-specific marketplaces for the risk-anchored small business
For risk-anchored SMEs, embedded finance within trade and procurement platforms can deliver context-driven insurance, hedging and guarantees at the point of transaction. However, this remains one of the least developed areas in SME banking.
Industry-specific marketplaces are better established, aggregating SME demand to enable more accurate pricing and scalable risk solutions. Digital platforms complement this by democratising access to FX hedging and simple insurance products.
What banks should do now
Capturing the SME opportunity requires deliberate strategic choices, not incremental change.
First, treat embedded banking as a priority. The most valuable platform partnerships are being formed now, and early movers will gain lasting distribution advantage.
Second, reassess SME portfolios using a sharper segmentation lens. Current portfolios reflect legacy biases—banks must realign toward segments where future value will accrue.
Third, combine business models, not isolate them. Digital, embedded, and marketplace models work best together, reinforcing each other and creating compounding advantage.
Finally, anchor investments in unmet SME needs, such as real-time credit, embedded risk solutions, and cross-border payments, and build capabilities around them.
Banks that act decisively will move from fragmented engagement to scalable, high-impact SME relationships.
