Making Small Business Finance Profitable Key Lessons Learned about Applying New Technologies to SME Finance Peer Stein, Banking Advisory Group December 5, 2002
Shifting the Productivity Frontier Productivity Frontier (Future state of Best Practice) How? Generating Growth: Through profitable marketing strategies Improving Asset Quality: Through enhanced risk management Lower unit costs per transaction or service Limited services to limited number of customers UNPROFITABLE Broader service offerings & higher asset quality Increasing Operating Efficiency: Through technological innovation
Developing successful small business finance operations A Bottom Up Approach Growth 6. Systems / IT Operating Efficiency Asset Quality Profitability = (New Business + Client Retention) - Cost
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 Segmentation capabilities of own clients and market.
2. Product/Services Secured loans Unsecured Loans Credit Cards Domestic payments International payments Check processing Payments Credit Savings Value-added Payroll services Accounting/tax support Insurance Information & tools Checking accounts Savings accounts Money market accounts Maximize client retention and profitability by offering product packages as well as cross- and up-selling.
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, lowmaintenance 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
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
Pre-selection and Marketing Review performance by sales and origination channel (e.g. target marketing vs. unsolicited applications) Define pre-selection strategies for own clients (crossselling), 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) Data capture & management, analytical skills and monitoring.
Importance Attached to Credit Reporting: Survey of Latin American Banks 35 Number of Firms 30 25 20 15 10 5 0 Collateral Financial Standing Of The Borrower Borrower's History With the Bank Information from a credit registry is more important Information from a credit registry is less important
Value Of Data for SME Lending HIGH PERSONAL BUSINESS VALUE LOW SMALL SIZE OF COMPANY LARGE
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? Cost efficiency, differentiation in the market and client satisfaction.
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 Clear responsibilities needs of the owner) 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 Be able to use information record / report / analyze.