Successful SME Banking

Successful SME Banking

A wide-ranging blog series covering the many and varied aspects of successful SME banking and financial services, in general. The GBRW team will regularly update this blog with posts on some the successful approaches used and key lessons learned over many SME banking and finance assignments around the world.

Enhancing the SME Customer Value Proposition with Non-Financial Services

Financial Services providers serving SMEs often need to differentiate themselves from the competition when marketing to target customers. This is not only the case for mature markets, but also for SME financial services in Emerging Markets, where the appetite for risk and/ or the pool of potentially bankable customers is relatively thin.

Product-oriented players can focus on differentiation through adopting an 'Operational Excellence' value discipline that gives them a competitive advantage in pricing. However this option is often not easy for mainstream commercial banks with a Customer Focus to adopt. Given that financial services products are among the most replicable, commercial banks attempting to target an SME segment with a relationship banking or 'one-stop-shop' approach often still find it difficult it differentiate the product mix from similarly positioned competitors.

I mean, in how many different ways can we meaningfully repackage an SME banking 'solution' (i.e. mix of current and savings account options, overdraft, leasing and receivables finance, trade finance, payment and settlement, and card services), so that it appears distinctive and appealing to a customer segment? These are very well-established products and there are often certain expectations and conventions that apply when developing a product specification. Given the general suspicion of banking customers to radical innovation in their financial services, this further limits the appeal of the bleeding edge in terms of SME financial services by commercial banks.

In future posts we'll be looking at manipulating aspects of the relationship sales and service model, distribution channels, and branding and advertising to create differentiation, however can we do anything further with the product mix? One popular approach is to consider adding 'Non-Financial Services' to the product mix. Sometimes called Business or Enterprise Development Services (BDS or EDS) in the field of development economics, they can encompass a very wide range of intangible (usually) products and services that add value for a particular SME segment, either priced separately or discounted through a relationship driven pricing approach. As always, these need to be carefully researched and designed to make sure they have a high level of appeal to the target customers. However, the neat thing about Non-Financial Services is the creative scope they offer financial institutions to strongly differentiate their CVP.

We'll be looking carefully at designing the CVP in future posts, but this seemed as good a point as any to introduce the obvious fact that customer-focused financial institutions should be looking well beyond the relatively limited constraints of pure financial services when developing their product mix. In case you need some inspiration, take a look at the slideshow below that showcases a range of established, as well as quite innovative approaches, to Non-Financial Services by some well-known commercial banks.

In future posts we might also look even more deeply at Non-Financial Services (NFS) as there are some interesting commercial aspects to be explored. Not least is the extent to which NFS might be used to positively influence the risk profile of your customers relative to the competition, and gain some some flexibility in capital allocation and pricing. Also, mainstream financial institutions may seriously need to consider the threat of disruptive competition from unexpected angles. For example, what is the opportunity for cloud-based vendors of Enterprise Resource Planning (particularly accounting), Data Warehousing, and Business Intelligence solutions to use their proposition or superior management information to expand into financial services?

If you liked this post you might be interested in GBRW's 'SME Banking Customer Relationship Management' training course, from GBRW Learning.

Training Course: SME Banking Customer Relationship Management

This course is intended for those interested in how to develop and deliver a Customer Relationship Management based approach for SME banking customers. It aims to show delegates how to use SME customer relationships to underpin the Customer Value Proposition and to sustainably drive customer loyalty and profitability.

Download course outline »

Strategic segmentation of the SME banking market

Strategic segmentation seems a simple enough concept, but often banks can tie themselves up in knots over it. For banks used to serving large corporate customers in a relatively thin market, each customer can tend to be a segment of one. However SMEs are a large and heterogeneous market, and it's important to have a systematic approach to differentiating between clusters of customers based on the distinct risk-reward criteria that are important to your bank.

It's also important to distinguish between a segmentation strategy and the qualification criteria for different relationship and service models that forms a key element of the Customer Value Proposition (CVP). The segmentation strategy should drive the definition of the CVP, rather than allowing the CVP to be driven by competitors.

In upcoming posts we hope to explore lots of interesting aspects of strategic marketing to SME customers by banks. In the interim we have embedded a SlideShare presentation to introduce some of the key principles of strategic segmentation for the SME market from our perspective, with a view to 'setting out our stall'.

If you liked this post you might be interested in GBRW's 'SME Banking Customer Relationship Management' training course, from GBRW Learning.

Training Course: SME Banking Customer Relationship Management

This course is intended for those interested in how to develop and deliver a Customer Relationship Management based approach for SME banking customers. It aims to show delegates how to use SME customer relationships to underpin the Customer Value Proposition and to sustainably drive customer loyalty and profitability.

Download course outline »

The importance of cost control in SME lending

One of the challenges of lending to SMEs is that the loan amounts are relatively small, so that even if loan margins are higher than when lending to mid-caps or large corporates, profits can swiftly be eaten up by operating costs. This is especially true if the bank applies the same credit approval procedures to SME lending as it does to large corporate lending.

Part of the answer may lie in cross-selling a range of products to SME customers. Another part of the answer could be to seek to minimise borrowing costs, and not pass on the savings to customers, thereby increasing the margin. In that regard the treasury and Asset & Liability Management functions are as important as the Credit function in ensuring a profitable SME lending business.

A third element, and in my view probably the most important, lies in reducing operating costs, principally by simplifying the internal approval process for making a loan to an SME customer. This is not so easy, as by and large SMEs represent a greater credit risk than mid-cap or large corporates.

There are a number of approaches to addressing this issue, and that is what I want to explore. The first priority is to select the right customers, and that is where the segmentation model comes in. Then it is essential to have the right standardised products for your target customer segments, and a loan approval process that to the greatest extent possible minimises input by your staff.

A process without any staff input at all is not possible, or at least most unwise, when lending to SMEs. At some point somebody from the bank has to visit the customer and form an opinion as to their business, their acumen, honesty, and motivation for being in business. However, every hour spent travelling to and meeting with the client eats into the overall profitability of the loan. How often should the loan officer visit? If you have one, what weighting should be given to the credit scorecard or rating model in the final credit decision?  80%?  60%? 30%? What on-going checks can be made on the business, automatically and remotely?

These are some of the issues that I would like to explore, and would welcome your views.