UK banks must drop their portal ambitions and shore up Net banking for small and midsize companies, according to a new Report from Forrester Research (Nasdaq: FORR). To win online SME relationships, institutions must add services like counselling and accounting connectivity to today’s banking platforms. Firms must separate these direct offerings from supplying indirect finance, enabling SME transactions at third-party online commerce sites.

“Banks won’t build SME relationships through both proprietary portals and Internet banking,” said Forrester Associate Analyst Charlotte Hamilton. “Incumbents’ hopes of portals will evaporate as they lose users to the growing number of sites offering specialist services to the fragmented SME landscape. At present, UK banks are underinvesting in Net banking platforms, leaving their SME customers exposed to new entrants that are building aggressively priced and rich online banking services.”

Bank portals will be drowned by fierce competition from numerous SME portals and eMarketplaces offering services ranging from generic business information to finance-specific content. Banks believe that they build strong relationships with SMEs through personal contact with branch-based managers. However, incumbents’ limited Net banking transactions open their online customers to pillaging from entrants offering cheaper Internet banking services with greater functionality. Firms face an industry shake-up as SMEs moving online find the greatest functionality available at innovative new sites.

“Firms must split today’s Internet banking and SME portal offerings into financial services delivered directly or indirectly to customers and discard generic services and unnecessary tools from today’s sites,” Hamilton added. “Banks should broaden Internet banking into what Forrester calls direct finance and, separately, enable SME transactions at online commerce sites through indirect finance; for instance, Forrester anticipates 15% of UK SMEs trading at online procurement sites, such as auctions, by 2005. Banks must seize this business financing opportunity by enabling payments and credit on eMarketplaces. As banks streamline their services into direct and indirect finance, their non-financial services on portals and Internet banking sites must disappear, leaving online trading platforms to industry sites and eProcurement specialists. In 2006, while more than three-fourths of SMEs will be likely to use direct finance services, demand for indirect finance will trail this at only one-sixth of SMEs. Banks must take a staggered approach to their SME financial services.”

For the Report “Salvaging Online SME Finance,” Forrester reviewed today’s online offerings and spoke with institutions, portals and vendors that supply online SME services. Forrester also analysed survey data from Oftel, the Federation of Small Businesses (FSB) and The Forum of Private Business (FPB). According to the UK Department of Trade and Industry, there are 3.7 million SMEs — businesses with fewer than 250 employees — in the UK. Three-fourths of these businesses bank with just four UK firms: Barclays, HSBC, Lloyds TSB and NatWest.