Forrester just published new research outlining the future of small and midsize business banking (also called SME banking to refer to SMEs, or small- and medium-sized enterprises). If you’re an executive at a traditional bank, it contains some grim and gloomy predictions. If you’re a Forrester client, you can read the brand-new, full report here.

Honestly, we weren’t looking to tell such a dark story, but that’s where the research took us. When we first decided to update an older research report titled “Small Business Banking Customers Are Hungry For Digital Services,” we figured it would be a pretty straightforward update with a few nifty examples and some new names in the mix — which we did in large part when we published another recent report outlining “The Digital Disruption of Small Business Banking.”

But after spending over a year looking at the market, attending conferences, speaking with executives from a wide range of firms, and conducting other research, the reality of the situation — and the potential dark future that traditional banks face in the SME space — became clear:

  • Most providers have been neglecting small- and medium-sized business clients. Our research shows that most established banks have been complacent and neglectful about SMEs for over a decade. As one digital executive for a large bank put it, “Small and midsized business clients account for more than half the revenue we see compared to retail customers, yet we only budget about 10% of our digital spend for anything having to do with digital services for our business customers.”
  • Fintechs have built ecosystems while most banks have watched from the sidelines. As a result of traditional banks’ lack of resources and focus on SME banking, disruptors have moved in to create new value and/or increase convenience for the owners and operators of these SMEs. The story of one disruptor is useful for illustrating this shift: Xero was once a small startup in Asia Pacific offering cloud-based accounting software to small businesses. But the company soon realized that SMEs have a voracious appetite for services (and content) that help them manage their business’s finances — or, even better, reduce their cognitive load, freeing them to do what they’re truly passionate about: run and grow the business themselves. Xero has now designed and built an entire marketplace where other technology companies — and a few banking providers that are either brave or in need of clients — offer services to SMEs on Xero’s platform.
  • Things are only going to get tougher for incumbent banks. The good news is that all is not lost: Financial services relationships tend to be quite sticky, and the SME banking market won’t be completely upended overnight. But the bad news is stark: Traditional banking providers will need to figure out where they fit in an expansive set of SME banking ecosystems that have grown up around them — and they will need to get over their fear of “other people’s platforms and ecosystems” to achieve sustained growth in SME banking over the next 10 years. Forrester has developed a framework for the different roles that various financial services companies will play in SME banking in the future (see image below).

There is, of course, a lot more in the full report, and our research on this topic will continue. So if you would like to be interviewed for future reports, or if you just want to discuss this topic further, please email my colleague Piers Conway or reach out to your Forrester account team.


Companies (Both Incumbent Banks And Disruptors) Will Exist Primarily Within One Of Four Broad Categories

This Forrester framework illustrates the future categories of SME banking.