Banks are sitting on a ticking clock regarding their small business customers. A massive shift is underway where software companies are quietly replacing traditional lenders as the primary financial hub for merchants. If banks do not act quickly to partner with these tech firms, they risk becoming invisible plumbing in the background of the global economy.
Software Vendors Are Taking Over
Independent Software Vendors (ISVs) are no longer just selling digital tools for booking appointments or managing inventory. They are becoming the new face of finance for Small and Medium Enterprises (SMEs). According to a recent detailed analysis by McKinsey & Co., banks in early-stage markets face a critical turning point. In these regions, software vendors currently handle less than 10% of SME payment volumes, but this is rapidly changing.
The opportunity for these vendors is enormous. By embedding payments directly into the software that business owners use every day, vendors are capturing market share at an unprecedented rate. Banks that fail to integrate with these platforms risk losing the direct customer relationship entirely.
For a small business owner, the choice is simple. It is much easier to accept a payment, pay a bill, and get a loan within the same app used to run the store than to log into a separate bank portal. This convenience is driving the migration away from traditional banking apps.
The Threat of Disintermediation
The real danger for banks is not just losing transaction fees. It is disintermediation. When a bank loses the direct interface with the customer, they lose the data. Without data, they cannot effectively cross-sell loans, insurance, or other high-margin products.
McKinsey’s report, “Decoding ISV maturity: a global playbook for payments growth,” highlights a stark reality. In markets where banks rarely partner with vendors, they are often viewed as direct competitors. This is a battle banks are struggling to win because they cannot match the user experience speed of a tech company.
However, there is a clear path forward. The report suggests a strategy of integration rather than isolation.
- Become the Backbone: Banks can provide the balance sheet, regulatory compliance, and payment rails.
- Let Tech Lead: Allow ISVs to own the front-end user experience and customer interface.
- Shared Revenue: Create commercial models where both parties benefit from transaction flows.
Partnerships Unlock New Revenue
The smart move for financial institutions is collaboration. We are seeing a trend where forward-thinking banks are teaming up with fintech giants to offer better services at a lower cost. This is particularly visible in the Asia Pacific region, where digital adoption is soaring.
Samarth Bansal, general manager at Wise Platform, emphasized this shift in an interview with Asian Banking & Finance. He noted that banks are realizing they cannot build everything in-house.
“For our part, banks recognize that for something as simple as making cross-border payments instant, they need a partner,” Bansal stated.
Many banks previously tried to keep customers locked inside their own proprietary apps. They believed this was the only way to maximize revenue. But that mindset is shifting. By integrating with platforms like Wise or other ISVs, banks can offer their customers instant, cheap international payments without building the infrastructure themselves. This retention strategy actually protects deposits in the long run.
Southeast Asia leads the Charge
The urgency to partner is perhaps strongest in Southeast Asia. A separate report by YCP Solidiance indicates that collaboration between fintechs and traditional institutions is the key driver for financial inclusion in the region.
The demand is moving beyond just simple payments. Digital credit is poised to become a massive revenue engine for financial services in the area. Automated loan procedures embedded within software platforms are speeding up approvals.
Consider the efficiency difference for a local merchant:
| Feature | Traditional Bank Process | Embedded Finance (ISV) |
|---|---|---|
| Loan Application | Paperwork, physical visits | One-click inside business app |
| Data Review | Weeks of manual auditing | Instant access to real-time sales data |
| Approval Time | Days or Weeks | Minutes or Hours |
| User Experience | Disconnected steps | Seamless flow |
This speed is why SMEs are flocking to software vendors. They get capital when they need it, based on data the software already has.
How Banks Can Survive the Shift
To survive, banks must stop viewing software vendors as enemies. They need to view them as a new distribution channel. The “embedded finance” market is projected to grow significantly, and banks have a choice to be a part of it or watch from the sidelines.
Banks must invest in better APIs (Application Programming Interfaces). These digital connectors allow a bank’s services to “plug in” to a software vendor’s platform. If a bank has poor APIs, a vendor will simply partner with a different bank that is easier to work with.
It allows the bank to remain the engine of the financial flow. By integrating early, banks remain the backbone of SME financial flows while allowing ISVs to own the user experience. This hybrid model combines the trust and capital of a bank with the agility and design of a software company.
The era of the bank branch is fading for business owners. The new branch is the software they use on their iPad or laptop. Banks that realize this today will own the market of tomorrow.
