making small business finance profitable peer stein, banking advisory group december 4, 2002 key...
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Making Small Business Finance Profitable
Peer Stein, Banking Advisory GroupDecember 4, 2002
Key Lessons Learned about Applying New Technologies to SME Finance
Shifting the Productivity Frontier
Lower unit costs per
transaction or service
Broader service offerings & higher asset quality
Productivity Frontier(Future state of Best Practice)
Limitedservices tolimited numberof customersUNPROFITABLE
How?
Generating Growth:
Through profitable marketing strategies
Improving Asset Quality:
Through enhanced risk management
Increasing Operating
Efficiency:
Through technological innovation
Developing successful small business finance operations – A Bottom Up Approach
1. Market Research
2. Products/Services
3. Risk Management / Analytics
4. Delivery Channels
6. Systems / IT
5. Organization
Profitability = (New Business + Client Retention) - Cost
OperatingEfficiency
AssetQuality
Growth
1. Market Research
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
1. Market Research
2. Products/Services
3. Risk Management / Analytics
4. Delivery Channels
6. Systems / IT
5. Organization
Segmentation capabilities of own clients and market.
2. Product/Services
Maximize client retention and profitability by offering product packages as well as cross- and up-selling.
• Checking accounts
• Savings accounts
• Money market accounts
• Payroll services
• Accounting/tax support
• Insurance
• Information & tools
• Domestic payments
• International payments
• Check processing
• Secured loans
• Unsecured Loans
• Credit Cards
Payments
Savings
Value-added
Credit
1. Market Research
2. Products/Services
3. Risk Management / Analytics
4. Delivery Channels
6. Systems / IT
5. Organization
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, low-maintenance 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
1. Market Research
2. Products/Services
3. Risk Management / Analytics
4. Delivery Channels
6. Systems / IT
5. Organization
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
1. Market Research
2. Products/Services
3. Risk Management / Analytics
4. Delivery Channels
6. Systems / IT
5. Organization
3. Risk Management / AnalyticsPre-selection and Marketing
– Review performance by sales and origination channel (e.g. target marketing vs. unsolicited applications)
– Define pre-selection strategies for own clients (cross-selling), 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)
1. Market Research
2. Products/Services
3. Risk Management / Analytics
4. Delivery Channels
6. Systems / IT
5. Organization
Data capture & management, analytical skills and monitoring.
Importance Attached to Credit Reporting:Survey of Latin American Banks
0
5
10
15
20
25
30
35
Collateral Financial StandingOf The Borrower
Borrower's HistoryWith the Bank
Nu
mb
er o
f F
irm
s
Information from a credit registry is more importantInformation from a credit registry is less important
4. Delivery Channels
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?
1. Market Research
2. Products/Services
3. Risk Management / Analytics
4. Delivery Channels
6. Systems / IT
5. Organization
Cost efficiency, differentiation in the market and client satisfaction.
5. Organization
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 needs of the owner)
1. Market Research
2. Products/Services
3. Risk Management / Analytics
4. Delivery Channels
6. Systems / IT
5. Organization
Clear responsibilities 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
1. Market Research
2. Products/Services
3. Risk Management / Analytics
4. Delivery Channels
6. Systems / IT
5. Organization
Be able to use information – record / report / analyze.