How to Make SME Segment Profitable

8/19/2019 How to Make SME Segment Profitable

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How to make the SME Segment Profitable for Commercial Banks

Greg Rung

May 2005


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Opening Remarks

• Talented speakers…

• … have alread said a lot

• This proves the !"alit of the conference…

• … and shows a common vision# ie need for economies of scale


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SME Banking Framework:Shifting the ProductivityFrontier

Broader service offerings & higher asset quality

Lower unit

costs pertransactionor service

Productivity Frontier Productivity Frontier (Future state of Best Practice)

Limitedservices tolimited numberof customersUNPROFITABLE

How?

GeneratingGrowth:

Through profitablemarketing strategies

Improing !sset"ualit#:

Through enhance$risk management

Increasing%perating

&fficienc#:

Throughtechnologicalinnoation

'hat are banks tr#ing to $o?


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Scope

Taken out of this presentation ut important:

• $ight environment is needed% credit b"rea"s# appropriate ta&sstems

• 'easing is definitel part of SME banking

• Elements on program lending# scoring…

!hat is "eft#

• Holistic• Hbrid

• Pro(ect)change management

• E&ec"tion


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$ey messages %Presentation Out"ine

• SME banking# altho"gh diffic"lt# can be highl profitable

• *ifferences across markets tend to disappear with theglobali+ation of the financial services ind"str,

• -n practice# it means that targeting SMEs impacts the entireval"e chain

• Based on this# several tpes of strategies can emerge

• -mplementation is critical


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SME Banking &an Be 'igh"yProfita"e

-n the .S# the SME segment generates higher ret"rns

ROE

Market Si(e

)nsurance&onsumer&redit

&redit&ards

Mortgages

SMEBanking


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-n a n"mber of Emerging Markets# some banks also generate high

ret"rns in the SME segment

E*amp"e of a ank in South East +sia

SME Banking &an Be 'igh"yProfita"e ,&ontd-


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.ifferences across markets/

0eading who"esa"e anks in1S and Europe

Main European Banks

and some others

Most other anks

Credit portfolio is%/Managed activel0e&% secondar marketactivities1

/Managed like a profitcenter

/'inked to overallbalance sheetmanagement

/Credit assessment donein a 2traditional3 wa,Man processes remain

length and costl

/4o sstematic rating#implementation of$5$6C concepts norlink between creditworthiness and pricing

/Credit rating is "sed forke b"siness decisions0pricing# capital allocation1

/Credit portfolio e&pos"re#risk and profitabilit aremeas"red

/Some processes oftenremain length and costl


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/ Tend to .isappear with the2"oa"i(ation of the Financia"Services )ndustry

/ 7rowingcompetition

/ 6pport"nit tocharge higher

interests andtransactionfees to SMEs

/ 4eed todiversifportfolio to

lower overallrisk

/ -nformationtechnologieslowering costs

Banks havean incentiveto tap newmarkets % 1nder3

servedMarket

&urrent&"ients

SMEs4

Microenter3prises 5Mass3market

0arge&osand

6+7 &"ients


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)n Practice4 Targeting SMEs )mpactsthe Entire 8a"ue &hain

Marketing

strateg

Prod"ctsandservicesofferings

$iskmanagement

*eliverchannels

6rgani+ation

-T ) Sstems


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9 Marketing Strategy

• -n addition to cond"cting competitive analsis 0on prod"cts# terms 8conditions9 from other co"ntries1#…

• … segment the market and b"ild "p in/depth knowledge of SMEcl"sters# especiall thro"gh third/part data providers

• :ind was of retaining e&isting credit/worth c"stomers…

• … 8 red"cing cost of ac!"isition of new targeted c"stomers

• Manage information transversall 0e,g,# get# compile and anal+edefa"lt information# if available b ind"stries 8 companies1


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; Products 5 Services Offerings

aimi*e client retention an$ profitabilit# b# offeringpro$uct packages as well as cross+ an$ up+selling

,omestic pa#ments International pa#ments -heck processing

Pa#ments

-hecking accounts .aings accounts one# market accounts

Insurance Brokerage Information / tools

0oans Guarantees -re$it -ar$s %er$rafts

,eposits

1alue+a$$e$

-re$it


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U.S. Small Business Profit Distribution

,eposits70-85%

0oans

10-15%

!ll %thers

5%

.mall Business

Profitabilit#

100%

Focus on $eposits een if len$ing is necessar#

; Products 5 ServicesOfferings ,&ontd-

Source: FIC


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Contribution

N u m b e r o f p r

o d u c t s

Source: Oxor! Inor"ation #echnolog$ &t!'

The more pro$ucts sol$; the greater the profit contribution

; Products 5 ServicesOfferings ,&ontd-


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Efciency Gains with Credit Scoring

EnterData

GenerateScore

ApplyDecisionStrategy

Auto decline Auto accepteview

!ighris"

#ediumris"

Lowris"


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= .e"ivery &hanne"s

• 7oals% cost efficienc# differentiation in the market and clientsatisfaction, :or that%

• $eview e&isting deliver channel mi& 8 "tili+ation…

• … as well as c"rrent and potential level of a"tomation

• :oc"s the branch network on marketing# sales and clientrelationships

• *esign m"lti/channel networks mi&ing branches ; b"sinessbankers)agents ; 5TMs ; mobile kiosks ; call centers ;electronic banking ; smart cards ; mobile banking


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Prospecting( Bu#er

I$entification

( Bu#er.olicitation

InformationProision

( Features

( Pricing

( .election

( !ailabilit#

!$ice an$-onsultation

( !ggregaties

( %ptional-ategori*atioin

( !lternaties

%r$er-apture

( .pecifications

( Feature

( &ntr#

%r$erProcessing

( TransactionProcessing

( Billing

-ustomer.upport

( -omplaintHan$ling

( !ccount3econciliation

-hannel &fficienc# (-apacit# to -ost 3atio)

High 0ow

-hannel

,irectail

Phone

-enter

13<

Branch

%nline

Pre+.ale .ale Post+.ale

Source: )usiness )an*ing )oar! +esearch

= .e"ivery &hanne"s ,&ontd-


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)n emerging markets4 persona" contact is critica""yimportant/


Source: FIC

Banco Solidario 0Ec"ador1# reaches of its c"stomersthro"gh bankers in the field ; similar sit"ation for Bank

*agang Bali 0-ndonesia1 which has ver few branches

?s

Bank B$- 0-ndonesia1 received an award from the

Indonesian Museum of Records for establishing


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=as is wor$ of mouth

( ,5 % o )anco Soli!arios ne. custo"ers are

reerre! /$ existing custo"ers

( t )an* )+I a senior "anager states “All new

customers are referrals. Good [loan customers

ne!er "ust wal# into t$e ban#%


Source: FIC


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? )T % Systems

• 5s for the organi+ation# client/driven vs, prod"ct/driven

• *evelop efficient integrated information sstems bleveraging appropriate technologies…

• … towards C"stomer $elationship Management 0C$M1capabilities…

• … and m"lti/channel management


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Focus of the strategy $ey componentsRisk management / .se sophisticated credit scoring models

/ B"ild informal networks to gather asmetricinformation on potential borrowers

/ *evelop deep "nderstanding of ind"strial sectors

Margin management / .se of technolog to red"ce deliver and servicecosts

/ $edesign organi+ation str"ct"re to manageoperational costs

Superior va"ue / 7ain in/depth "nderstanding of c"stomer needs andbehavioral drivers to develop and deliverdifferentiated val"e proposition

Based on This4 Severa" Types ofStrategies can Emerge

proposition


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&onc"usions

• SME banking is hbrid

• -t generall involves a specific strateg and a total redesignof the val"e chain

• "alit of e&ec"tion is ke


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E*amp"e of Pro@ect

Modu"e 9 : Standardi(ation of Product Offering

Elaboration

d’une gamme de

produits cible

Collecte

des contrats

Analyse de performance

Benchmarking

Plan

d’implémentation

Elaboration

d’une gamme de

produits cible

Collecte

des contrats


Benchmarking

Plan

d’implémentation

*efine arevisedprod"ctoffering

7et infor/mation one&istingprod"cts

5nal+e performance

Benchmarking

-mplementation


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E*amp"e of Pro@ect ,&ontd-

Modu"e ; : )mprovement of 0oan +ppraisa"Process and Scoring

.atawarehousing

+na"ysis ofcurrentsituation

•*ata available•Scoring tools inplace

•'oan appraisal

forms•Methodologies)processes

:ind data andfollow/"p

Scoringtoo" *evelopment of

scoring tools

•Back/testing•*efinition of newproced"res

•Comm"nication•Training•:ollow/"p

*efine missing data


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E*amp"e of Pro@ect ,&ontd-

Modu"e < : )mprovement of &o""ections

Elaboration

d’une gamme de

produits cible


Benchmarking

Elaboration

d’une gamme de

produits cible


Benchmarking

•-dentif !"ick wins•-mprove processes•Set/"p a call center•Training

5nalsis of the portfolio

5nalsis of the processes


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Possi"e Ae*t Step if)nterest: .iagnostic

2ather data on

– C"stomer segmentation – Sales organi+ation – C$M – $isk/based pricing

– Centrali+ation of credit/approval – 5cc"rac of $isk $eporting – Efficienc of Collections

– Processes streamlining – Scoring)$ating tools – Branch as a distrib"tion

channel – 6rgani+ation of back/office

– Prod"ct mi& and impact onf"nds

– 7overnance)*isclos"re – Treas"r Management ) 5'M

– :ee vs, interest income ratio – Profitabilit b c"stomer segments

– Portfolio/at/$isk – > loans with earl defa"lts – > 4on Performing 'oans – $atios on Collections Efficienc – $atios on Provisions and Frite/offs

– 6verhead)4et -ncome – Staff prod"ctivit – Branch prod"ctivit

– $atio loans)deposits – $atio interest bearing ) noninterest bearing deposits

– 5'M ke ratios

Costof:"nds

6ver/headCosts

Costof $isks

7rossMargin

&a"cu"ate key indicators1nderstandprofitai"ity drivers

– :orm"latea diagnosticon c"rrentsit"ationand was ofimprovingnet margin

– *raft a

proposal


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&ontact .etai"s

2reg RungEmai": grungifcorg

mailto:[email protected]:[email protected]


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o"t


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SME Banking )s .ifficu"t/

SME market knowledge is diffic"lt to ac!"ire; 6+ &orporate7 market composed of a few hundreds of "arge we""3

known companies4

vs

; + mass market composed of hundreds of thousands of SMEs indifferent )ndustry Sectors and 2eographic areas

SME $isk is diffic"lt to manage for traditional banks; Financia" information on the usiness is scarce and often non

re"ia"e

; SMEs are often under3capita"i(ed

; SMEs are often una"e to provide adeCuate co""atera"s

; SMEs "ack Financia" Management cu"ture

SME banking has high cost/to/serve; One &orporate transaction can generate the same Aet Banking

)ncome as >D SME transactions/

; / But is not much cost"ier to the Bank than 9 SME transaction

) & i i h h


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/ )n &ountries with the+deCuate Environment

Banking $eg"lations

G"dicial Sstem

; Shou"d enforce creditor rights; Shou"d a""ow Cuick and efficient dispute reso"ution

Pament Sstems; To improve productivity

; To deve"op va"ueadded products with good service Cua"ity

Comm"nications# -nfrastr"ct"re; Easy contact with customers and ranches across country

Credit -nformation; &redit3)nformation Sharing


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Example o a Simple Scorecard

$ %

'(

G) '**+***

,-

.es

/ 0*

.earsin Business

)otal Assets

1egative

2ile 3nformation

% / $ ,%

,*

L) 4'**+***

'5

1o

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,% / $

,-

1 3

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1o 3nvestigation

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/ $ 5

06

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5 / $ '

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Single'6

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'6

7wn

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$ '

'5

8rof% Services

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!eavy #anuf%

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#aritalStatus

9 ofDependents

esidentialStatus

.ears atAddress

3ndustry

3ndustry : continued

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ent

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etail

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6* / $ *

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< '== 2air+ 3saac and ;o+ 3nc%


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Evaluating the Credit Applicant

; ! A A ; ) E 3 S ) 3 ; > ? D G # E 1 ) ; E D 3 ) S ; 7 3 1 G

@/@/@//@@

,('6

,

'5

,

,*

,*

,-

'

Age#arital status

9 of dependents

esidential status

)ime at address

3ndustry

)ime in Business

)otal Assets

1egative file information

7DDS 72 E8A.#E1) =

7CEALL

Decision

@Accept

'=*

Accept

Documents

How to Make SME Segment Profitable