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Best of SME Banking

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Ahmed Rashid Joy
Ahmed Rashid Joy

This document discusses various business models and strategies that banks use to effectively serve small and medium enterprises (SMEs). It provides examples of relationship-based strategies from Standard Chartered Bank and Wells Fargo, an advisory-based model from TEB Bank in Turkey, a segment-based model from Garanti Bank in Turkey, a niche model targeting women entrepreneurs, a supply-chain linked model from Citibank in India, and an alternative financing model using online factoring from NAFIN in Mexico. The models demonstrate different approaches to positioning, segmentation, products, and partnerships that banks employ to better meet the needs of SME customers.

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Global Best Practices SME Banking Ahmed Rashid Joy Financial Market Specialist AS, South Asia International Finance Corporation
Operational Structure 2 (Source: SME Banking Practices: IFC’s Experience and Benchmarking Results, 2010) Positioning with separate P&L across all products on actual or shadow basis Clear management focus & accountability Further segmented organization common by business size No one correct way of positioning Incentivized behaviors across the network = key
Variety of Business Models & Strategies • Relationship-based • Retail-based for mass SME • Advisory-differentiated • Segmentation-based • Supply-chain-linked • Mobile-money-based • Niched (female entrepreneurs) • Alternative financing models 3
Example of Relationship-based Strategies: Standard Chartered Bank • Adopts one model for small businesses & another for medium- size • Refines segmentation of service approach by customer revenue value • Calculates customers’ value to the bank & assigns them to 1 of 4 relationship-manager approaches • Hires former business owners & manages SME banking specialists • Differentiates relationship & service level based on value • Allows scalability while controlling service costs Dedicated RM Virtual RM Portfolio Manager No RM
Example of Retail-based Model for Mass SME: Wells Fargo Business Direct 5 The small-business market is served by two separate internal bank organizations. Business Direct (Small) • Lends up to $100,000 • Customers with sales < $2M • Most loans originated through mail, phone, or in the branch. No banker relationship • Extensive use of credit reports for underwriting & account monitoring. Tax returns sometimes used for income verification • Collateral not usually taken Business Banking (Medium) • Lends up to $1 Million or more • Customers have sales from $2M to $20M • Loans originated by specially trained bankers who manage customer relationship • Loans made using full financial statement analysis: liquidity, leverage, debt-service coverage, etc. (for both business and owners) • Loans typically collateralized
Example of Advisory-based Model: TEB Bank in Turkey  Gap in the market for a player to emerge as an SME champion based on perceived role as the SME advisor  SMEs provide • Information establishing proposition, building customized financing options • Business opportunities for revenue generation or cost reduction • Financial strategies  Improved bankability, retention, and risk characteristics of SME portfolio  Potential opportunities for • Business-club concept (Barclays Africa) • SME academy trainings and seminars • SME consultant provision in the network 6
Example of Segment-based Model: Garanti Bank in Turkey • Increases profitability for bank, adds convenience and value to the SME customer. • Increases uptake of sticky products (deposit accounts, payroll, pensions, wealth management). • Establishes proposition, builds customized financing options (typically for specific sector funding requirements), extends with bundle of other services for wallet acquisition. 7
Example of Niche-based Model: Women SMEs Branded loan product • Partners with women SME sectoral associations & business associations to create visibility • Develops/adapts a loan product for women SMEs, with a simple application process & quick turnaround time Partnership Branch business adviser • Promotes branch-level business advisers to whom women SMEs can go for help Business skills • Provides regular financial literacy-skills training for women • Provides regular business management skills to women SMEs Product bundling • Develops a specific branded product that could be bundled with benefits for children & investment Branding • Develops a specific brand /message for financial services to women Financial literacy 8
Example of Supply-chain-linked Model: Citibank in India Leverages Linkages & Applies Vertical Strategy Linked Businesses Distributors & Manufacturers Product - Trade Finance & Services and other X-Sell products - Clean Working Capital (Channel Finance/ PO Finance) PLUS X-Sell products Acquisition - In-house Segment Sales Teams - TTLC oriented prospecting (Bulk acquisition strategy) Marketing & - Participation in industry association events - Communication in partnership with TTLC / GRB Communication - Advertising in Trade Journals (Eg. Participation in Dealer meets/ Supplier meets) - Global Network - Clean Credit - Brand Name - Speedy & simplified Approval Process - Service & Transaction Excellence - Sales tool to fuel growth - Speedy Credit Turnaround - EVA improvement - Trade & Treasury Expertise - Channel loyalty Risk Approach - Program led evaluation based on buyer - TTLC support (Eg. FLDG, Stop Supply, references, EW information) profile and basic financial analysis - TTLC linked Transaction financing Segment Exporters Value-Proposition For Dealer / Supplier For TTLC Top-tier Local Corporate(TTLC) & Global Relationships(GR) DistributorsSuppliers Global RelationshipsExporters 9
Alternative Finance Sources: Online Factoring at NAFIN in Mexico 10 CASE STUDY: NAFIN, Mexico  Provides online factoring services to SME suppliers  “Productive chains” program allows SMEs to use big-buyer receivables for working capital finance  Credit risk of the SME effectively gets transferred to higher-quality corporate customers  By 2009, nearly 500 corporations involved, &d $60 billion in finance extended to more than 80,000 SMEs through 21 banks & non-banks  Licensing requirements can allow non-financial-institution services into the market  Examples: leasing & factoring  Strengthen credit reporting needed to even the playing field between small and big banks

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Best of SME Banking

  • 1. Global Best Practices SME Banking Ahmed Rashid Joy Financial Market Specialist AS, South Asia International Finance Corporation
  • 2. Operational Structure 2 (Source: SME Banking Practices: IFC’s Experience and Benchmarking Results, 2010) Positioning with separate P&L across all products on actual or shadow basis Clear management focus & accountability Further segmented organization common by business size No one correct way of positioning Incentivized behaviors across the network = key
  • 3. Variety of Business Models & Strategies • Relationship-based • Retail-based for mass SME • Advisory-differentiated • Segmentation-based • Supply-chain-linked • Mobile-money-based • Niched (female entrepreneurs) • Alternative financing models 3
  • 4. Example of Relationship-based Strategies: Standard Chartered Bank • Adopts one model for small businesses & another for medium- size • Refines segmentation of service approach by customer revenue value • Calculates customers’ value to the bank & assigns them to 1 of 4 relationship-manager approaches • Hires former business owners & manages SME banking specialists • Differentiates relationship & service level based on value • Allows scalability while controlling service costs Dedicated RM Virtual RM Portfolio Manager No RM
  • 5. Example of Retail-based Model for Mass SME: Wells Fargo Business Direct 5 The small-business market is served by two separate internal bank organizations. Business Direct (Small) • Lends up to $100,000 • Customers with sales < $2M • Most loans originated through mail, phone, or in the branch. No banker relationship • Extensive use of credit reports for underwriting & account monitoring. Tax returns sometimes used for income verification • Collateral not usually taken Business Banking (Medium) • Lends up to $1 Million or more • Customers have sales from $2M to $20M • Loans originated by specially trained bankers who manage customer relationship • Loans made using full financial statement analysis: liquidity, leverage, debt-service coverage, etc. (for both business and owners) • Loans typically collateralized
  • 6. Example of Advisory-based Model: TEB Bank in Turkey  Gap in the market for a player to emerge as an SME champion based on perceived role as the SME advisor  SMEs provide • Information establishing proposition, building customized financing options • Business opportunities for revenue generation or cost reduction • Financial strategies  Improved bankability, retention, and risk characteristics of SME portfolio  Potential opportunities for • Business-club concept (Barclays Africa) • SME academy trainings and seminars • SME consultant provision in the network 6
  • 7. Example of Segment-based Model: Garanti Bank in Turkey • Increases profitability for bank, adds convenience and value to the SME customer. • Increases uptake of sticky products (deposit accounts, payroll, pensions, wealth management). • Establishes proposition, builds customized financing options (typically for specific sector funding requirements), extends with bundle of other services for wallet acquisition. 7
  • 8. Example of Niche-based Model: Women SMEs Branded loan product • Partners with women SME sectoral associations & business associations to create visibility • Develops/adapts a loan product for women SMEs, with a simple application process & quick turnaround time Partnership Branch business adviser • Promotes branch-level business advisers to whom women SMEs can go for help Business skills • Provides regular financial literacy-skills training for women • Provides regular business management skills to women SMEs Product bundling • Develops a specific branded product that could be bundled with benefits for children & investment Branding • Develops a specific brand /message for financial services to women Financial literacy 8
  • 9. Example of Supply-chain-linked Model: Citibank in India Leverages Linkages & Applies Vertical Strategy Linked Businesses Distributors & Manufacturers Product - Trade Finance & Services and other X-Sell products - Clean Working Capital (Channel Finance/ PO Finance) PLUS X-Sell products Acquisition - In-house Segment Sales Teams - TTLC oriented prospecting (Bulk acquisition strategy) Marketing & - Participation in industry association events - Communication in partnership with TTLC / GRB Communication - Advertising in Trade Journals (Eg. Participation in Dealer meets/ Supplier meets) - Global Network - Clean Credit - Brand Name - Speedy & simplified Approval Process - Service & Transaction Excellence - Sales tool to fuel growth - Speedy Credit Turnaround - EVA improvement - Trade & Treasury Expertise - Channel loyalty Risk Approach - Program led evaluation based on buyer - TTLC support (Eg. FLDG, Stop Supply, references, EW information) profile and basic financial analysis - TTLC linked Transaction financing Segment Exporters Value-Proposition For Dealer / Supplier For TTLC Top-tier Local Corporate(TTLC) & Global Relationships(GR) DistributorsSuppliers Global RelationshipsExporters 9
  • 10. Alternative Finance Sources: Online Factoring at NAFIN in Mexico 10 CASE STUDY: NAFIN, Mexico  Provides online factoring services to SME suppliers  “Productive chains” program allows SMEs to use big-buyer receivables for working capital finance  Credit risk of the SME effectively gets transferred to higher-quality corporate customers  By 2009, nearly 500 corporations involved, &d $60 billion in finance extended to more than 80,000 SMEs through 21 banks & non-banks  Licensing requirements can allow non-financial-institution services into the market  Examples: leasing & factoring  Strengthen credit reporting needed to even the playing field between small and big banks

Editor's Notes

  1. Note to Trainer Model-3 in case 20% + SME portfolio in bank’s balance sheet. This shows four different organizational models among the banks surveyed for the IFC’s 2010 SME benchmarking report. Another option would be to serve small and medium-sized businesses separately. All of the models shown here work. Success of course depends on how effectively an institution implements a model and incentivizes performance. The governance model may depend on bank regulations. For instance, China now requires that the SME banking department have equal status with retail and corporate banking, and report to the bank’s general manager. Note: Students can obtain a copy of the full IFC report, SME Banking Practices, from http://advisoryservices.ifc.org/uploads/documents/Excerpts%20Report.pdf
  2. Note to Trainer These strategies are not mutually exclusive.
  3. For SMALL loans RM concept not cost effective. Virtual RM- Can call anytime; dedicated VRM
  4. This bank offers 7,000 videos for customer. Arrange workshops for SME clients. Need 3 years to be an advisor. Not feasible for small at mass level.
  5. Sector based strategy. All SMEs are not borne equally. They targeted 13 out of 23 sectors in Turkey. Plain Vanilla products are customized for each sectors. SME Pension plan, export finance, deposit etc.