Making Small Business
Finance Profitable
Key Lessons Learned about
Applying New Technologies to
SME Finance
Peer Stein, Banking Advisory Group
December 4, 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
5. Organization
4. Delivery Channels
3. Risk Management / Analytics
2. Products/Services
Operating
Efficiency
1. Market Research
Asset
Quality
Profitability = (New Business + Client Retention) - Cost
6. Systems / IT
5. Organization
4. Delivery Channels
3. Risk Management / Analytics
2. Products/Services
1. Market Research
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
Segmentation capabilities of own clients and market.
6. Systems / IT
5. Organization
4. Delivery Channels
3. Risk Management / Analytics
2. Products/Services
1. Market Research
2. Product/Services
• Domestic payments
• International payments
• Check processing
• Secured loans
• Unsecured Loans
Payments
Credit
Savings
• Credit Cards
• Checking accounts
• Savings accounts
• Money market accounts
Value-added
• Payroll services
• Accounting/tax support
• Insurance
• Information & tools
Maximize client retention and profitability by offering product
packages as well as cross- and up-selling.
6. Systems / IT
5. Organization
4. Delivery Channels
3. Risk Management / Analytics
2. Products/Services
1. Market Research
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
6. Systems / IT
5. Organization
4. Delivery Channels
3. Risk Management / Analytics
2. Products/Services
1. Market Research
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
6. Systems / IT
5. Organization
4. Delivery Channels
3. Risk Management / Analytics
2. Products/Services
1. Market Research
3. Risk Management / Analytics
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
BUSINESS
VALUE
PERSONAL
LOW
SMALL
SIZE OF COMPANY
LARGE
6. Systems / IT
5. Organization
4. Delivery Channels
3. Risk Management / Analytics
2. Products/Services
1. Market Research
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?
Cost efficiency, differentiation in the market and client
satisfaction.
6. Systems / IT
5. Organization
4. Delivery Channels
3. Risk Management / Analytics
2. Products/Services
1. Market Research
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)
Clear responsibilities and clear processes.
6. Systems / IT
5. Organization
4. Delivery Channels
3. Risk Management / Analytics
2. Products/Services
1. Market Research
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.