Middle Market Bull, But SMBs Need More Help From Banks

The report: Business Barometer 2024

Source: Umpqua

Why we picked it: Commercial and small business banking has been on a rocky path since Covid-19’s arrival in the U.S. By understanding the contrasting needs of different business segments, financial institutions can tailor their services more effectively, from lending practices to technology offerings. The findings on AI, cybersecurity and payment trends in particular provide valuable guidance for product development and risk mitigation.

Executive Summary

The business landscape is deeply divided, a picture painted by Umpqua Bank’s Business Barometer.

Middle market companies are riding high on a wave of optimism not seen in six years, while small businesses hunker down in a defensive posture reminiscent of pandemic-era caution. This stark contrast sets the stage for a year of divergent strategies and outcomes across the American business spectrum, challenging conventional wisdom about economic recovery and growth.

Umpqua’s annual survey — which captures the pulse of U.S. business leaders’ strategic plans and economic outlook — reveals that middle market enterprises are poised for growth, with expectations for increased demand, revenue and profitability at record levels. Meanwhile, their smaller counterparts find themselves in a holding pattern, grappling with the lingering effects of inflation and high interest rates on consumer demand. This dichotomy raises important questions about the nature of economic recovery and the factors driving business confidence in today’s complex marketplace.

Key Takeaways:

Economic optimism gap: 68% of middle market leaders view the current economy positively, compared to just 29% of small business leaders.

AI adoption disparity: 42% of middle market companies are “moving forward quickly” with generative AI implementation, while only 12% of small businesses share this urgency.

Cybersecurity concerns: Middle market companies were four times more likely to fall victim to cyberattacks in the past year compared to small businesses.

Payment technology divide: 62% of middle market businesses have implemented instant payments technology, versus 43% of small businesses.

Supply chain financing: With 51% of middle market companies onshoring operations, banks should consider tailored supply chain financing solutions to support this transition.

What we liked about the report: It’s hard to get a sense of what businesses — and which segments of businesses — are using AI. The Umpqua Bank Barometer excelled in quantifying the AI adoption gap, revealing that 42% of middle market companies are rapidly implementing generative AI compared to just 12% of small businesses. Having this specific data point was unique, compared to a lot of the generic data currently available in the space.

What we didn’t: The report fell short in exploring the nuances of cybersecurity threats. While it noted that middle market companies were four times more likely to experience cyberattacks, it didn’t provide detailed breakdowns of attack types, their financial impacts or specific preventative measures.

The Economic Outlook is Setting the Tone for Business Banking

A remarkable 68% of middle market leaders hold a positive view of the economy, marking the highest level of confidence since the survey’s inception six years ago. This optimism extends to future prospects, with nearly half reporting they anticipate improved economic conditions in the coming year.

Small business owners, in sharp contrast, are significantly less confident about their economic situation. Only 29% express a positive outlook on the current economy, a figure that has plummeted to levels last seen during the height of Covid. Looking ahead, a mere 30% of small business leaders expect economic conditions to improve in the next 12 months.

“Businesses of all sizes have been tremendously resilient for several years. But it’s a tale of two economies now,” writes Richard Cabrera, head of commercial banking at Umpqua Bank, in the report.

The divergence in economic outlook is mirrored in the strategic plans of these two business segments. Middle market companies, buoyed by their optimism, are aggressively pursuing growth opportunities. They are more likely to engage in mergers and acquisitions, with 52% considering acquiring another business and 43% contemplating a merger.

Additionally, middle market firms are prioritizing investments in technology and efficiency. A substantial 88% plan to digitize operations to improve efficiency, while 81% intend to invest in financial tools to enhance payment system security.

Small businesses, by contrast, are adopting a more cautious approach. Their focus is primarily on immediate operational needs, with 35% planning to invest in equipment and 38% allocating resources to marketing efforts. Only 7% are considering mergers, and a mere 11% are contemplating acquisitions, highlighting their more conservative stance in the face of economic uncertainty.

Dig deeper:

How the AI Revolution Impacts Business Growth

The adoption of artificial intelligence, particularly generative AI, has emerged as a significant differentiator between middle market and small businesses. This technological divide could have far-reaching implications for future competitiveness and growth.

Middle market companies are at the forefront of the AI revolution. An impressive 42% of these businesses report that they are “moving forward quickly” with generative AI implementation. Another 36% are already implementing AI for specific tasks and functions. This rapid adoption is driven by the tangible benefits they’re experiencing: 43% report improvements in work efficiency, while 38% note an enhanced competitive advantage.

The impact of AI is being felt across various business functions in the middle market segment:

IT and cybersecurity (33%)
Marketing, sales and customer service (31%)
Product development (10%)
Strategy and operations (8%)

In stark contrast, small businesses are significantly behind in AI adoption. Only 12% are moving forward quickly with generative AI, and a whopping two out of five say they have no intention to use it in the coming year. This hesitancy is partly due to uncertainty about AI’s potential impact: about one in five small business leaders are unsure when AI will significantly affect their business, while another one in five believe it will never have a significant impact. If small businesses are thinking about utilizing artificial intelligence in their organization, they plan to use it for marketing and customer service or client deliverables and analyses.

This disparity in AI adoption and application could potentially widen the performance gap between middle market and small businesses in the coming years.

Payments Rules All

The shift towards faster payment systems is another area where the divide between middle market and small businesses is evident. This trend is accompanied by an increased need for real-time fraud protection.

Middle market businesses are leading the charge in implementing instant payment technologies. Sixty-two percent of middle market companies have already adopted such systems, compared to 43% of small businesses.

Recognizing the risks associated with faster payment systems, businesses are bolstering their fraud protection measures. Ninety-three percent of middle market companies have either added or plan to add strengthened fraud protection, compared to 66% of small businesses.

Specific control measures implemented by businesses include:

Cybersecurity and Fraud Is One Massive Concern

As businesses increasingly rely on digital technologies, cybersecurity and fraud prevention have become critical concerns. The Business Barometer reveals significant differences in both the experiences and preparedness of middle market and small businesses in this arena.

Middle market companies were approximately four times more likely to fall victim to a cyberattack in the past year compared to small businesses. While this might initially suggest greater vulnerability, it could also indicate that middle market companies are more aware of and better at detecting such attacks.

In response to these threats, middle market companies have been more proactive in implementing preventive measures. A substantial 83% have adopted fraud prevention solutions offered by their banks. In comparison, only 56% of small businesses have taken similar precautions.

The types of fraud experienced by businesses vary, but some common threats include:

The Flux of the Supply Chain Changes Owns It All

While the acute supply chain issues of recent years have largely subsided, with 92% of businesses reporting they can now purchase needed goods, strategic shifts in supply chain management continue.

Middle market companies, in particular, are reevaluating their supply chain strategies. In the last calendar year, 51% have moved manufacturing or supply chains back to the U.S., continuing the onshoring trend observed in previous years.

Looking ahead, 73% of middle market companies with operations abroad are likely to move or shift these operations to new locations in the coming year. This suggests an ongoing reconfiguration of global supply chains, with potential implications for operational costs, resilience, and geopolitical risk management.

Editor’s note: This article was prepared with AI language software and edited for clarity and accuracy by The Financial Brand editorial team.