Micro-, small, and medium-sized enterprises (MSMEs) are the backbone of the global economy, accounting for more than half of global GDP, over 90 per cent of all companies, and more than two-thirds of business employment.
For banks, MSMEs represent a growth opportunity: This segment accounts for 21 per cent of total banking revenue pools, and banking revenue from MSMEs is growing 7 per cent a year, faster than retail or corporate banking (Exhibit 1).
tBut banks need to move quickly to better serve their current MSME clients and attract new ones. Over the past few years, digital attackers have rapidly won over MSMEs with a seamless mobile-first experience and much lower costs.
In the United Kingdom, for example, these new entrants—such as Monzo, Revolut Business, Starling Bank, and Tide—count about a third of the country’s MSMEs as their customers, according to our analysis. That’s up from a negligible share of the market five years ago.
MSMEs include microenterprises with one to nine employees, small businesses with up to 50 workers, and medium-size enterprises employing up to 250 people. For banks, MSMEs often offer higher returns than individual customers do, as they tend to have larger checking accounts and loan balances and make more frequent transactions.
Furthermore, MSME owners, often affluent or high-net-worth individuals, also have significant personal-banking needs, giving banks the opportunity to build deeper and more valuable relationships.
However, banks face challenges in effectively serving MSMEs, including outdated distribution models, inefficient manual processes, and evolving customer expectations. These challenges are further exacerbated for microenterprises due to factors such as elevated credit risk and inconsistent or missing financial statements.
On the bright side, banks can harness rapidly evolving technology to better serve MSME clients and compete with digital attackers. The advent of AI, particularly gen AI and agentic AI, is making it possible for banks to radically improve cost efficiency while enhancing the customer experience.
In the small-business segment, AI helps to identify the most relevant products and solutions for each client, at the right moment. This can transform how relationship managers (RMs) engage with MSME clients: RMs can focus their efforts on high-value opportunities, allowing them to offer more personalised and effective services.
In addition, incumbent banks can substantially improve operational efficiency by optimising and automating manual processes with AI, such as credit applications and know-your-customer (KYC) processes.
Banks see MSME clients as a key focus area, given the revenue that could be lost to competitors as well as the growth potential. This article details the challenges in serving the segment, outlines a model of effectively serving MSMEs through an optimal mix of digital and human interactions, describes how banks can build out the necessary digital capabilities, and outlines practical steps for getting started.
Challenges persist
Despite the revenue potential, banks face several challenges in effectively serving the MSME segment:
- Coverage models vary, and there is no clear winner. Banks around the world use different models to serve MSMEs. Many European banks and some North American banks use a traditional model focused on RMs, resulting in high costs. Certain North American banks are testing a digital model with pooled virtual RMs, though no winning recipe has emerged. Asian banks tend to serve MSMEs through retail bank branches, using various models.
- Banks have not kept pace with the digital evolution of their MSME customers. In emerging Asian markets, for example, MSMEs have rapidly digitised after the COVID-19 pandemic. Many banks have fallen behind as they have prioritised consumer segments over MSMEs in their digital agenda.
An excellent digital experience is more important than ever for MSMEs. Good online and mobile banking is the number-one reason for MSMEs selecting a primary bank, according to our 2024 survey of approximately 2,500 small business owners across seven countries in Europe and the Middle East (Exhibit 2).
MSME clients tend to be highly digitally active. In 2024, 80 per cent of MSME clients in Europe were active on digital banking platforms at least once every 30 days, according to Finalta by McKinsey. This was 17 percentage points higher than the digital activity of retail customers. Highly digitally active clients often result in higher revenue for banks.
Banks that excel in digital can translate that into better financial performance and expand their market share. Finalta benchmarks illustrate that digitally active MSME clients have substantially higher deposit balances, make significantly more transactions, and are much less likely to leave the bank than digitally inactive MSME clients.
When considering the more than 200 digital capabilities that Finalta tracks for banks—across sales, onboarding, transactions, account management, and other categories—most banks worldwide offer less than half these capabilities, on average, while leading banks offer about 85 per cent. Banks need to prioritise the digital capabilities that matter most to their clients and excel in delivering them, rather than striving to get to a perfect score on digital capabilities.
- Many banks still use inefficient manual processes. Handling loan applications, account management, and other services manually is time-consuming and error-prone, and doesn’t meet the high expectations of MSME owners who value speed and convenience. By automating manual processes and using AI in credit underwriting, banks can reduce operational costs; free up frontline staff to focus on customers, improving their satisfaction; and enhance competitiveness.
While the trends outlined above have been evident for the past five years or so, a new threat has emerged for incumbent banks: In many markets, digital attackers are rapidly capturing market share.
The superior digital customer experience offered by fintech companies means banks need to do more to compete for MSME clients. Small businesses in the United States are increasingly turning to integrated software vendors (ISVs), such as Clover, Square, and Toast, as payment providers, posing a challenge for legacy merchant acquirers (including those few banks with their own acquiring business). Our research shows that 49 per cent of MSMEs in the United States are using incumbent ISVs as their primary point-of-service provider, with the adoption rate of fintech ISVs reaching 42 per cent.1
In the past few years, the share of total spending in restaurants managed by ISVs has grown twice as fast as the proportion managed by legacy merchant acquirers. Toast, a payment platform for restaurants, recorded year-to-year revenue increases of 42 per cent in 2023 and 28 per cent in 2024. Similar trends are visible in other markets as well. In addition, fintech companies have started to build scale among MSME customers across various markets.
These include Mercury, operating mainly in the United States; Knab, operating primarily in the Netherlands; and Qonto and Revolut Business in European markets.
The model: Digital-led, with a human in the loop
The challenges we describe require incumbent banks to rethink and enhance the way they serve their MSME customers by elevating the digital experience. Moving toward a digital-first approach can unlock significant value.
Finalta data has shown that in Western Europe, top-performing banks in the SME segment bring in twice as much revenue per active SME customer as the weakest performers, and nearly four times as much revenue per risk-weighted asset.
To emulate these top performers, banks need to rethink their sales and service models, including onboarding and underwriting, to focus on a model that benefits from the strengths of both digital and human interactions.
This model is characterised by a heavy reliance on digital channels, where almost all servicing transactions are completed through self-service on apps and websites, and most new product sales are digitised. For example,
Finalta data shows that leading European banks get 75 per cent of their small-business-product sales from digital channels, double the rate of average banks.
Digital-first doesn’t mean that the human touch is irrelevant. The emerging model defines the value-added role that humans can play, focusing on customers with complex needs and sophisticated products that require advisory services.
Non-dedicated bankers will serve most MSME clients, providing remote or branch-based support as needed, while dedicated RMs will focus on top-tier, higher-revenue customers, ensuring they receive personalised advice and offers.
For instance, we recently worked with a large Western European bank to reshape its MSME segmentation and coverage model, which included the scaling of a remote advisory pool that can proactively serve clients more efficiently than dedicated RMs.
Seamless management of the MSME customer journey is key, allowing customers to transition smoothly between online and offline interactions.
Additionally, the model involves exploring partnerships, such as with e-commerce platforms, to meet customers where they are and offer them relevant services, such as payment solutions for online transactions, personalised financial advice, and fraud protection.
Key capabilities for serving MSMEs
To become a best-in-class bank in the MSME segment, it is imperative to develop capabilities that are essential for staying competitive and meeting clients’ evolving needs. In our experience, the following capabilities are priorities:
- Digital engagement. For microcompanies, the mobile app will serve as the primary interface with the bank, necessitating a broad set of servicing and sales functionalities. For small and medium-sized companies, a combination of mobile app and web platforms is typically required, with differentiated features tailored to these clients’ more complex needs.
- Simplified and tailored value proposition. Leading banks are rethinking their MSME product offerings to ensure they are easy to understand and access. This includes simplifying pricing structures, for example, by offering tiered, subscription-like packages that are tailored to customer needs. Some banks and fintech companies have developed tailored propositions for certain subsegments with distinct needs, such as hospitality or agricultural businesses. By understanding the diverse needs of target subsegments and adapting offerings accordingly, banks can create products and services that resonate with these clients, resulting in increased acquisition and deeper engagement.
- Customer value management and personalisation. Banks can learn from other industries, such as telecommunications, to develop distinctive customer value management (CVM) capabilities. These capabilities enable data-driven recommendations and actionable insights, such as trigger-based automated lending offers. By using AI, banks can provide personalised services and products that meet the unique needs of each MSME client, enhancing customer satisfaction and loyalty.
- Reimagined digital sales and servicing journeys. Seamless product sales journeys are a must. For instance, many banks are redesigning their MSME lending journeys to ensure full automation and self-service, enabled by preapproved credit decisions. Some banks are also developing credit underwriting models that leverage additional data sources, such as e-commerce platforms.
- Digital sales. Strong digital marketing capabilities involve delivering the right offers with the right message and frequency at the right moment through the right channel. Leading banks excel in their ability to attract traffic, both via owned channels such as their website and app and via paid channels such as online ads and search engine marketing. For instance, a European incumbent bank has recently started to build up its conversion rate optimisation capabilities, which effectively doubled the share of digital MSME customers the bank acquired. Leading banks also continuously optimise conversion rates of sales journeys by monitoring points at which potential customers drop off and applying A/B testing of websites, ads, and messages.
- Services beyond banking. To create a differentiated value proposition for MSMEs, an increasing number of banks are offering additional value-added services such as corporate treasury support, digital accounting, and billing (Exhibit 3). For instance, a leading SME bank in India has integrated a mini enterprise resource planning solution into its app, providing basic enterprise resource planning functionalities suited to MSMEs’ needs.
- Frontline capabilities. Leading banks transform the productivity and performance of frontline staff by elevating sales skills, equipping the sales force with AI and analytics-enabled tools, strengthening performance culture, and maintaining an effective structure for KPIs and incentives. Some banks also need to develop a remote advisory model to effectively serve MSME clients, resulting in a lower cost to serve than a dedicated RM.
- Use of AI, including gen AI, to drive efficiency. AI technologies, including AI agents, play a crucial role in automation and efficiency, including in the following processes, among others:
- Client engagement and customer service. Gen AI can help RMs with hyperpersonalized communication outreach and real-time suggestions to use in conversations with clients, based on customer history. A conversational chatbot can nudge customers to use self-service on common requests, freeing up human advisors to focus on more complex and value-added tasks.
- Credit decisions and underwriting. Recently, an Asian bank developed agent-based gen AI systems that autonomously extract information from various sources, calculate relevant ratios to assess creditworthiness, compare those outcomes with typical thresholds, and summarise the results in draft credit memos for credit officers’ review.
- Contracting. Immediate contract generation can streamline the loan approval process, reducing turnaround times and improving customer satisfaction.
- KYC. Several banks are redesigning their KYC processes, for example, the process of regularly updating and verifying customer information, to harness AI in gathering and assessing the necessary information.
Practical steps to get started
The recommended plan for which capabilities to improve varies depending on the starting situation of a given bank. Typically, the following three-pronged approach works best for incumbent banks:
- Frontline commercial excellence. The first step is to optimise the work of frontline staff to lift performance. This includes freeing up RMs to meet more clients, for example, by streamlining processes, rapidly elevating bankers’ sales capabilities and tools, and improving sales support for RMs (for instance, by adding product specialists).
- An enhanced and seamless digital offering. The next step is to improve the bank’s digital proposition by digitising more service and sales journeys, for example, by offering end-to-end digital onboarding. In the near term, digitising high-priority journeys where digital adoption is strongest can be a great starting point. These initiatives can be brought to market within a few months, gradually elevating digital activity and customer engagement.
- A personalised and data-driven experience. Leading banks supplement the first two steps with additional capabilities. For example, developing robust CVM capabilities allows banks to deliver data-driven recommendations and actionable insights, for instance, by making offers based on customer events or behaviours. Simplifying and innovating product offerings based on changing MSME needs is key, as is scaling virtual coverage to enhance the customer experience, particularly for MSME clients who don’t visit physical branches often.
Some of the benefits of a digital-first approach to MSME clients can be achieved quickly. For instance, using data and analytics to support frontline staff can yield outcomes within three to six months. Banks that successfully develop their MSME model can become market leaders, deliver distinctive services to their clients, and fend off the attack from neobanks.
The MSME segment is a critical and growing market for banks, offering significant revenue potential and the opportunity to build deeper and more valuable relationships. At the same time, this segment is facing disruption from digital attackers, a trend that poses a credible threat to incumbent banks. This calls for swift action. By effectively adopting a digital-led model with a human touch, banks can improve their financial performance, strengthen their market position, and contribute to MSMEs’ success.
