GBRW+SME+Banking+(Key+Principles)

7/27/2019 GBRW+SME+Banking+(Key+Principles)

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2GLOBAL EXPERIENCE, PRACTICAL EXPERTISE

SME BANKING: KEY PRINCIPLES

In most countries Small and Medium Sized

Enterprises (SMEs) represent a substantial

proportion of all economic activity, and

typically account for well in excess of 50 per

cent of total employment. Governments

therefore regard the growth of the SME

segment as essential to the balanced

development of the economy. Likewise banks

and financial institutions compete to capture

a share of this potentially lucrative market.

developing a successful SMEbanking business meansadopting novel approaches toovercome unexpectedchallenges.

However the experience of many banks, both

in developed and emerging markets, is that

developing a successful SME banking business

means adopting novel approaches to

overcome unexpected challenges. We have

assimilated the key challenges into six broad

themes below.

WHY TARGET THE SME

MARKET?

Whilst there are problems to be solved,investment in developing a strong SMEbanking business remains a priority strategyfor most banks for the following reasons.

Large Market Size

In any economy, SMEs account for asignificant proportion of economic activity,employment, and financial transactions. Thepotential profit pool for banks is thereforelarge.

Lower Price-Sensitivity

Compared with larger corporates, SMEs are farless price-sensitive. They tend to be moreconcerned with access to financial services, andare willing to pay a premium for good serviceand the right products, delivered throughconvenient channels.

Strong Customer Loyalty

Once they have been won as customers, SMEsare typically reluctant to move to another bank,

and will provide stable income for many years.This contrasts with the behaviour of largercorporates who are usually multi-banked andwill award transactions to different banksbased on very fine price differentials.

Lucrative Relationships

SMEs are often owned by high-net worthindividuals. Many are also suppliers to largercorporates. By understanding these ownershipstructures and supply chains, and offeringrelated products, banks can indirectlystrengthen their private banking and corporate

businesses.

High Growth Potential

Most large corporations start out as SMEs.Banks that can identify and support goodquality small enterprises may find that thesegrow into substantial corporate customers.

GBRW can help your bank realise the benefitsof investing in developing an SME bankingfranchise, through the extensive practical andconsulting experience of the GBRW teamthroughout the world.

EXISTING ORGANISATION STRUCTURE AND

OPERATING MODEL NOT WELL SUITED TO SME

MARKET

RELATIVELY LOW LOAN SIZE MEANS INTEREST

INCOME ALONE NOT SUFFICIENTLY

PROFITABLE

SME DEFAULT RATES AND LOAN LOSSES TENDTO BE HIGHER THAN CORPORATE CUSTOMERS

MARKET PLANNING INHIBITED BY POOR

QUALITY DATA

RELATIONSHIP MANAGERS AND RISK

MANAGERS UNFAMILIAR WITH CULTURE OF

BANKING SMESFIRST MOVER ADVANTAGE OFFSET BY

UNEXPECTED LOAN LOSSES OR REPLICATIONBY COMPETITORS


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SUCCESS FACTORS FOR

SME BANKING

1. Superior Economic and IndustrySector Analysis: Understand the marketto identify and develop high growth/ highprofitability segments.

2. Market Leadership in ChosenSegments: Carefully define yourcustomer segments and be a leader in yourchosen market rather than trying to winthe whole of the SME segment.

3. Cost Control: Take advantage ofopportunities for standardisation, processre-engineering, and adoption of newtechnology to improve efficiency andreduce costs.

4. Separation of SMEs from Mid-Caps:Mid-Caps differ from true SMEs not just insize but in the appropriate treatmentstrategy. In our view Mid-Caps are almostalways better served within the Corporatebanking segment, rather than diluting thefocus on SMEs.

5. Cross-Selling: Maximise cross-sellopportunities to capture all the fee incomeand liability-side business you can, andalso the lucrative personal business ofdirectors and owners.

6. Credit Scoring and Rating: Adoptcredit risk scoring and rating tools toradically improve the consistency of creditdecisions, enhance portfolio management,improve customer service, and lower thecosts of lending.

7. Cash Flow Analysis: Develop basic cashflow forecasting and analysis skills for bothcustomers and staff, to overcome some ofthe challenges of misleading or missingfinancial statements.

8. Risk-Based Pricing: Improve loan lossforecasting and adopt risk-based pricing atsub-segment or customer level tomaximise portfolio profitability.

9. Business Culture: Keep in mind themajor changes in the business culturerequired to make SME banking a success.Adjust reward and incentivisation,performance management, and trainingand development to assist the transition.

10.Leadership: Make sure the SME businessis sponsored at the most senior level, andthe business has a Board-level profile.

Fig. 1: GBRW Process Flow for Building aSuccessful SME Banking Business

Review and

Analysis

Economic Analysis and

Forecasting

Internal Analysis

Market and Competitor

Analysis

Segmentation Strategy

Portfolio Review

Portfolio Management MIS

Operating and

Distribution

Model

Organisation Structure

Channel Strategy

Risk

Management

Credit Strategy

Policy and Procedure

Development

Credit Risk Scoring and Rating

Tools

Portfolio Management

Approach

Training and Development of

Staff

Strategic

Marketing

Customer Understanding

Product Development


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GBRW APPROACH TO SME

BANKING

GBRW is a leader in working with banksaround the world, and particularly in emergingmarkets. We develop and deliver viable andprofitable SME banking models throughpractical consulting. In a world of imperfectinformation, we have the experience to helpbanks achieve realistic solutions to addressingthe SME market sustainably.

Our clients particularly value our focus onimplementation, rather than just strategydevelopment. GBRW is a consulting firmwhich understands these business challengesand we can assist across a wide range of SMEbanking issues. If you find some of these ideasand approaches useful or interesting, we wouldbe happy to discuss with you the uniquechallenges of your own organisation, and howwe might be able to assist.

MARKET UNDERSTANDING

The SME market is not homogeneous, but

covers a huge variety of different types ofenterprise with widely varying financial needs.Identifying which segments of the market aremost attractive to a bank, and how best toaddress their needs, will help ensure thesuccess of the business. GBRW emphasises thefollowing elements when working with banks:

Economic Analysis and Forecasting

We can undertake macro-economic and

industry sector analysis to help identify thesectors and segments with the best growth andprofit profiles. We assimilate the best high-level economic research and form a view aboutthe trajectory of the economy over the next fiveyears. The data is used to develop industry riskand sensitivity profiles with which toundertake scenario analysis against the SMEportfolio. As well as individual customers,successful SME banking is about strategicexposure to the right areas of the economy.

Internal Analysis

We consider the banks own portfolio. Usingthis more detailed portfolio data will addcolour to the analysis and projections, and helptarget industry sectors and sub-segments withmost attractive risk/reward ratios.

Market and Competitor Analysis

We use available data to estimate the size andcomposition of the broader SME market, andpotential market share metrics. Also, we reviewcompetitor offerings and market positioning.

As well as the potential attractiveness of asegment, we consider where your bank hascompetitive advantage in terms of skills,knowledge, or brand.

PORTFOLIO MANAGEMENT

Underpinning almost all elements of asuccessful approach to SME banking is theconcept of active portfolio management. At itssimplest, this means that management has thenecessary quality and quantity of timelyinformation on the Banks SME customers to

understand how they are performing on anaggregated basis, and to forecast performanceunder different scenarios. More sophisticatedapproaches support even more granular andeffective marketing and risk managementstrategies which can yield excellent financialperformance. Whilst the portfolio managementcapacity will evolve over time, we suggest earlythought is given to some of the fundamentalsincluding:


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Internal Definition of SME Segment

We can advise on the most appropriate

definition of SME customers from the banksperspective, by size of the business, form ofownership, and current relationship. Care willbe needed as branches may be reluctant to losetheir best customers, while the corporatebusiness may be eager to transfer their smallerproblem customers. Although there may be aregulatory or national policy definition ofSMEs, the bank should approach the definitionfrom its own perspective. SMEs are valuablecustomers, not simply a demographic segment.

create your own definitionsfor the SME market they arevalued customers, not just aneconomic demographic

Portfolio Review

GBRW can help you undertake a review of theexisting SME portfolio, by first centralising allthe SME account information. If this provesimpractical an alternative is undertake asampling exercise.

Portfolio Management MIS

We can advise on the how the bank can bestmonitor its sector, client and productprofitability, and to measure performanceagainst budgets and business plans. For thatthe SME Unit is likely to need a customisedManagement Information System (MIS)Because customers will usually be managed bythe branches, it is essential that customer andaccount level data is centrally warehoused.The on-going portfolio and market analysescan be integrated with the MIS to produceProbability of Default measures. Combined

with the calculation of estimated losses onindividual products, this will help drivedecisions on pricing, credit analysis andmarketing.

SEGMENTATION STRATEGY

It is important to select carefully which parts ofthe SME market you wish to target with yourSME banking proposition. GBRW can help youdevelop your segmentation strategy startingfrom the following principles:

Aim for Leadership in Chosen Markets

In our experience, aiming for marketleadership in closely targeted segments isusually more effective than seeking to capturea certain share of the overall SME market.

Identify 20 High Potential Sectors

Identify the most promising 20 businesssectors in terms of growth and/or consistentlystrong profitability e.g. medical, broadcasting,software development, transport, tourism. Alsoconsider in which of those segments the bankmay already have some momentum.

Define Your Customers

It is important for management and sales staffto have a clear understanding of the typicalprofile of your preferred customer, using

criteria such as ownership and managementstructure, size and type, links in the valuechain, and maturity, amongst others. Considerthe use of hypothetical customer profiles and/or case studies to bring this exercise to life.

Consider Geographic and DemographicFactors

Economies can vary markedly from region toregion. Your bank should make decisions aboutwhere its SME business is best concentrated.Try to select at least 10 preferred areas to

develop the SME business in the initial phases.Naturally this should feed into yourdistribution strategy (which may be expandedonce the strategy is shown to be working).

Remember Your Existing Customers

You should be in a position now to clearlydefine and identify your current SME portfolio,which is most likely split between the Retailand Corporate businesses. Give early thoughtto identifying and tracking them, and payattention to the migration strategy.


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DISTRIBUTION CHANNELS AND

OPERATING MODEL

When establishing an SME business unit, thestructure and business model will be quitedifferent to either Retail or Corporate banking.There is no perfect solution but the goal is todevelop and build a model which gives SMEcustomers convenient access to the banksservices, while facilitating the cross-selling of abroad range of products, and ensuring thatrelationship managers are incentivised tomaximise customer profitability. At the sametime it will need to lower costs, ensure effectiverisk management and control, and maintain

expected levels of service to the customer.Whilst this is a complex operational andbusiness challenge, GBRW has found thatadopting the following principles tends toresult in more successful outcomes:

Carefully Position the SME Unit

The positioning of an SME banking businesswithin the organisation chart has often been acause for contention, with competingarguments from Corporate and Retail. Neither

is usually an ideal fit, and most banks withsuccessful SME businesses position themindependently, and ranked equally with othermajor business divisions. And remember thatyou do not have to use the term SME in theunits title; on the contrary, it can makecustomer feel that they are considered lessimportant than their large corporatecounterparts. Use a name which will appeal tocustomers and staff, for example businessbanking, commercial banking, orindependent enterprise.

Consider the use of SME Centres

Often the needs of customers can better besupported by creating designated and separateSME Centres, even if they are located close toexisting branches. These can act as a locus forexpertise and improvement for SME bankingin the area, enhancing the relationship withcustomers whilst also propagating bestpractice.

Enable Electronic Channels

SME owner/managers often work underpressure, and welcome any service thatfacilitates day-to-day financial management

and avoids time-consuming visits to the bank.Owners of young SMEs may themselves also beyoung, and very open to using electronicchannels (internet banking, mobile phonebanking etc.) to meet their core transactionalneeds. It is therefore important to incorporatea range of online services in the overall SMEchannel proposition.

RISK MANAGEMENT

The GBRW team, comprising experiencedformer senior bankers, is exceptionally wellplaced to advise on risk management issues.We are experts in identifying the credit, marketand operational risks inherent in the SMEbusiness and putting in place the appropriateprocesses, controls and mitigations to managethose risks. Our approach emphasises:

Even Balance Sheet Growth

Whilst many SMEs are credit hungry, it isimportant that asset growth is balanced bydeposit growth. Capturing liability-sidebusiness (i.e. current and savings deposit

accounts) and generating an SME portfoliowhich is largely self-funding is a good guidingprinciple.

Risk-Based Pricing

The benefit of good portfolio management andanalysis is the ability to apply risk-basedpricing at segment or even customer level. Thismakes sure that potential loan losses are wellcovered by profits and that good credits areretained through competitive pricing.


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Risk Scoring and Rating Models

These improve the consistency, predictability,

speed, and cost of credit decision-makingthrough the expert use of data and technology.GBRW has expertise in SME scoring and ratingplease contact us for more detailedinformation on our SME Credit Risk Scoringand Rating Tools and Models.

Use of Cash Flow Forecasting andJudgemental Analysis

We understand that good customer financialdata is not always available for SMEs inemerging markets. However, we can help

relationship managers to use simple cash flowforecasting tools, and to apply non-financialanalytical approaches, to reach sound creditdecisions.

Sensible Use of Collateral

Collateral is not an excuse for poor lendingdecisions, but it is a useful tool to manage risk.But over collateralisation can make a bankuncompetitive. We can help reduce thedependency of the lending process on collateralby using credit scoring and rating data to

introduce a sliding scale of requirements.

Policies and Procedures

We help develop standardised credit policiesand procedures for staff, reducing cost,improving efficiency, and enhancing customerservice.

Non-Performing Loans

Any growing SME loan portfolio will includesome problem loans, though if the business isbased on a sound strategy and strong risk

management, these will be within the budgetedparameters. Nevertheless the bank canminimise losses, and maximise potentialreturns, by quickly identifying customers whoare experiencing difficulty and dealing withthem through a well-structured process. Thiscould include remedial measures, recovery, orwrite-off, depending on the position of thecustomer.

MARKETING STRATEGY

GBRW has experience in developing marketingstrategies for the Corporate, SME, and Retailsegments. A marketing strategy for SMEs inparticular, might need to consider some or allof the following elements:

Branding

The SME business may need its own image andbrand in order to differentiate its approach andwhat it does from the rest of the bank. It willalso make SME customers feel that they are

dealing with specialists who understand theirparticular needs.

Differentiating the Offer

The bank will also need to differentiate its SMEoffering from those of its competitors. Themost successful banks achieve that throughtheir product and service range, their sub-segment focus, their marketing, and theirdelivery and branding. Price also has to becompetitive, but concentrating on pricecompetition is not a viable long-term strategy.

Watching the Competition

Whilst innovation and differentiation paydividends, it is also essential to monitor marketdevelopments and what the competition isdoing. There is nothing wrong with replicatinga competitors product or approach if they areworking successfully and can benefit yourfranchise.


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Sales Approach

A different sales approach will be required bybusiness developers and relationship managersto make the most of SME customers. You willneed to develop appropriate marketing toolsand distribution methods, and train front-linestaff to identify customers product needs andwin their business using consultative sellingtechniques.

Value Chains

The banks major corporate relationships canbe used as a means of identifying goodcustomers in their supply chain. Products can

be developed which deepen theserelationships, such as supply chain finance(receivables and stock financing). Both yourSME and corporate customers can benefit froman enhanced cash-flow whilst the risk profile ofthe credit is improved.

Family Banking

Many SMEs are family-owned businesses, andare also often part of a larger network ofindividuals and enterprises linked by strongfamily and community bonds. To maximise the

banks business potential requires a well-coordinated approach between the SME andRetail banking businesses, e.g. to attract high-net worth personal accounts, or investmentbusiness.

keeping relationshipmanagers on the road andvisiting clients in their ownpremises is a key factor in goodsales as well as effective risk

management.

CUSTOMER UNDERSTANDING

Customer understanding is much more thanjust asking what your customer wants. Morethan likely they will tell you they simply wantmore credit at lower cost, which is usuallyunacceptable to the bank! Good customerunderstanding, however, gives the bank anadvantage in negotiating a favourablecompromise with the customer that isultimately mutually beneficial. The GBRWapproach emphasises:

Focus Groups

For a variety of reasons, formal surveys ofSMEs can be a disappointing in the quality orusefulness of information that they provide.Focus groups of SME customers are anextremely valuable, and relatively cheap,source of qualitative information onpurchasing preferences, values, and behaviour.

Benchmarking the Competition

Valuable ideas can be generated, andimportant lessons learned, by encouragingcomparisons with the competition. Send yourstaff on a discreet mystery shopping exercise to

see for themselves what the competition isdoing well, and in what areas you have theadvantage.

Staff Insights

Front-line staff, who are dealing withcustomers and with the banks products andprocesses all the time, can have great insightinto customer needs and how the banksservice delivery can be improved. Encourageyour product development, marketing, andsales teams to suggest new ideas, and

remember to also look at regional andinternational banks for inspiration.

Maximising Share of Wallet

Unlike large Corporates, SMEs show greaterloyalty to banks that support them. We believethat providing an SME with credit entitles youto EXPECT that customer to use you as a solefinancial services provider provided you offeradequate products and levels of service.Remember that profitable SME banking meansaiming for 100% of a customers share of

wallet.


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Service as well as Products

The overall customer experience encompasses

products, service quality, channel and price.The bank can use its knowledge of customerpreferences to guide customers towards morecost-effective solutions (e.g. internet banking,mobile banking, deposit/cash points). The staffresources freed from the branches can then bedirected towards the sales force. Keepingrelationship managers on the road andvisiting clients at their own premises is a keyfactor in effective selling as well as good riskmanagement.

Enterprise Development Services

Most SMEs do not have enough practicalbusiness support, and many fail needlessly.Many countries have schemes and institutionsproviding non-financial assistance to SMEs ona commercial basis or often free of chargebasis. These enterprise development servicestypically include strategic or financialplanning advice, legal, regulatory, and taxadvice, and consulting and training across awide range of skills. Banks can add value totheir SME customers by linking up withexisting Enterprise Development Services, or

can even consider offering them directlythrough the bank.

PRODUCT DEVELOPMENT

Good product development means masteringthe art of keeping costs down whilstsimultaneously meeting the full financialservices needs of customers in a way thatmakes them feel valued. Through our extensiveexperience in customer and productdevelopment consulting for the SME market,GBRW can offer support in the following areas:

Product Range

Banks can boost the profitability of SMEcustomers by having a range of products whichtruly responds to customer needs, includingliability-side, cash management, trade finance,and shorter-term secured asset finance. SMEscan markedly improve profit retention andcapitalisation through a well-structured cashflow solution, which is ideal for both thecustomer and their bankers.

promote value chain and tradefinance products, and shorter-

term secured asset finance, toimprove cash-flow

Customer Segment Solutions

One way of quickly and efficiently gaining salesmomentum in a desirable segment is throughcustomer offers (products and productbundles, delivery mechanisms, pricing modeletc.) tailored to the requirements andpreferences of the identified target sub-segments. This makes customers feel that thebank is providing them with a solution that

matches their exact needs, not just a genericSME proposition.

Product Development Process

Getting new and innovative products on themarket quickly and effectively is a corecompetence of any successful bank. Banksneed to review regularly the existing productportfolio, design and launch new products tofill the gaps, and also put in placemethodologies to design, test and launchproducts, profitably and with a minimum of

risk.

CONTACT DETAILS

To discuss your banks needs in more detail, orto find out more, please contact one of theGBRW team.

Paul Rex, Managing Director

[email protected]

Jeremy Denton-Clark, Director

[email protected]

Johnny Rizq, Director

[email protected]

Michael Coates, Director

[email protected]

GBRW Ltd, 27 Throgmorton Street, LondonEC2N 1AQ, United Kingdom

Phone: +44 (0)20 7382 9900

GBRW+SME+Banking+(Key+Principles)

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