Midsize banks traditionally served a comfortable niche. They were large enough to meet the lending needs of local businesses but small enough to know which applicants in their communities were a safe bet.

Now that niche looks more like a vise. Midsize banks often struggle to compete with deep-pocketed larger banks, community-focused small banks, and nimble fintech startups. Meanwhile, they are increasingly at risk of losing their traditional lending business to non-bank players such as pension funds, insurance companies, and mutual funds.

Restrictions on in-person interactions have made most retail customers more comfortable with digital banking services—reducing the need for making visits to bank branches, which are instrumental in helping midsize banks build customer relationships. At the same time, commercial banking clients have come to expect a level of ease, accessibility, and sophistication similar to the digital experiences they enjoy in retail banking.

What’s more, many small- and mid-cap companies switched to larger banks after the failure of multiple regional banks in 2023. Midsize banks also have outsized exposure in the commercial real estate market, where rising interest rates and falling occupancy levels could make it more difficult for developers to repay their loans.

To understand the challenges and priorities of midsize banks—those with between 250 and 1,500 employees—SAP Insights conducted a global study in 2024, comprising 12,003 responses across numerous industries. Of those responses, 1,009 came from banking organizations—91% of which cited growth as an “organizational priority” over the next 12 months.

Respondents said their top growth strategies were expanding their distribution channels and partners, expanding their market presence, and increasing the overall scale of their business operations.

At the same time, respondents cited several constraints to growth. Most were related to challenges in obtaining accurate, data-driven insights, including the ability to assess vulnerabilities in their supply chains (that is, the financial services supply chains or borrowers’ supply chains), which could jeopardize borrowers’ ability to repay their loans. Banks also need to deliver an improved customer experience and more personalized service to meet the needs of today’s digital customers. Midsize banks plan to overcome these challenges by bolstering their data and analytics skills and technology tools while cautiously moving toward using AI.

This report provides insights into what midsize banks need to grow and how they’re planning to achieve that growth.

Data is at the core of top growth constraints

The greatest challenge to growth for midsize banks, according to respondents, is the difficulty of detecting supply chain problems, which was cited as a top-three challenge by 37.5% of respondents. Disruptions to a client’s supply chain can quickly paralyze its business —and its ability to repay its loans.

To secure more timely and accurate information about the state of their creditors’ supply chains, banks need access to the right data. Combining internal data with, for example, external news sources, a bank can more quickly detect changes in the economy, geopolitical relations, or public health (such as a pandemic) that might affect its clients’ ability to repay their loans.

These insights can also drive growth by allowing a bank to, for example, proactively offer clients customized services that help them maximize their working capital.

A second inhibitor to growth is also data-related: lack of integration among a bank’s systems and databases, cited by 34.2% of respondents. Such integration is essential to providing the data that can help banks understand all aspects of customer transactions and interactions and provide personalized experiences that meet all customer needs, from deposits to lending to payment cards.

The holistic view provided through integration can help banks maximize customer retention and profitability, identify and mitigate supply chain issues, and enable assured, cost-effective compliance.

Too often, midsize financial institutions deploy disconnected IT systems or legacy enterprise resource planning software that requires extensive manual support and disjointed data. Using these fragmented systems puts them at a disadvantage, especially when competing against new digital competitors.

Data—everything from overnight deposit levels to profitability per customer—is also essential to managing risk, ensuring compliance, and driving growth. But 32.5% of respondents cited a lack of such data as a top-three impediment to their growth plans.

It’s little wonder, then, that nearly half (49.7%) of respondents cited new or updated analytics and decision-making tools as one of their top three technology or tool priorities to overcome growth challenges. Respondents also said they would implement new business software systems (44.1%) and improve systems integration (41.3%) to overcome the data challenges standing in the way of growth.

Importantly, these are the same technologies that respondents said they’d turn to in their efforts to simplify work and improve business processes—a priority named by 92.2% of respondents. These technologies would help overcome the top constraints to process simplification and improvement. These include supply chain weaknesses (named by 38.7% of respondents), lack of integration (34.6%) and business silos (32.6%)—all of which also pose challenges to growth.

Improving the customer experience through personalization

The ability to capture and analyze customer data also closely aligns with respondents’ business plans to overcome growth challenges. Among these were improving the quality of management decision-making and improving the customer experience, named as a top-three plan by 37.1% and 36.7% of respondents, respectively.

With the right data, banks can enable not only more creative loan underwriting but also greater personalization, more engaging human interactions, and targeted marketing outreach to help broaden and deepen engagement with both retail and commercial customers.

To carry out their business and technology plans, however, banks also realize they need a different set of skills in their workforce, particularly the ability to work with data and analytics tools. Expanding skills and talent was named as a top-three business plan by 42.0% of respondents and was also named as the number-one business plan by the largest percentage of respondents (14.7%).

For banks to compete with both fintechs and larger banks, they’ll need to become more adept with digital technologies, which will require more tech-savvy workers. Providing “digital-grade” experiences and data can help provide the ease of use that customers have come to expect and fend off competition from fintech startups.

Data and analytics will also come into play in other ways. Regulatory and public scrutiny of environmental, social, and governance (ESG) scores will continue to grow, and banks will have to standardize and tailor data to meet ESG reporting requirements. While some banks can calculate real-time risk with a single data source in the cloud, others are still struggling with data management.

With a “single source of truth” for financial accounting, banks can gain better access to regulatory and business data, enabling them to be more flexible and responsive to the requirements for financial insight and control.

AI: Another piece of the analytics puzzle

AI presents rich opportunities for growing midsize banks, and they recognize it. The vast majority of respondents (93.7%) said adopting standard AI business applications (for example, machine learning to analyze data and the use of prediction techniques) was a high or medium priority.

Midsize banks are slightly more likely to have begun using AI than their peers in other industries. Currently, however, respondents are using AI for relatively low-risk or traditional activities, such as developing marketing and sales content, detecting fraud, and managing contracts.

However, this could soon change. Respondents were also asked to rate how highly they’d prioritize several more strategic AI use cases. Uses of AI earning a high-priority ranking reflect banks’ business objectives: enabling more accurate and efficient decision-making (named by 49.1% of respondents as a high priority), enhancing opportunities for training and skill development (47.5%), and creating new business models and revenue streams (48.8%).

Larger financial services firms are already using AI to help advisors answer client questions and identify investments based on macroeconomic, geopolitical, or technological trends rather than traditional industry sectors or company profiles. Recent research by Oxford Economics found that many banks are applying AI capabilities to banking processes, including accelerating customer onboarding, streamlining back-office operations, amplifying performance analytics, improving the customer experience, and mitigating risk.

Predictive analytics, enhanced with AI-driven insights into fraud exposure and management, can improve fraud detection, increase data transparency, and enable greater regulatory compliance. AI can also eliminate repetitive manual tasks, such as service ticket management, by automatically determining classifications, routing, and responses.

What’s on the horizon for midsize banks

Midsize banks may not be able to compete with the sheer scale of mega-banks or the digital innovation of fintech startups. But with the right skills, data and analytics tools, and careful use of AI, they hope to use their in-depth knowledge of customers and communities to grow through improved decision-making and new, personalized services.

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