SME Clients: Do It Smart, Win Their Hearts
How the banking industry can appeal to small and medium-sized enterprises
Small and medium-sized companies are contributing in a big way to the world's largest economies—representing more than half of GDP in the G7. These companies, which range from independent taxi drivers to companies with hundreds of employees, are making choices about where to do their banking, and will usually opt for the bank that values their business in a personal way. To win them over, banks must win their hearts, not just their minds, to create valuable, long-lasting relationships.
In most countries, small and medium-sized enterprises (SMEs) generate the largest share of gross domestic product (GDP) and contribute significantly to employment. In fact, one study finds that in the G7 countries, SMEs contribute on average 53 percent of GDI, and in European Union countries for which data was available, that figure is almost 49 percent (see figure 1).1
Given SMEs' importance to the world's largest economies, we would expect banks to have well-developed approaches to the segment. But often the opposite is true, with SMEs grouped into retail, or corporate, or both. Because SMEs are so heterogeneous—ranging from a small proprietor to a company with hundreds of employees—successfully serving these clients requires clarity in four areas: segmentation, products, channels and services, and risk management.
On the surface, the framework shown in figure 2 on the following page could apply to any customer segment. The difference when applied to SMEs is the overlay of the components—the interactions shown by the overlapping circles in the Venn diagram.
The following discusses our SME banking approach in all four areas.
Segmentation: Don't Look at Size Alone
Most banks use size as the main criteria for determining which clients are classified as SMEs. Although size can be defined in a number of ways, revenue, the number of employees, and the size of the customer's credit portfolio are the most common criteria used. There is nothing wrong with these criteria, but when you look only at size, opportunities to serve SMEs' needs might be missed, as becomes apparent through more targeted industry or behavioral-based segmentation. Some would argue that a loan is a loan, so why complicate matters? However, the reality is that a loan is not necessarily a simple product. Small companies have varied needs—a dentist will need different types of loans than a small factory owner or an independent business consultant.
Our framework combines the traditional size approach with a needs-based view. This interplay of size and needs results in "mass-tailored" solutions for different client segments within the SME family.
Also, superimposing an industry view allows for more accurate forecasting of sector demand. Forecasts of trends in industry sectors are typically prepared years in advance to understand how they will develop. This outlook can also be drilled down into SME subsectors to predict future growth and demand.
Bank Products: From Basic to Tailored
Getting SME banking products right is as much art as it is science. Products range from retail to corporate products and everything in between. The challenge is in pricing them to generate sufficient profits, which we will discuss this in the risk management section.
Using the framework in figure 3, we overlay product categories for the different segments to understand what offers will appeal to which SME clients. The bottom part of the framework is home to products for retail customers, such as credit cards, overdrafts, credit lines, deposit accounts, and targeted loans. Moving up the framework, the products are more tailored to the individual and resemble corporate products, such as working capital loans, asset loans, corporate credit cards, investment banking services, hedging products, and cross-border currency products.
This is the science of the product offering. The art is defining the line where the mass retail products end and the corporate products begin. This line varies among countries and levels of economic and regulatory sophistication.
Matching Channels and Services to Customers
Not long ago, at least to someone over 40 years old, the question, "Which channel should my customer use?" was easy to answer: at branches. There is no one answer to this question today because of the numerous delivery channels. Matching a customer with delivery channels requires understanding their needs and financials. To put it bluntly, how much is this customer worth to us?
While all SME customers believe they warrant an individual relationship manager (RM) to serve all of their needs, the fact is they don't. It is neither economical nor a best practice to give everyone an RM. For example, a customer with a technical problem will have a hard time getting real help from an RM; a call-center technical assistant is far more equipped to provide such assistance. Along the same lines, teaching SME customers to use automated bank services such as website and mobile banking services saves time and money and reduces the need for expensive office space and teller staff since customers don't have to come to the bank as often.
So, which businesses along the SME continuum—family, micro, small, medium—need or financially warrant an RM? Family SMEs do not, micro clients might if the business is substantial enough, and small and medium-size clients need assigned RMs to manage the relationship actively, identify cross-selling opportunities, and deliver value to the client and the bank.
Closely tied to the channel mix are the services offered to small and medium businesses. Small business owners' personalities and habits are as varied as the businesses that fall under the SME umbrella. According to a recent IFC report on SME banking, "SMEs have unique demands and value personal attention Meeting these demands can be costly, given the frequency of contact required and the potentially lower revenue earned per client."2 Customer value can be the ultimate arbiter of what services and benefits are offered to SME customers. For the family and micro segments, services will generally be limited, with most clients served via cost-effective call centers and electronic banking. Nevertheless, these customers can also still use dedicated SME areas and talk with specialists when visiting branches that have SME-dedicated areas and personnel.
Higher-value, larger clients are offered preferred pricing, support for preparing business plans, dedicated call centers, and ID cards and programs for faster, more convenient service. Here loyalty programs combined with card products and invitations for high-value clients to attend bank-sponsored events can enhance the customer experience.
Because the range of value-adding services varies from region to region and country to country, it is not feasible to value one service over others. However, SME customers around the world are likely to choose to stay with a bank that treats them as more than just a mass customer, as the IFC study points out. The client wants to know that its business is valued in a personal way. This is the "do it smart, win their heart" part of SME banking.
Risk Management
A one-size-fits-all approach to risk management will not attract SMEs. For smaller clients where a loan is simple and there is very little or no collateral, a scoring approach is the most effective way to manage risk. For the larger medium-sized SME, a case-by-case approach works best, especially when data quality is poor. Data reliability has an impact on the ability to apply a scoring model and forego collateral-based risk management assessments. The right-hand side of figure 4, where data quality is good, allows for risk assessment based on a scoring system. But in the case of larger clients, collateral can be applied either as a secondary risk assessment or concurrent to a predictive scoring model.
When first venturing into the SME arena, it is not unusual to struggle to get risk management right. It is fine to err on the side of conservatism and then, with experience, loosen some of the restrictive credit risk management practices without impairing the risk profile but still boosting revenue growth.
Loyal, Valuable Business Is the Prize
Attracting the SME customer segment is not a simple task, but it is a growing area of focus for many banks around the world given the overall size of the market and the potential for increased revenues and profits. Being smart in the four areas discussed in this paper— segmentation, products, channels and services, and risk management–will not only win SMEs hearts, but also earn clients that repay you with enduring loyalty and years of valuable business.
Author
John Winkler is a partner in the Moscow office.
The author wishes to thank Ettore Pastore, James Deighton, Jacek Krawczynski, Jiri Steif, Erick Peterson (GBPC), Maciej Gawinecki, Domen Zadravec, and Adam Szonyi for their help in writing this paper.
1 The G7 is an organization of seven nations that facilitates economic cooperation among the world's largest industrial nations. Its members are France, Germany, Italy, Japan, the United Kingdom, the United States, and Canada
2 "The SME Banking Knowledge Guide," Advisory Services, International Finance Corporation
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