NON-FINANCIALSERVICES INSME BANKING

Approaches to developing non-financial or enterprise

development services to supplement financial

services to SME customers

Build Customer

Loyalty

Improve Customer

Profitability

Raise Brand Recognition

Build Internal

Expertise

Generate New

Business

Small and Medium-sized Enterprises (SMEs) represent an important and substantially under-banked market, in emerging markets in particular.

The SME segment can be a long-term, sustainable source of profits for banks struggling with low margins in corporate banking, and intense competition in retail banking .

However SMEs exhibit relatively higher default rates through the business cycle, so a careful strategy is required to ensure segment profitability, business survival, and customer tenure characteristics (culminating in reliable Customer Lifetime Value or CLV forecasts).

SME customers in particular often have needs beyond the pure provision of financial services, and these needs represent an opportunity to build brand recognition and customer loyalty, as well as improving the relative credit performance of our SME portfolio.

NON-FINANCIAL NEEDS OFSME CUSTOMERS

FORMS OF NON-FINANCIAL OR ENTERPRISE DEVELOPMENT SERVICES

Typical approaches include:

business coaching and mentoring

consulting and advisory

accountancy and financial planning advice

economic insight and business intelligence

training and development

peer and value chain networking

business tools, models, and methodologies

Typical topics include:

strategy and planning

finance and budgeting

pricing and cost control

operations and logistics

marketing and sales

human resources management

risk management

Most banks offer their MSME customers business advice, financial planning guides, and economic and industry analysis through web pages, downloads, and hardcopy

print versions, but many banks are innovating in EDS. The following case studies provide some examples.

Providing SME customers with a business planning tool can be a useful way of helping them improve the performance of their business, while also laying the groundwork for access to

finance. Web-based services such as Scotiabank’s in this example can be hosted ‘in-house’ or outsourced to ‘cloud’ based vendors who can offer hosting and support services for a customized and/or discounted (or free) solution for your current and potential customers. Browser based web applications are becoming predominant over desk-top installation and offer many advantages. But

such tools can also be provided in hard-copy format if preferred by customers.

CASE STUDY: BUSINESSPLANNING SOFTWARE

Many banks offer their SME customers a suite of templates to download from their website. These might include MS Word and Excel templates that customers can use to help solve simple problems. Examples are draft legal agreements (e.g. for contracting staff), financial statement templates, business plan templates, and market, product or competitor

analysis tools amongst others. Here is a screenshot of a typical Excel cash flow forecasting template developed by GBRW. Of course SME customers can also use these templates to support discussions with their bank about the

business and its financial services needs, and to support the credit application process.

CASE STUDY: BUSINESS TEMPLATES

CASE STUDY: MENTORING& COACHING

Lloyds Bank offers a mentoring service where businesses are linked

with a suitable mentor (on a chargeable basis) through a web-

based ‘match-making’ service. The mentor will be a senior business

figure with excellent coaching skills who can provide an independent and

experienced voice for the management team.

E-Learning is a great way to cascade knowledge and expertise to your MSME customers. Scotiabank is a

member of the E-Business Coalition in Canada which provides high-quality, fee-based, certified

training for small and medium-sized business owners. Through their sponsorship of the E-

Business Coalition, Scotiabank are able to offer discounted course prices to their customers.

CASE STUDY: BUSINESS E-LEARNING

Hosting, moderating and cultivating an online discussion and networking forum and

community (of both current customers and other registered posters) can be a good way of

raising the profile of the brand, better understanding the SME market, and also

generating new leads and product ideas. This example from Bank of America is well executed.

CASE STUDY: DISCUSSION FORUMS

CASE STUDIES: COLLABORATIVEMARKETING/ PURCHASING POWER

RBS has engaged in a collaborative marketing arrangement with Moorepay, a leading vendor of payroll and HR services. Similarly Lloyds Bank has established a relationship with Croner Consulting, an expert

in employment and health and safety. Banks can also their bulk purchasing power to negotiate discounts for customers. In this case, the added benefit is that HR and health and safety issues are a very common source of business problems and interruptions, and can be

critical in the event of litigation. Similar arrangements can be set up for utilities and telecoms, accounting and business services, and

information technology amongst others.

Many banks actively sponsor and/ or host small business networking events and

seminars. Hot topics of interest to SMEs can be covered by industry experts and product

experts. The bank’s relationship managers can introduce new products and services. This example is from Standard Chartered Bank.

CASE STUDY: NETWORKING EVENTS

CASE STUDY: MARKET INSIGHT

ANZ offers an innovative new solution to its business

customers – a subscription based business intelligence

application which analyses over 20mn card transactions through

ANZ’s merchant acquisition network and provides detailed

analytics to subscribers. For example, users can analyse

trends within their own business, benchmark against competitors, and profile the

characteristics of their customers based on card usage.

MSME customers tend to exhibit unnecessarily high default rates due to some of the following factors:

rapid growth – SME firms on a high-growth track tend to suffer relatively higher failure rates

high-risk attitude of entrepreneurs – the personality of individuals plays a role in the risks a business takes

lack of management experience – the ability to make the right decisions is improved through practice

low capitalization – under-capitalised firms have much less resilience to unexpected events

niche marketing – has the potential for higher profit growth but failure rates are raised because growth is purchased at the expense of higher risk

chance – interruptions in business continuity can have a dramatic impact on MSMEs

WHY DO SME CUSTOMERSNEED NFS/EDS?

One of the goals of EDS is to help MSMEs to mitigate or interrupt these factors

There is a wide range of EDS, but perhaps the simplest way to define them is as the suite of non-financial/ professional services and knowledge products which MSMEs need or demand in order to develop and succeed. Established and/ or larger enterprises might have professional accounting, finance, legal, and management advice from a well-established pool of professional advisors. However smaller and start-up enterprises, or those operating in emerging markets, often do not have the same level of access or are not accustomed to taking up these services.

In most countries there are publically funded or subsidized support services for small business (sometimes associated with loan guarantee schemes). Especially in emerging markets, donors and governments have supported EDS as a means to encourage SME creation and employment generation. Banks in developed markets usually offer a range of non-financial services to SME customers as well.

WHERE CAN CUSTOMERS FIND ENTERPRISE DEVELOPMENT SERVICES?

SMEs in emerging markets have limited options when seeking good advice

1. Sector Knowledge: The market research required provides many insights into marketing and risk strategy.

2. Better Preparation: Potential and actual customers can be indirectly encouraged to better prepare for access to finance. The credit process is swifter and better informed.

3. Lower Customer Risk: Customers receiving good advice demonstrate a lower risk profile than those who don’t.

4. More Profitable Customers: Customers who receive good advice are more likely to grow and increasingly consume financial services.

5. Better Brand Perception: The Bank can use EDS as a way to build its reputation amongst target customers

6. Better Bankers: Assimilating small business knowledge and expertise inside the Bank, can lead to significantly improved risk judgement and better relationship management behaviours amongst staff

7. Improved Lead Generation: Provision of EDS can be a gentle way to generate new customer leads.

7 REASONS FOR BANKS TO PROVIDE EDS FOR SME CUSTOMERS

SME owners are a diverse group and any comment on their traits is clearly a generalisation, however there are some common themes which are of particular note:

Over Confidence – many entrepreneurs fail to recognise the benefits of good advice or assistance, without sufficient regard to their personal weaknesses or risks to their business (the Dunning-Kruger effect or ‘unconscious incompetence’).

Timidity – there are other business owners who will need to be convinced that seeking advice and assistance is not a sign of weakness and need not be an intimidating or embarrassing experience – rather that it is liberating and confidence building.

Price Sensitivity – understandably many owners are very reluctant to pay for services which are intangible and fail to yield an easily identifiable return on investment. Paradoxically, many also view charitable, public/donor-funded or volunteer services as having little value.

UNDERSTANDING SME CUSTOMERS AND ATTITUDES TO EDS

Time Poverty – many MSME owners are notoriously busy and find it difficult to make the time required for Enterprise Development Services, once again because they have a short-term focus and are unable to recognise the long-term benefits.

Management Instincts – often MSME owners are highly effective producers and/ or marketers, but don’t have a strong background in or high regard for general management – such as financial control, human resources management, or IT for example.

Suspicion – sometimes financial institutions offering Enterprise Development Services find their customers evasive about the issues they are facing in their business because they have a perception that their bankers will use this to restrict vital credit.

UNDERSTANDING SME CUSTOMERS AND ATTITUDES TO EDS

Take time to research and analyse these characteristics in your own customers

SIMPLE RESEARCH AND ANALYSIS METHODOLOGY

• Background research (desktop)

• Market demand study (survey, structured interviews, focus groups)

• Stakeholder analysis (financial sector, private sector associations, public sector, donor agencies and NGOs)

Local Market Research

• Comparison by implementing agency or institution

• Comparison by market – emerging market versus developed market approaches

• Comparison by target beneficiary – e.g. micro-, small-, medium? Start-ups? Tech entrepreneurs?

Analysis of International

Practice

An initial output of a research exercise should be an elaboration of the strategic options for the development and implementation of EDS. This would consider factors such as:

Target market (e.g. business stage, size, sector, type, ownership structure etc.)? Types of service (e.g. business advice, business analytics, financial planning tools,

product and service discounts etc.) Funding model (e.g. loss leader, subsidized, bulk procurement discounts, fee

structure, collaborative cost-sharing etc.)? Distribution model (e.g. collaborative, web-based, hard copy collateral, social

networking etc.)? Approach to knowledge management (in-sourcing of expertise and knowledge,

recruitment, training and development of staff, outsourcing expertise)? Realisation of benefits (key performance indicators, risk management, budgeting,

project sponsor and stakeholder identification)?

DEVELOPMENT OF STRATEGIC OPTIONS

Demonstrate that your EDS/NFS offer contributes to the bottom line

1. Make sure you have a detailed and comprehensive needs assessment and market research exercise before committing too much.

2. Carefully consider the prevailing local business culture as it varies wildly from one country to another, and indeed even regional variations are stark.

3. Watch out for other EDS providers in the market. Are there opportunities to collaborate? Is there a threat of cannibalization?

4. If you use technology, carefully consider the sophistication of your customer base and their familiarity with using technology.

5. Building a critical mass of online users or subscribers is hard. Don’t over-estimate the appeal of your offer or web users’ fear and dislike of “spam”.

6. Make sure your offer is sustainable and high quality. There is nothing worse for your reputation than introducing a poor service and/ or wasting the time of customers by inconsiderately withdrawing the service.

7. Don’t go a full roll-out in the first instance – make sure you pilot your EDS by any combination of offer, segment, or geography.

7 TIPS AND TRAPS IN INTRODUCING EDS

Whatever you do, make sure your researchis robust and your pilot is thorough

CONTACT DETAILS AND FURTHER INFORMATION

Mike Coates, Director

You can find out more about GBRW Consulting by visiting our website on http://www.gbrw.com

Visit my LinkedIn profile at http://uk.linkedin.com/in/mikecoates73 and feel free to connect

Email us at mail@gbrw.com