How to Make SME Segment Profitable
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Transcript of 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$ling
( !ccount3econciliation
-hannel &fficienc# (-apacit# to -ost 3atio)
High 0ow
-hannel
,irectail
Phone
-enter
13<
Branch
%nline
Pre+.ale .ale Post+.ale
Source: )usiness )an*ing )oar! +esearch
= .e"ivery &hanne"s ,&ontd-
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)n emerging markets4 persona" contact is critica""yimportant/
= .e"ivery &hanne"s ,&ontd-
Source: FIC
Banco Solidario 0Ec"ador1# reaches of its c"stomersthro"gh bankers in the field ; similar sit"ation for Bank
*agang Bali 0-ndonesia1 which has ver few branches
?s
Bank B$- 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#%
= .e"ivery &hanne"s ,&ontd-
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
/ $edesign organi+ation str"ct"re to manageoperational costs
Superior va"ue / 7ain in/depth "nderstanding of c"stomer needs andbehavioral drivers to develop and deliverdifferentiated val"e proposition
Based on This4 Severa" Types ofStrategies can Emerge
proposition
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&onc"usions
• SME banking is hbrid
• -t generall involves a specific strateg and a total redesignof the val"e chain
• "alit of e&ec"tion is ke
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E*amp"e of Pro@ect
Modu"e 9 : Standardi(ation of Product Offering
Elaboration
d’une gamme de
produits cible
Collecte
des contrats
Analyse de performance
Benchmarking
Plan
d’implémentation
Elaboration
d’une gamme de
produits cible
Collecte
des contrats
Analyse de performance
Benchmarking
Plan
d’implémentation
*efine arevisedprod"ctoffering
7et infor/mation one&istingprod"cts
5nal+e performance
Benchmarking
-mplementation
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E*amp"e of Pro@ect ,&ontd-
Modu"e ; : )mprovement of 0oan +ppraisa"Process and Scoring
.atawarehousing
+na"ysis ofcurrentsituation
•*ata available•Scoring tools inplace
•'oan appraisal
forms•Methodologies)processes
:ind data andfollow/"p
Scoringtoo" *evelopment of
scoring tools
•Back/testing•*efinition of newproced"res
•Comm"nication•Training•:ollow/"p
*efine missing data
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E*amp"e of Pro@ect ,&ontd-
Modu"e < : )mprovement of &o""ections
Elaboration
d’une gamme de
produits cible
Analyse de performance
Benchmarking
Elaboration
d’une gamme de
produits cible
Analyse de performance
Benchmarking
•-dentif !"ick wins•-mprove processes•Set/"p a call center•Training
5nalsis of the portfolio
5nalsis of the processes
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Possi"e Ae*t Step if)nterest: .iagnostic
2ather data on
– C"stomer segmentation – Sales organi+ation – C$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
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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
'
,% / $
,-
1 3
'*
1o 3nvestigation
*
/ $ 5
06
1 3
*
5 / $ '
05
Single'6
*
'6
7wn
6*
$ '
'5
8rof% Services
05
!eavy #anuf%
5
#aritalStatus
9 ofDependents
esidentialStatus
.ears atAddress
3ndustry
3ndustry : continued
#arried0*
'
'6
ent
'
' / $ 0
,*
3%)%
0
7thers
,-
Divorced
,
,
8arents
,*
0 / $ (
,
7ther Services
0*
1 3
,-
7ther'6
13'6
0 / 6
'*
;ompany
'5
( / $ '*
0*
etail
,-
6 / !igh
1 3
,*
'* / $ '
00
;atering%
,*
' / !igh
6*
1 3
'6
'5 / $ ,'
(
,' / $ ,
'*
, / $ 0*
'5
0* / $ 6*
,(Age of 7wner
6* / $ *
0
* / !igh
6,
1 3
'*
1 3
,
Building
'*
1 3
,*
< '== 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