Unlocking banks’ potential to earn from SMEs

SUITS THE C-SUITE By Vicky Lee-Salas

First Published in Business World (08/04/2014)

WHAT should banks do when faced with a slump in earnings? Some may conduct business as usual by focusing efforts towards traditional revenue drivers. A case can also be made, however, for taking a fresh approach towards an underserved yet promising customer segment: the small to medium enterprise (SME). If SME clients are handled correctly, they could provide the local banking industry its much needed boost.

So far, banks have had to endure a difficult start to the year. According to the Bangko Sentral ng Pilipinas (BSP), the total net income of universal and commercial banks plunged by 48% in the first quarter from the same period last year due to volatile market conditions and the tapering of the US Federal Reserve’s bond-buying program.

At the same time, banks have not been conducting much business with SMEs. Further BSP data show that the compliance rate of the Philippine banking system with the required loan portfolio for micro, small, and medium enterprises stood at just 5.2%-5.6% as of March.

Admittedly, SMEs are a complex segment to cater to given their varied requirements and differing growth potential. However, a savvy approach to this segment, particularly with regard to how SMEs are dealt with at the front office, could unlock earning opportunities for banks.

The front office service model is an important area to consider when revamping a bank’s approach to SMEs. Changes at this level could mean improvements to how a bank’s resources are allocated, how client relationships are managed, and how transactions are streamlined — all of which could yield higher margins. This is according to the recent EY publication titled Business banking: redesigning the front office.

The EY report advises banks to keep in mind four steps to successfully redesign their front office model for SMEs.

First, banks need to redefine their segmentation of SMEs such that clients are grouped by their behaviors and needs, rather than by their revenues alone. Characteristics to watch out for could include market penetration, growth potential, competitive intensity, current and future risk appetite, and mix of local and international business. Data and portfolio analytics will be required to accomplish this segmentation. Such a redefined segmentation of SME clients will also help banks determine each customer’s value. This is critical considering that, according to EY estimates, only 20% of the total customer base is responsible for 80% to 90% of a bank’s income.

Second, banks need to revamp their service models in such a way that their resources are properly allocated to serve each SME segment. The objective is to allocate scarce resources to the most valuable customers. The EY report suggests, for instance, a three-tiered service model wherein lower-income SME clients are served through branch personnel as well as digital and self-service portals only. The more profitable SME clients and those that require more sophisticated services like derivatives and foreign exchange are meanwhile provided access to a relationship manager pool on top of the other contact points mentioned. For premium SME clients, they can be assigned a dedicated relationship manager. Customers at this level often need a banker to consult for major strategic decisions.

Third, banks would do well to implement “transformational change initiatives” for both the front office and support functions. This entails streamlining processes and using common standards to address overlap in the front office and support roles. These initiatives will prevent process breaks, lengthy cycle times, errors and rework which could frustrate customers. This way, relationship managers are also less encumbered by paperwork. Moreover, investments will be needed for technology platforms tasked with business process automation and data governance, so the bank can provide “faster and more intuitive solutions,” the EY report states.

Finally, as banks revamp their approach, they should communicate changes to the customers and roll out an incentive program. SME clients should be made to understand the benefits of the front office reforms. An active contact strategy should also be deployed. Further, incentives should be in place so that the customer chooses the service model appropriate to its particular segment at the least cost to the bank. This can be achieved, for instance, by reducing costs for the basic service model for those lower income clients.

These four tracks can help banks open capacity in the front office. These can also decrease administrative costs and hasten turnaround time. More importantly, these will “enhance the customer experience” leading to client retention.

Now is the best time to act before non-banks such as technology providers, telecommunication firms, asset managers, and insurance companies completely corner the SME market’s needs for services like mobile payments and business advisory. After all, not only do SMEs represent a growing and potentially profitable customer segment, but they could very well be the industry heavyweights of the future. Banks would do well to establish a relationship early on and what better way to start than with a revamped front office.

Vicky Lee-Salas is a Partner of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.