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GBRW SME Banking (Key Principles)
GBRW SME Banking (Key Principles)
developing a successful SME banking business means adopting novel approaches to overcome unexpected challenges.
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. MARKET PLANNING INHIBITED BY POOR QUALITY DATA EXISTING ORGANISATION STRUCTURE AND OPERATING MODEL NOT WELL SUITED TO SME MARKET SME DEFAULT RATES AND LOAN LOSSES TEND TO BE HIGHER THAN CORPORATE CUSTOMERS
Fig. 1: GBRW Process Flow for Building a Successful SME Banking Business Economic Analysis and Forecasting Internal Analysis Market and Competitor Analysis Segmentation Strategy Portfolio Review Portfolio Management MIS
Risk Management
Credit Strategy Policy and Procedure Development Credit Risk Scoring and Rating Tools Portfolio Management Approach Training and Development of Staff
Strategic Marketing
PORTFOLIO MANAGEMENT
Underpinning almost all elements of a successful approach to SME banking is the concept of active portfolio management. At its simplest, this means that management has the necessary quality and quantity of timely information on the Banks SME customers to understand how they are performing on an aggregated basis, and to forecast performance under different scenarios. More sophisticated approaches support even more granular and effective marketing and risk management strategies which can yield excellent financial performance. Whilst the portfolio management capacity will evolve over time, we suggest early thought is given to some of the fundamentals including:
MARKET UNDERSTANDING
The SME market is not homogeneous, but covers a huge variety of different types of enterprise with widely varying financial needs. Identifying which segments of the market are most attractive to a bank, and how best to address their needs, will help ensure the success of the business. GBRW emphasises the following elements when working with banks:
SEGMENTATION STRATEGY
It is important to select carefully which parts of the SME market you wish to target with your SME banking proposition. GBRW can help you develop your segmentation strategy starting from the following principles: Aim for Leadership in Chosen Markets In our experience, aiming for market leadership in closely targeted segments is usually more effective than seeking to capture a certain share of the overall SME market. Identify 20 High Potential Sectors Identify the most promising 20 business sectors in terms of growth and/or consistently strong profitability e.g. medical, broadcasting, software development, transport, tourism. Also consider in which of those segments the bank may already have some momentum. Define Your Customers It is important for management and sales staff to have a clear understanding of the typical profile of your preferred customer, using criteria such as ownership and management structure, size and type, links in the value chain, and maturity, amongst others. Consider the use of hypothetical customer profiles and/ or case studies to bring this exercise to life. Consider Geographic and Demographic Factors Economies can vary markedly from region to region. Your bank should make decisions about where 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 your distribution strategy (which may be expanded once the strategy is shown to be working). Remember Your Existing Customers You should be in a position now to clearly define and identify your current SME portfolio, which is most likely split between the Retail and Corporate businesses. Give early thought to identifying and tracking them, and pay attention to the migration strategy.
create your own definitions for the SME market they are valued customers, not just an economic demographic
Portfolio Review GBRW can help you undertake a review of the existing SME portfolio, by first centralising all the SME account information. If this proves impractical an alternative is undertake a sampling exercise. Portfolio Management MIS We can advise on the how the bank can best monitor its sector, client and product profitability, and to measure performance against budgets and business plans. For that the SME Unit is likely to need a customised Management Information System (MIS) Because customers will usually be managed by the branches, it is essential that customer and account level data is centrally warehoused. The on-going portfolio and market analyses can be integrated with the MIS to produce Probability of Default measures. Combined with the calculation of estimated losses on individual products, this will help drive decisions on pricing, credit analysis and marketing.
RISK MANAGEMENT
The GBRW team, comprising experienced former senior bankers, is exceptionally well placed to advise on risk management issues. We are experts in identifying the credit, market and operational risks inherent in the SME business and putting in place the appropriate processes, controls and mitigations to manage those risks. Our approach emphasises: Carefully Position the SME Unit The positioning of an SME banking business within the organisation chart has often been a cause for contention, with competing arguments from Corporate and Retail. Neither is usually an ideal fit, and most banks with successful SME businesses position them independently, and ranked equally with other major business divisions. And remember that you do not have to use the term SME in the units title; on the contrary, it can make customer feel that they are considered less important than their large corporate counterparts. Use a name which will appeal to customers and staff, for example business banking, commercial banking, or independent enterprise. Even Balance Sheet Growth Whilst many SMEs are credit hungry, it is important that asset growth is balanced by deposit growth. Capturing liability-side business (i.e. current and savings deposit accounts) and generating an SME portfolio which is largely self-funding is a good guiding principle. Risk-Based Pricing The benefit of good portfolio management and analysis is the ability to apply risk-based pricing at segment or even customer level. This makes sure that potential loan losses are well covered by profits and that good credits are retained through competitive pricing.
MARKETING STRATEGY
GBRW has experience in developing marketing strategies for the Corporate, SME, and Retail segments. A marketing strategy for SMEs in particular, might need to consider some or all of the following elements: Branding The SME business may need its own image and brand in order to differentiate its approach and what it does from the rest of the bank. It will also make SME customers feel that they are dealing with specialists who understand their particular needs.
CUSTOMER UNDERSTANDING
Customer understanding is much more than just asking what your customer wants. More than likely they will tell you they simply want more credit at lower cost, which is usually unacceptable to the bank! Good customer understanding, however, gives the bank an advantage in negotiating a favourable compromise with the customer that is ultimately mutually beneficial. The GBRW approach emphasises: Focus Groups For a variety of reasons, formal surveys of SMEs can be a disappointing in the quality or usefulness of information that they provide. Focus groups of SME customers are an extremely valuable, and relatively cheap, source of qualitative information on purchasing preferences, values, and behaviour. Benchmarking the Competition Valuable ideas can be generated, and important lessons learned, by encouraging comparisons with the competition. Send your staff on a discreet mystery shopping exercise to see for themselves what the competition is doing well, and in what areas you have the advantage. Staff Insights Front-line staff, who are dealing with customers and with the banks products and processes all the time, can have great insight into customer needs and how the banks service delivery can be improved. Encourage your product development, marketing, and sales teams to suggest new ideas, and remember to also look at regional and international banks for inspiration. Maximising Share of Wallet Unlike large Corporates, SMEs show greater loyalty to banks that support them. We believe that providing an SME with credit entitles you to EXPECT that customer to use you as a sole financial services provider provided you offer adequate products and levels of service. Remember that profitable SME banking means aiming for 100% of a customers share of wallet.
keeping relationship managers on the road and visiting clients in their own premises is a key factor in good sales as well as effective risk management.
promote value chain and trade finance products, and shorterterm secured asset finance, to improve cash-flow
Customer Segment Solutions One way of quickly and efficiently gaining sales momentum in a desirable segment is through customer offers (products and product bundles, delivery mechanisms, pricing model etc.) tailored to the requirements and preferences of the identified target subsegments. This makes customers feel that the bank is providing them with a solution that matches their exact needs, not just a generic SME proposition. Product Development Process Getting new and innovative products on the market quickly and effectively is a core competence of any successful bank. Banks need to review regularly the existing product portfolio, design and launch new products to fill the gaps, and also put in place methodologies to design, test and launch products, profitably and with a minimum of risk.
CONTACT DETAILS
PRODUCT DEVELOPMENT
Good product development means mastering the art of keeping costs down whilst simultaneously meeting the full financial services needs of customers in a way that makes them feel valued. Through our extensive experience in customer and product development consulting for the SME market, GBRW can offer support in the following areas: Product Range Banks can boost the profitability of SME customers by having a range of products which truly responds to customer needs, including liability-side, cash management, trade finance, and shorter-term secured asset finance. SMEs can markedly improve profit retention and capitalisation through a well-structured cash flow solution, which is ideal for both the customer and their bankers. To discuss your banks needs in more detail, or to find out more, please contact one of the GBRW 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, London EC2N 1AQ, United Kingdom Phone: +44 (0)20 7382 9900