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Making Small Business Finance Profitable. Key Lessons Learned about Applying New Technologies to SME Finance. Peer Stein, Banking Advisory Group December 4, 2002. Shifting the Productivity Frontier. How?. Productivity Frontier (Future state of Best Practice). Generating Growth:

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Making small business finance profitable l.jpg

Making Small Business Finance Profitable

Key Lessons Learned about Applying New Technologies to SME Finance

Peer Stein, Banking Advisory Group

December 4, 2002


Shifting the productivity frontier l.jpg
Shifting the Productivity Frontier

How?

Productivity Frontier

(Future state of Best Practice)

Generating Growth:

Through profitable marketing strategies

Improving Asset Quality:

Through enhanced risk management

Increasing Operating Efficiency:

Through technological innovation

Lower unit costs per transaction or service

Limited

services to

limited number

of customers

UNPROFITABLE

Broader service offerings & higher asset quality


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Developing successful small business finance operations – A Bottom Up Approach

Growth

6. Systems / IT

5. Organization

4. Delivery Channels

3. Risk Management / Analytics

2. Products/Services

Operating

Efficiency

Asset

Quality

1. Market Research

Profitability = (New Business + Client Retention) - Cost


1 market research l.jpg

6. Systems / IT A Bottom Up Approach

5. Organization

4. Delivery Channels

3. Risk Management / Analytics

2. Products/Services

1. Market Research

1. Market Research

Assess data sources & reliability

  • Information and credit reports both for consumers and for businesses (if possible – cross-referenced)

  • Default information, if available (by industries, companies)

    Carry out secondary market research

  • Segmentation (size & industries)

  • Regional focus and characteristics

  • Competitive analysis (other sources, products, terms & conditions)

    Conduct primary market research and focus groups

  • Stage 1: Assessing customer preferences and profitability potential

  • Stage 2: Testing specific product/services designs

Segmentation capabilities of own clients and market.


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6. Systems / IT A Bottom Up Approach

5. Organization

4. Delivery Channels

3. Risk Management / Analytics

2. Products/Services

1. Market Research

2. Product/Services

  • Domestic payments

  • International payments

  • Check processing

Payments

  • Secured loans

  • Unsecured Loans

  • Credit Cards

  • Checking accounts

  • Savings accounts

  • Money market accounts

Savings

Credit

Value-added

  • Payroll services

  • Accounting/tax support

  • Insurance

  • Information & tools

Maximize client retention and profitability by offering product packages as well as cross- and up-selling.


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6. Systems / IT A Bottom Up Approach

5. Organization

4. Delivery Channels

3. Risk Management / Analytics

2. Products/Services

1. Market Research

2. Product/Services – Credit examples

#1: Small Business Loan based on Wells Fargo Model

  • Processes based on portfolio approach: standardized loan origination through credit application scoring, rapid response time, low-maintenance account access through electronic & telephone banking

  • Average outstanding loan size in the US case: US$15,000

  • Target market: Sole proprietorships and very small businesses

  • Requires suitable external data availability to build solid scoring systems


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6. Systems / IT A Bottom Up Approach

5. Organization

4. Delivery Channels

3. Risk Management / Analytics

2. Products/Services

1. Market Research

2. Product/Services – Credit examples

#2: Receivables Financing Loan based on SME Loan

  • Automated processes yet very client-driven: standardized loan origination using a combination of application scoring and basic credit review, real-time credit risk management on the basis of an automated monitoring of sales, cash & receivables of the clients

  • Average outstanding loan amount in HK case: US$100,000

  • Target market: larger small and the lower end of mid-sized companies

  • Requires suitable legal framework for security arrangements and basic internet penetration among SMEs


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6. Systems / IT A Bottom Up Approach

5. Organization

4. Delivery Channels

3. Risk Management / Analytics

2. Products/Services

1. Market Research

3. Risk Management / Analytics

Pre-selection and Marketing

  • Review performance by sales and origination channel (e.g. target marketing vs. unsolicited applications)

  • Define pre-selection strategies for own clients (cross-selling), clients of clients, and market segments

    Underwriting

  • Review current performance of small business clients in both retail portfolios and commercial portfolios

  • Leverage credit scoring experience of consumer credit underwriting (models, application processing, reporting)

    Portfolio Management and Collections

  • Review current performance of collections

  • Leverage retail experience in collections (defined stages, collection scoring, call center)

Data capture & management, analytical skills and monitoring.


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Importance Attached to Credit Reporting: A Bottom Up ApproachSurvey of Latin American Banks

35

30

25

20

Number of Firms

15

10

5

0

Collateral

Financial Standing

Of The Borrower

Borrower's History

With the Bank

Information from a credit registry is more important

Information from a credit registry is less important


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Value Of Data for SME Lending A Bottom Up Approach

HIGH

PERSONAL

BUSINESS

VALUE

LOW

SMALL

SIZE OF COMPANY

LARGE


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6. Systems / IT A Bottom Up Approach

5. Organization

4. Delivery Channels

3. Risk Management / Analytics

2. Products/Services

1. Market Research

4. Delivery Channels

Review delivery channels options

  • Existing channel mix & utilization

  • Level of automation

    Adapt and develop delivery channels

  • Keep it simple – 24/7

  • Branch – Business Bankers/Agents – ATM – Call center – Electronic Banking

  • Mobile Banking?

Cost efficiency, differentiation in the market and client satisfaction.


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6. Systems / IT A Bottom Up Approach

5. Organization

4. Delivery Channels

3. Risk Management / Analytics

2. Products/Services

1. Market Research

5. Organization

Review current organizational set-up

  • Current market and product focus

  • Sales / Credit / Collections

    Allign organizational requirements

  • Separate organizational responsibilities for SME Finance (rather part of retail than of commercial banking)

  • Combined factory and sales approach

  • Centralized processing of credit applications

  • Clear responsibilities for collections

  • Clear responsibilities and incentives for deposit raising and cross-sales (including personal financing needs of the owner)

Clear responsibilities and clear processes.


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6. Systems / IT A Bottom Up Approach

5. Organization

4. Delivery Channels

3. Risk Management / Analytics

2. Products/Services

1. Market Research

6. IT / Systems

Review current systems

  • Client-driven vs. product-driven

  • Reporting and data management capabilities

  • Delivery channel support

    Adapt systems development

  • Towards Customer Relationship Management (CRM) capabilities

  • Towards maximum data availability

  • Towards multi-channel management

Be able to use information – record / report / analyze.


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