Redefining SMB banking: From digital channels to intelligent advisory

For years, European banks fought a digital "arms race," believing a best-in-class app was the key to winning the Small and Medium-sized Business (SMB) market. That race is over. The problem? Everyone won. With slick digital interfaces and high app store ratings now table stakes, the very success of digital transformation has led to a strategic dead end: the commoditisation of the user experience.The proof is in the paradox. While major business banking apps from HSBC and Eurobank boast user ratings of 4.7 or higher, a 2025 Backbase report reveals that 26% of customers have switched banks due to "inadequate digital offerings." This isn't a contradiction; it’s a signal. SMBs are no longer asking, "Can I do this online?" They are asking, "What can my bank's digital tools do for my business?" The battleground has shifted from transactional efficiency to intelligent advisory, and banks still fighting the old war are losing ground.

The New Mandate: SMBs Want a Partner, Not Just a Platform

As transactional banking becomes a commodity, SMBs are demanding a new relationship. They seek a financial partner that provides strategic, data-driven guidance to fuel growth. This isn’t a preference; it’s a core expectation.

An EY survey found that an overwhelming 85% of SMEs expect their Relationship Manager to be actively involved in developing their long-term business strategy. They don't just want a lender; they want a co-pilot. This desire for a "digital CFO" is being amplified by the mainstreaming of AI. With generative AI reshaping service expectations, SMBs know what's possible. It’s no surprise that a Backbase survey found 59% of banking customers want tailored financial recommendations from their provider.

This creates a structural crisis for the traditional banking model. The high-touch, human-led advisory that SMBs crave is not economically viable for banks to deliver at scale across the entire segment. PwC analysis highlights this mismatch, noting that banks struggle to serve SMBs efficiently due to costly manual processes. This capabilities gap—the inability to deliver personalised advice at scale—is the precise vulnerability that new competitors are exploiting.

The Real Threat: How Embedded Finance is Making Banks Invisible

While banks focused on perfecting their apps, a more profound disruption was re-architecting the financial landscape: embedded finance. This isn't a new channel; it's a fundamental restructuring that integrates financial services directly into the software platforms SMBs use every day—for accounting, e-commerce, and operations. It threatens to make the bank an invisible, commoditised utility.

The scale of this threat is immense. The European embedded finance market is forecast by McKinsey to surpass €100 billion by 2030. This growth is fueled by a vastly superior model. For example, the cost of acquiring a qualified SME lending lead through an embedded channel is 15 to 20 times lower than through traditional banking channels.

This creates a nearly insurmountable cost advantage for platform competitors. As McKinsey notes, a small business starting today may never need to interact with a conventional bank, instead accessing payments, credit, and accounts directly through platforms like Shopify or Xero. Banks are organized by product silos (lending, payments), but an SMB thinks in terms of business workflows (buying inventory, managing cash flow). Embedded finance aligns with the SMB’s world, making it a more intuitive and valuable partner. To compete, banks must evolve from being a destination to being a service that is present wherever business happens.

The European Imperative: A €25 Trillion Call to Action

This challenge is more than a commercial concern; it is a matter of collective economic stewardship. SMBs are the bedrock of the European economy. According to 2022 Eurostat data, 99.8% of the EU’s 32 million enterprises are SMBs. They are the primary engine of employment, providing jobs for over 85 million people—nearly two-thirds of the entire business workforce.

Yet, this vital sector is systemically underserved. The European Investment Fund revealed that in 2023, nearly one in four Euro area SMEs experienced severe difficulties in accessing the finance necessary for growth. This is not just a missed business opportunity; it’s a market failure that caps Europe's economic potential.

The financial sector stands at a crossroads. Continuing to compete on yesterday's terms—focusing on app features while non-financial platforms capture the customer relationship—is a path to irrelevance. The alternative is to embrace a new role. By embedding intelligent, data-driven advisory into the fabric of their digital offerings, banks can move beyond being mere transaction processors.

They can reclaim their essential function as the engines of growth and stewards of European prosperity. The question for every banking leader is no longer about building a better app, but about building a better partner. The future of European business depends on it.