Making Small Business Finance Profitable

Peer Stein, Banking Advisory GroupDecember 4, 2002

Key Lessons Learned about Applying New Technologies to SME Finance

Shifting the Productivity Frontier

Lower unit costs per

transaction or service

Broader service offerings & higher asset quality

Productivity Frontier(Future state of Best Practice)

Limitedservices tolimited numberof customersUNPROFITABLE

How?

Generating Growth:

Through profitable marketing strategies

Improving Asset Quality:

Through enhanced risk management

Increasing Operating

Efficiency:

Through technological innovation

Developing successful small business finance operations – A Bottom Up Approach

1. Market Research

2. Products/Services

3. Risk Management / Analytics

4. Delivery Channels

6. Systems / IT

5. Organization

Profitability = (New Business + Client Retention) - Cost

OperatingEfficiency

AssetQuality

Growth

1. Market Research

Assess data sources & reliability– Information and credit reports both for consumers

and for businesses (if possible – cross-referenced)– Default information, if available (by industries,

companies)

Carry out secondary market research– Segmentation (size & industries)– Regional focus and characteristics– Competitive analysis (other sources, products, terms

& conditions)

Conduct primary market research and focus groups– Stage 1: Assessing customer preferences and

profitability potential– Stage 2: Testing specific product/services designs

1. Market Research

2. Products/Services

3. Risk Management / Analytics

4. Delivery Channels

6. Systems / IT

5. Organization

Segmentation capabilities of own clients and market.

2. Product/Services

Maximize client retention and profitability by offering product packages as well as cross- and up-selling.

• Checking accounts

• Savings accounts

• Money market accounts

• Payroll services

• Accounting/tax support

• Insurance

• Information & tools

• Domestic payments

• International payments

• Check processing

• Secured loans

• Unsecured Loans

• Credit Cards

Payments

Savings

Value-added

Credit

1. Market Research

2. Products/Services

3. Risk Management / Analytics

4. Delivery Channels

6. Systems / IT

5. Organization

2. Product/Services – Credit examples#1: Small Business Loan based on Wells

Fargo Model– Processes based on portfolio approach:

standardized loan origination through credit application scoring, rapid response time, low-maintenance account access through electronic & telephone banking

– Average outstanding loan size in the US case: US$15,000

– Target market: Sole proprietorships and very small businesses

– Requires suitable external data availability to build solid scoring systems

1. Market Research

2. Products/Services

3. Risk Management / Analytics

4. Delivery Channels

6. Systems / IT

5. Organization

2. Product/Services – Credit examples#2: Receivables Financing Loan based on

SME Loan– Automated processes yet very client-driven:

standardized loan origination using a combination of application scoring and basic credit review, real-time credit risk management on the basis of an automated monitoring of sales, cash & receivables of the clients

– Average outstanding loan amount in HK case: US$100,000

– Target market: larger small and the lower end of mid-sized companies

– Requires suitable legal framework for security arrangements and basic internet penetration among SMEs

1. Market Research

2. Products/Services

3. Risk Management / Analytics

4. Delivery Channels

6. Systems / IT

5. Organization

3. Risk Management / AnalyticsPre-selection and Marketing

– Review performance by sales and origination channel (e.g. target marketing vs. unsolicited applications)

– Define pre-selection strategies for own clients (cross-selling), clients of clients, and market segments

Underwriting– Review current performance of small business clients

in both retail portfolios and commercial portfolios – Leverage credit scoring experience of consumer

credit underwriting (models, application processing, reporting)

Portfolio Management and Collections– Review current performance of collections– Leverage retail experience in collections (defined

stages, collection scoring, call center)

1. Market Research

2. Products/Services

3. Risk Management / Analytics

4. Delivery Channels

6. Systems / IT

5. Organization

Data capture & management, analytical skills and monitoring.

Importance Attached to Credit Reporting:Survey of Latin American Banks

0

5

10

15

20

25

30

35

Collateral Financial StandingOf The Borrower

Borrower's HistoryWith the Bank

Nu

mb

er o

f F

irm

s

Information from a credit registry is more importantInformation from a credit registry is less important

Value Of Data for SME Lending

HIGHBUSINESSPERSONAL

SIZE OF COMPANY

LOW

SMALL LARGE

VALU

E

4. Delivery Channels

Review delivery channels options– Existing channel mix & utilization– Level of automation

Adapt and develop delivery channels– Keep it simple – 24/7– Branch – Business Bankers/Agents – ATM –

Call center – Electronic Banking– Mobile Banking?

1. Market Research

2. Products/Services

3. Risk Management / Analytics

4. Delivery Channels

6. Systems / IT

5. Organization

Cost efficiency, differentiation in the market and client satisfaction.

5. Organization

Review current organizational set-up– Current market and product focus– Sales / Credit / Collections

Allign organizational requirements– Separate organizational responsibilities for SME

Finance (rather part of retail than of commercial banking)

– Combined factory and sales approach– Centralized processing of credit applications– Clear responsibilities for collections– Clear responsibilities and incentives for deposit

raising and cross-sales (including personal financing needs of the owner)

1. Market Research

2. Products/Services

3. Risk Management / Analytics

4. Delivery Channels

6. Systems / IT

5. Organization

Clear responsibilities and clear processes.

6. IT / Systems

Review current systems– Client-driven vs. product-driven– Reporting and data management capabilities– Delivery channel support

Adapt systems development– Towards Customer Relationship Management

(CRM) capabilities– Towards maximum data availability– Towards multi-channel management

1. Market Research

2. Products/Services

3. Risk Management / Analytics

4. Delivery Channels

6. Systems / IT

5. Organization

Be able to use information – record / report / analyze.