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Updated 12 min read

Small business banking in 2027. The market banks still underserve

Online lenders now get 29% of US small business loan applicants, up from 17%. Five fixes for banks from 15 industry reports.

Adam Brooks

Startups and B2B SaaS

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In the Federal Reserve’s 2020 survey, 17% of US small businesses that applied for a loan went to an online lender. In the 2025 survey, 29% did.

And 60% of those online borrowers said the loan cost more than they expected. So something other than price sends owners there.

We read 65 industry reports for this series, and 15 say something concrete about small business. We tested them against the Fed’s survey of 6,525 firms and the British Business Bank’s 2026 market report.

The loan is only the entry point. The money sits in the daily flows: payments, cash, foreign exchange. In the UK, McKinsey finds transaction banking already brings in most SME revenue. The bank that runs those flows keeps the client.

The reports add up to five fixes, and banks already have most of what they need for them.

The first starts with data most banks hold but keep apart.

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The short version

  • Fintechs win the application. 29% of US small business loan applicants went to an online lender in 2025, up from 17% in 2020 (Federal Reserve).
  • Banks still win the outcome. Applicants at small banks were the most likely to get the full amount, at 57%. 60% of online borrowers paid more than they expected.
  • The profit is in the flows. In US small business acquiring, value-added services earn gross margins of up to 80%, against 20 to 30% for basic processing (McKinsey).
  • Cross-border is the open door. Fintech specialists already handle about 20% of small business cross-border payment flows (McKinsey).
  • A market can flip in a decade. UK challenger and specialist banks wrote 60% of gross SME bank lending in 2025, up from 39% in 2012 (British Business Bank).
  • AI changes the cost to serve. CloudWalk serves small merchants with revenue per employee of nearly $2.5 million (BCG).

1. Lend from the data you already have

Visa’s consultants put the problem in one line: for many small firms, “the barrier is limited and fragmented data.”

The cost of that is large. Citing International Finance Corporation data, Visa puts the small business financing gap at about $1.01 trillion in North America, roughly 3.8% of GDP. In East Asia and the Pacific it is $2.4 trillion.

The Fed’s numbers show the same gap from the owner’s side. 60% of US small employer firms applied for financing in the year before the 2025 survey. Only 42% of applicants got everything they asked for, and 22% got nothing. Most needed the money for operating expenses (56%), not for growth.

The UK looks similar. Half of smaller businesses that seek finance want it for working capital, the British Business Bank finds.

The odd part is that banks often hold the missing data already. Visa notes that banks usually keep issuing and acquiring data apart. Put together, card spend and card acceptance show a firm’s working capital needs almost as they happen. Square does this in the US, combining both sides to offer cash flow tools. Shopify Credit resets a merchant’s limit every month based on its sales.

Open finance fills in what the bank cannot see. In Mastercard’s survey of 300 executives, 40% said open finance let them lend to a wider range of small businesses.

Online lenders built their model on exactly this. The Fed describes them as underwriting on cash flow data, often for amounts under $100,000. That is where most of the demand sits: in the Fed’s survey data, half of US small business applicants asked for $100,000 or less in total.

What to do in 2027:

  • Merge issuing, acquiring and account data into one view of each business.
  • Underwrite thin-file firms on cash flow, with the owner’s consent to share accounting and payment data.
  • Turn that view into pre-approved offers before the owner has to ask.

2. Own the daily flows around the loan

McKinsey’s UK banking team is blunt about it. Transaction banking now makes up the majority of SME revenue in the UK. The bank that runs a firm’s payments, payroll and foreign exchange holds the relationship. The bank that only lends risks keeping the loan and losing everything around it.

The margins explain why. McKinsey’s payments team finds that in US small business acquiring, value-added services earn gross margins of up to 80%. Basic processing earns 20 to 30%. For software-led acquirers and vertical software platforms, embedded payments, services and subscriptions now bring 40 to 60% of gross profit.

BCG sees the same shift from the other side. In small business acquiring, it says, vertical software vendors increasingly have to own their category to keep clients.

Fees matter to the owner too. Deloitte notes that US card processing fees often exceed 2% per transaction, one of the larger operating costs for small and mid-sized firms.

And new firms start in new places. Mastercard’s economists found that 44% of new card-accepting US businesses in 2024 were online-only, up 20 points since 2019. In Brazil, a 2025 McKinsey survey found that Pix instant payments make up about 40% of the sales mix of small and mid-sized firms.

McKinsey’s advice to UK banks is to win businesses at formation. Put the account, payments, cards and expenses into the company set-up, then solve a few recurring jobs well: tax payments, supplier management, cash forecasting. Challengers such as Tide already do this for small, new firms.

What to do in 2027:

  • Be there on the day the company is registered.
  • Bundle the account, card acceptance and invoicing, and price the bundle, not each transaction.
  • Pick two or three recurring jobs and make them painless.

3. Make cross-border work for a ten-person firm

Small firms are more international than most banks treat them. In the Fed’s survey, 48% of US small employer firms sourced at least some inputs from abroad. About one in five sold to customers outside the US.

Fintechs noticed first. McKinsey’s cross-border team estimates that specialists now handle about 20% of small business and SME cross-border flows. They started with consumer payments and remittances, where they hold about 50%.

Figure 1. Fintech specialists’ share of cross-border payment flows, by segment (%)
SegmentValue
Consumer payments and remittances50
Small business and SME20

Source: McKinsey, “Cross-border payments: Out of the commodity trap, into the future”, August 2026. Both values are approximate.

A survey of 520 commercial bankers by Visa Direct and Finextra shows how far banks still have to go. Their clients are bigger than the firms in this article, from $10 million in revenue up. Still, only 2% of the banks think their cross-border offer is good enough. 41% say their clients can already get faster payments elsewhere. Three in four say at least a quarter of their commercial clients are moving funds away from the main bank.

Price is not what drives them away. Faster payments (23%), treasury and ERP integration (22%) and access to other rails (21%) lead. Lower fees come last, at 14%.

So price alone will not hold a client. McKinsey’s team says cheap transfers are enough for a sole trader. A firm that imports, exports or holds foreign cash needs tools for FX, liquidity and cash flow. In the UK, McKinsey adds, a firm’s first move abroad often brings its first real currency exposure.

What to do in 2027:

  • Give small firms tracked, predictable cross-border payments inside the app they already use.
  • Offer simple FX hedging at the moment of the first foreign invoice.
  • Build in the order the clients ask: speed and integration first, price after.

4. Use AI to make small accounts pay

Small business has always been expensive to serve one client at a time. AI changes that math.

BCG’s Future of Finance team expects AI to cut the cost of treasury and cash management enough to offer real-time liquidity insight and cash flow forecasts to small business clients. It also expects small-ticket lending to small businesses in emerging markets to become viable, as AI cuts origination and underwriting costs.

CloudWalk shows what this looks like at scale. BCG’s fintech report describes an AI-native firm serving micro, small and medium merchants in Brazil and, since 2024, the US. It has 7 million monthly active users, revenue per employee of nearly $2.5 million and an annualized net revenue run-rate of about $1.7 billion as of March 2026. Its merchant assistant helps with pricing and campaigns.

Visa sketches the bank version. Relationship management agents send tailored offers, schedule follow-ups and call in a human only when one is needed.

The pressure runs both ways. Accenture expects AI agents to give small firms the treasury tools large corporates have had for years, moving deposits to the best rate with no effort from the owner. McKinsey’s payments team estimates that cash-optimizing agents could put about $32 billion of commercial net interest income at risk in its base case. Its advice is to become the agentic adviser for small and mid-sized clients, so their agents work through the bank and not around it.

Small firms are ready for this. 46% of US small employer firms already use AI, the Fed found.

What to do in 2027:

  • Give relationship managers agents that watch cash flow and draft the next offer.
  • Offer cash forecasting and sweeps before an outside agent does.
  • Track the cost to serve each small client, and push it down every quarter.

5. Fix the experience before you add products

Banks keep a real advantage here. The Fed found bank and credit union applicants more satisfied with their lender than online lender applicants. Bank borrowers were also far less likely to pay more than they expected.

Figure 2. US small business borrowers whose costs were higher than expected, 2025 (%)
LenderValue
Online lenders60
Small banks37
Large banks32

Source: Federal Reserve Banks, “2026 Report on Employer Firms: Findings from the 2025 Small Business Credit Survey”, March 2026.

So why do owners leave? The Fed’s own reading is that they turn to online lenders because they expect a yes, and a fast one. Banks win mostly on relationships they already have. Over two-thirds of bank applicants in the Fed’s data named an existing relationship as their main reason.

That makes the first offer decisive. In the UK, only 34% of smaller businesses looked at more than one provider the last time they applied for finance, the British Business Bank found. My read is that whoever is in front of the owner when the need appears gets the deal.

The experience can be fixed faster than most banks plan for. Our ING SMB banking redesign was prototyped and user-tested in 23 days. In the tests, owners cared less about new features than about seeing in one place what money comes in this week and what goes out.

What to do in 2027:

  • Give a clear yes or no quickly, with criteria the owner can read.
  • Show the full cost up front. That is where online lenders lose trust.
  • Test with real owners before every release.

Where the reports disagree

Are fintechs winning small business lending? The Fed says applications are moving to them. McKinsey’s fintech team says SME lending is still a lagging segment for fintechs, held back by churn and the natural failure rate of small firms. The few that scaled did it through lending embedded in platforms, not as stand-alone SME banks. I think both are true. Fintechs win the first application. Few of them build a lasting lending book.

Is credit getting easier? In the UK, gross SME bank lending rose 9% to £68 billion in 2025. Non-bank lenders added £18.3 billion. Yet the stock of SME bank loans has fallen 22% in real terms since 2012, as firms repay faster and use more flexible finance. More lenders have not added up to more bank debt outstanding.

How healthy are small firms going into 2027? Mastercard’s economists found tariffs hit US small firms harder. In consumer electronics, their spending growth ran 20 points below large firms in 2025, against 6.6 points in 2024. In the Fed’s survey, revenue expectations fell to their lowest since 2020. In Türkiye, PwC’s Strategy& team lists SME loans among the drivers of new bad loans.

What I’m watching in 2027:

  • Whether online lenders keep gaining applicants while their costs keep surprising borrowers.
  • Whether UK banks win back formation-day accounts from challengers.
  • Whether banks put agents in front of small clients before the clients’ own agents start moving the money.

Small business is a fair test of a bank’s digital work. The owner has no treasury team and no time for a form that asks the same thing twice. Most of what a bank needs to serve them well already sits in its own data. The work is getting it in front of the owner.

Sources

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