The SME exodus: How traditional banks in Australia and New Zealand can regain lost ground in the SME space
By Jeremy Thomas (pictured), Regional Director at Backbase
Digital disruptors have eroded the market share of traditional banks, but by modernising their approach, major players in Australia and New Zealand can win back small and medium enterprises (SMEs) with seamless, customer-focused solutions.
Although small businesses are regularly referred to as the backbone of the Australian and New Zealand economies – they provide employment for approximately six million people – the sector has been under-served by the traditional banking sector, historically.
Many banks have geared their offerings towards large commercial and retail enterprises while smaller businesses have found it harder to obtain the facilities and funds needed to support their growth.
Cue an exodus to non-traditional and digital native financial services providers that haven’t sought to make copious volumes of paperwork and slow access to money their hallmarks.
Rather, these newer comers have focused on creating a very different experience for SME customers, one that’s centred around speed, ease of use and personalisation.
The flight to non-traditional lenders
And it’s worked: 54 per cent of Australian SMEs would look to non-bank lenders to finance their investments in 2025, according to ScotPac’s latest SME Growth Index report, released in October 2024. By contrast, just 35 per cent of SMEs planned to tap their main relationship bank, or one of its peers, down from 47 per cent the previous year.
‘The days of cumbersome, one-size-fits-all bank financing are gone, replaced by a growing demand for alternative options that are faster, more accessible and more flexible,’ the Index report notes.
‘SME owners and operators have been motivated to move beyond traditional funding sources, especially lending against the family home, to keep pace with rising costs and uncertain demand. Despite record recent rises, all signs point to further increases in SME non-bank lending in the years ahead.’
How they’re keeping the customer satisfied
So, what exactly have these digital upstarts been doing differently or better to capture the custom of so many SMEs, so quickly?
Offering seamless onboarding and faster access to credit, for starters. Both are a boon to SME leaders. With a multitude of demands on their time, they tend to be less than enamoured by the prospect of having to visit a branch, merely to get a new finance facility up and running.
Throw in some digital tools to help SME owners manage forecasting, cash flow, invoicing, expense tracking and other aspects of the finance function, and offer a user-friendly data analytics capability to help them extract the insights they need to make better decisions.
Finally, make it easy for them to get in touch – and get answers! – whenever and however they choose, and you’ve created a compelling value proposition for a cohort of more than 2.5 million potential customers.
Reversing the trend
Traditional banks that have belatedly realised they’d like a little bit more of that small time action do have a number of advantages they can leverage.
These include trust, deep industry expertise, plentiful resources and the rich well of customer data already in their keeping.
They will, however, need to adopt large sections of the interlopers’ playbook, if they’re to regain the custom of underwhelmed SMEs that have decamped to non-traditional competitors.
That means rethinking what it is small businesses truly need from their banking partners and focusing on personalisation and convenience at every touchpoint.
Winning back mind and market share at scale is likely to require significant transformation of processes and practices. Many established institutions continue to operate on a patchwork of point solutions, each addressing a specific requirement or function. These solutions have not necessarily been designed to work together seamlessly and having a fragmented architecture can make it challenging, if not impossible, to deliver the personalised, responsive digital interactions and experiences SMEs have become accustomed to receiving.
Tools to turn the tide
That’s where engagement banking technology comes into its own. Composable, pre-integrated customer experience capabilities and out-of-the-box journeys can support financial services providers to deliver new customer experiences efficiently and cost effectively, at scale.
It’s transformation-enabling technology that allows banks to modernise quickly and cost effectively, without having to rip out and replace a swathe of core platforms.
Instead, they’re able to unlock the value of their existing data without the disruption, delay, expense and risk a large-scale overhaul invariably entails, and adopt the data-driven, digital and mobile-first engagement model today’s SMEs are seeking.
Robust authentication and data protection measures mean they’re able to do so securely, thereby making it easier for their SME customers to protect themselves from the rising tide of online scammers and fraudsters that have them squarely in their sights.
For banks in Australia and New Zealand that are serious about recapturing their lost share of the SME segment this year, it’s mission critical technology that belongs at the heart of the ICT stack.
