The report, 'Salvaging Online SME Finance,' advocates that to win online SME relationships, institutions must add services like counselling and accounting connectivity to today's banking platforms. Firms must separate these direct offerings from supplying indirect finance, enabling SME transactions at third-party online commerce sites.

According to Forrester analyst Charlotte Hamilton, at present, UK banks are underinvesting in Net banking platforms, leaving their SME customers exposed to new entrants that are building aggressively priced and rich online banking services.

Numerous SME portals and e-marketplaces are offering services ranging from generic business information to finance-specific content. While banks believe that they build strong relationships with SMEs through personal contact with branch-based managers, incumbents' limited Net banking transactions open their online customers to pillaging from entrants offering cheaper Internet banking services with greater functionality, says the report.

Hamilton continues: "Banks should broaden Internet banking into what Forrester calls direct finance and, separately, enable SME transactions at online commerce sites through indirect finance."

Forrester anticipates 15% of UK SMEs trading at online procurement sites such as auctions, by 2005. However, while more than three-quarters of SMEs will be likely to use direct finance services, demand for indirect finance will trail this at only one-sixth of SMEs.

"Banks must seize this business financing opportunity by enabling payments and credit on e-marketplaces," says Hamilton. "As banks streamline their services into direct and indirect finance, their non-financial services on portals and Internet banking sites must disappear, leaving online trading platforms to industry sites and e-procurement specialists."