how to make sme segment profitable com
TRANSCRIPT
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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 already said a lot
This proves the quality 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
Lowerunit costs
per
transactionor
service
Productivity FrontierProductivity Frontier(Future state of Best Practice)
Limitedservices tolimitednumberofcustomersUNPROFITA
BLE
How?
GeneratingGrowth:
Through profitablemarketing strategies
Improving AssetQuality:
Through enhancedrisk management
Increasing
OperatingEfficiency:
Throughtechnologicalinnovation
What are banks trying to do?
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Scope
Taken out of this presentation but important:
Right environment is needed: credit bureaus, appropriate taxsystems
Leasing is definitely part of SME banking
Elements on program lending, scoring
What is left?
Holistic
Hybrid
Project/change management
Execution
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Key messages /Presentation Outline
SME banking, although difficult, can be highly profitable
Differences across markets tend to disappear with the globalizationof the financial services industry.
In practice, it means that targeting SMEs impacts the entire valuechain
Based on this, several types of strategies can emerge
Implementation is critical
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SME Banking Can Be HighlyProfitable
In the US, the SME segment generates higher returns
ROE
MarketSize
InsuranceConsumerCredit
CreditCards
Mortgages
SMEBanking
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n a number of Emerging Markets, some banks also generate high
eturns in the SME segment
xample of a bank in South East Asia
SME Banking Can Be HighlyProfitable (Contd)
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Differences across markets
Leading wholesale banks inUS and Europe
Main European Banks
and some others
Most other banks
Credit portfolio is:-Managed actively(ex: secondary marketactivities)
-Managed like a profitcenter
-Linked to overallbalance sheetmanagement
-Credit assessment donein a traditional way.Many processes remain
lengthy and costly
-No systematic rating,implementation ofRAROC concepts norlink between creditworthiness and pricing
-Credit rating is used forkey business decisions(pricing, capital allocation)
-Credit portfolio exposure,risk and profitability aremeasured
-Some processes oftenremain lengthy and costly
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Tend to Disappear with theGlobalization of the FinancialServices Industry
- Growingcompetition
- Opportunity tocharge higher
interests andtransactionfees to SMEs
- Need todiversifyportfolio to
lower overallrisk
- Informationtechnologieslowering costs
Banks havean incentiveto tap newmarkets : Under-
servedMarket
CurrentClients
SMEs,
Microenter-prises &Mass-market
LargeCosand
A Clients
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In Practice, Targeting SMEs Impactsthe Entire Value Chain
Marketing
strategy
Productsandservicesofferings
Riskmanagement
Deliverychannels
Organization
IT / Systems
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1. Marketing Strategy
In addition to conducting competitive analysis (on products, terms &conditions; from other countries),
segment the market and build up in-depth knowledge of SME clusters,especially through third-party data providers
Find ways of retaining existing credit-worthy customers
& reducing cost of acquisition of new targeted customers
Manage information transversally (e.g., get, compile and analyze defaultinformation, if available by industries & companies)
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2. Products & Services Offerings
Maximize client retention and profitability by offeringproduct packages as well as cross- and up-selling
Domestic payments International payments Check processing
Payments
Checking accounts Savings accounts Money market accounts
Insurance Brokerage Information & tools
Loans
Guarantees Credit Cards Overdrafts
Deposits
Value-added
Credit
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U.S. Small Business Profit Distribution
Deposits70-85%
Loans
10-15%
All Others
5%
Small Business
Profitability
100%
Focus on deposits even if lending is necessary
2. Products & ServicesOfferings (Contd)
Source: FIC
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The deposit/loan ratio largely determines smallbusiness ROE
1:1 2:1 3:1 4:1 5:1
40%
20%
0%
Small Business Profitability
Bank A
Bank B
Bank C
Source: First Manhattan Consulting Group
Deposit-to-loan ratio
Smallbu
sinessu
nitR
OE
2. Products & ServicesOfferings (Contd)
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Contribution
Numberofpr
odu
cts
$51,462
$54,343
$11,432
$10,871
$12,702
$7,149
$1,641
$477
$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000
Eight
Seven
Six
Five
Four
Three
Two
One
Source: Oxford Information Technology, Ltd.
The more products sold, the greater the profit contribution
2. Products & ServicesOfferings (Contd)
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Efficiency Gains with Credit Scoring
EnterData
GenerateScore
ApplyDecisionStrategy
Auto decline Auto acceptReview
Highrisk
Mediumrisk
Lowrisk
3. Risk Management / Analytics
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4. Delivery Channels
Goals: cost efficiency, differentiation in the market and clientsatisfaction. For that:
Review existing delivery channel mix & utilization
as well as current and potential level of automation
Focus the branch network on marketing, sales and client relationships
Design multi-channel networks mixing branches businessbankers/agents ATMs mobile kiosks call centers electronicbanking smart cards mobile banking
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Prospecting
BuyerIdentification
BuyerSolicitation
InformationProvision
Features
Pricing
Selection
Availability
Advice andConsultation
Aggregatives
OptionalCategorizatioin
Alternatives
OrderCapture
Specifications
Feature
Entry
OrderProcessing
TransactionProcessing
Billing
CustomerSupport
ComplaintHandling
AccountReconciliation
Channel Efficiency (Capacity to Cost Ratio)
High Low
Channel
DirectMail
Phone
Center
VRU
Branch
Online
Pre-Sale Sale Post-Sale
Source: Business Banking Board Research
4. Delivery Channels (Contd)
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In emerging markets, personal contact is criticallyimportant
4. Delivery Channels (Contd)
Source: FIC
Banco Solidario (Ecuador), reaches 45% of its customersthrough bankers in the field similar situation for Bank
Dagang Bali (Indonesia) which has very few branches
Vs
Bank BRI (Indonesia) received an award from the
Indonesian Museum of Records for establishing 4,658branches throughout the country (92% of Bank BRIsportfolio is microloans)
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as is word of mouth
45 % of Banco Solidarios new customers are
referred by existing customers
At Bank BRI, a senior manager states, All new
customers are referrals. Good [loan] customers
never just walk into the bank
4. Delivery Channels (Contd)
Source: FIC
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5. Organization
Align organizational requirements
Separate organizational responsibilities for SME Finance(part of retail rather than corporate banking)
Market versus product focus
Clarify responsibilities for sales vs. credit vs. collections
Clear responsibilities and incentives for deposit raising andcross-sales (including personal financing needs of theowner)
Centralized processing of credit applications
Clear processes for collections
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6. IT / Systems
As for the organization, client-driven vs. product-driven
Develop efficient integrated information systems by leveragingappropriate technologies
towards Customer Relationship Management (CRM) capabilities
and multi-channel management
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Focus of the strategy Key componentsRisk management - Use sophisticated credit scoring models
- Build informal networks to gather asymetricinformation on potential borrowers
- Develop deep understanding of industrial sectors
Margin management - Use of technology to reduce delivery and servicecosts
- Redesign organization structure to manageoperational costs
Superior value - Gain in-depth understanding of customer needs andbehavioral drivers to develop and deliverdifferentiated value proposition
Based on This, Several Types ofStrategies can Emerge
proposition
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Conclusions
SME banking is hybrid
It generally involves a specific strategy and a total redesignof the value chain
Quality of execution is key
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Example of Project
Module 1 : Standardization of Product Offering
Elaboration
dune gamme de
produits cible
Collecte
des contrats
Analyse de performance
Benchmarking
Plan
dimplmentation
Elaboration
dune gamme de
produits cible
Collecte
des contrats
Analyse de performance
Benchmarking
Plan
dimplmentation
Define arevisedproductoffering
Get infor-mation onexistingproducts
Analyze performance
Benchmarking
Implementation
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Example of Project (Contd)
Module 2 : Improvement of Loan AppraisalProcess and Scoring
Datawarehousing
Analysis ofcurrentsituation
Data availableScoring tools inplace
Loan appraisal
formsMethodologies/processes
Find data andfollow-up
Scoringtool Development of
scoring tools
Back-testingDefinition of newprocedures
CommunicationTrainingFollow-up
Define missing data
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Example of Project (Contd)
Module 3 : Improvement of Collections
Elaboration
dune gamme de
produits cible
Analyse de performance
Benchmarking
Elaboration
dune gamme de
produits cible
Analyse de performance
Benchmarking
Identify quick winsImprove processesSet-up a call centerTraining
Analysis of the portfolio
Analysis of the processes
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Possible Next Step ifInterest: Diagnostic
Gather data on
Customer segmentationSales organizationCRMRisk-based pricing
Centralization of credit-approvalAccuracy of Risk ReportingEfficiency of Collections
Processes streamliningScoring/Rating toolsBranch as a distribution
channelOrganization of back-office
Product mix and impact onfunds
Governance/DisclosureTreasury Management / ALM
Fee vs. interest income ratioProfitability by customer segments
Portfolio-at-Risk% loans with early defaults% Non Performing LoansRatios on Collections EfficiencyRatios on Provisions and Write-offs
Overhead/Net IncomeStaff productivityBranch productivity
Ratio loans/depositsRatio interest bearing / noninterest bearing deposits
ALM key ratios
CostofFunds
Over-headCosts
Costof Risks
GrossMargin
Calculate key indicatorsUnderstandprofitability drivers
Formulatea diagnosticon currentsituationand ways ofimprovingnet margin
Draft a
proposal
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Contact Details
Greg RungEmail: [email protected]
mailto:[email protected]:[email protected] -
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out
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SME Banking Is Difficult
SME market knowledge is difficult to acquire A Corporate market composed of a few hundreds of large well-
known companies,
vs.
A mass market composed of hundreds of thousands of SMEs indifferent Industry Sectors and Geographic areas
SME Risk is difficult to manage for traditional banks Financial information on the business is scarce and often non reliable
SMEs are often under-capitalized
SMEs are often unable to provide adequate collaterals
SMEs lack Financial Management culture
SME banking has high cost-to-serve One Corporate transaction can generate the same Net Banking Income
as 50 SME transactions
But is not much costlier to the Bank than 1 SME transaction
I C i i h h
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In Countries with theAdequate Environment
Banking Regulations
Judicial System
Should enforce creditor rights Should allow quick and efficient dispute resolution
Payment Systems To improve productivity
To develop valueadded products with good service quality
Communications, Infrastructure Easy contact with customers and branches across country
Credit Information Credit-Information Sharing
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3. Risk Management / Analytics
Use of advanced, cost effective tools & processes forcomprehensive risk management
from data capture & management to data analysis andmonitoring...
by possibly leveraging information derived from historicalperformance of SME clients
and scoring experience of consumer credit underwriting(models, application processing, reporting)
This supposes good coordination between portfolio managementand collections departments, in particular
3 Risk Management / Analytics (Contd)
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Example of a Simple Scorecard
< .5
16
GT 100,000
27
Yes
30
Yearsin Business
Total Assets
NegativeFile Information
.5 < 2.5
20
LT $100,000
18
No
15
2.5 < 5
27
N I
10
No Investigation
0
5 < 8
34
N I
0
8 < 15
38
Single14
0
14
Own
40
< 1
18
Prof. Services
38
Heavy Manuf.
8
MaritalStatus
# ofDependents
ResidentialStatus
Years atAddress
Industry
ndustry - continued
Married30
1
14
Rent
15
1 < 3
20
I.T.
35
Others
27
Divorced5
2
25
Parents
20
3 < 6
25
Other Services
30
N I
27
Other14
NI14
3 4
10
Company
18
6 < 10
30
Retail
27
4 High
5
N I
20
10 < 15
33
Catering.
20
15 High
40
N I
14
18 < 21
6
21 < 25
10
25 < 30
18
30 < 40
26Age of Owner
40 < 50
35
50 High
42
N I
10
N I
25
Building
10
N I
20
1995 Fair, Isaac and
3. Risk Management / Analytics (Contd)
3 Risk Management / Analytics (Contd)
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Evaluating the Credit Applicant
C H A R A C T E R I S T I C J U D G M E N T C R E D I T S C O R I N
+++++
2614
25
18
25
20
20
27
15
gearital status
of dependents
esidential status
ime at address
dustry
ime in Business
otal Assets
egative file information
?ODDS OFREPAYMENT 95%
OVERALLDecision
+Accept
190Accept
3. Risk Management / Analytics (Contd)