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Efma Article

  1. 1. COVER STORY SMErelationship management The future of banking ■ Next cover stor y ■ N° 226 October / November / December 2010 ■ Cards & payments ■ OTP BANK Benefit from knowing your customers p. 52 / SWEDEN More or fewer segments? p. 56 / SURVEY Winning model for small business p.60 / PORTUGAL Adjusting the commercial approach to customers p. 64 / UBIBANCA Developing relationship management performance p. 68 / SURVEY Why spend money on relationship management? p. 72 / SUB-SEGMENTATION Capturing granular growth opportunities p. 86 / July / August / September 2010 - N° 225 Efma journal | 51
  2. 2. Cover Story ❘ SME banking OTP Bank Benefit from knowing your customers More than ever before, during the crisis period, we have realised that customers are the bank’s most important asset and the value of the bank is the value generated by existing and future clients. Starting from this perspective, we have decided to focus on understanding how to improve the bank’s value to customers and how to optimise the value of client relationship in order to retain clients longer, grow them into bigger customers and make them more profitable. W Roxana Maria Hidan ith fact-findings showing that it is always easier and Deputy director, product less expensive to sell additional products and management directorate OTP Bank România services to existing customers than to acquire new ones, especially in a market where the economic conditions are not as good as they were previously, we wanted to understand where we stood and found out which of our clients offered the best opportunities for growth. In this respect, we initiated a segmentation analysis to obtain more information about our customers, for example: average number of products typically used, profitability per client, frequency of transactions, history of relationship with the bank, etc. For the purpose of segmentation, a scorecard was designed and points were attributed to clients based on the behavioral patterns and on the value of these customers to the bank. The weights allocated to each variable were determined by ranking different variables using specialised decision-making software. The expert scorecard model helped us to define how the various behavioral and customer value variables would play out against each other and which would be more important to define the type of customer that we want to have more of. A final score was calculated for each client using both the benchmarks and the scorecard variables weights. Based on the distribution of final scores, the customers were separated into four main segments: − Green –the most profitable clients. This segment represents 23% of the total number of SME clients who generate more than 85% of the revenues. − Potential green –registering a good cross-selling ratio, these clients are the main providers of liabilities within SME segment. − Orange –the largest SME segment, carrying out 40% of the clients. The product usage within this segment is sporadic, and the income contribution is not covering the operational costs. 52 | July / August / September 2010 - N° 225 Efma journal
  3. 3. SME banking ❘ Cover Story Customer distribution 9% Green 23% Potential green Orange 28% 40% Red − Red –inactive clients. In addition to the four segments identified by the data mining exercise, the newcomers and start-up businesses will generate a fifth segment. The second phase consisted in a quantitative research conducted within the first two most profitable client segments. The purpose of this research was to gain additional insights about the profile of the clients in the identified segments, what were the sources of satisfaction/dissatisfaction, and what were the motivational triggers and the opportunities for new products and services. The research revealed the following facts: • 78% of “green” and “potential green” clients consider OTP as being the main bank and 59% are performing more than 80% of their transactions through the accounts open with OTP Bank Romania; • the good relationship with the staff of the bank is “the core” feature for 48% of the “green” and “potential green” customers; • the proactive approach of the bank representatives and good “word of mouth” are very important criteria when choosing a bank. 43% of the companies started their relationship with OTP Bank because a bank’s representative visited them, and 39% because they received good references from their business partners. Only 28% paid a visit to the bank without being previously visited by a bank representative or without receiving good references regarding OTP Bank. As the interviewed customers were part of the most profitable SME clients, one of the most important aspects of the research was customers satisfaction. This part of the research was conducted by an independent research agency. The matrix used to rank customers’ satisfaction confirmed that the aspects registering higher importance and higher satisfaction are: July / August / September 2010 - N° 225 Efma journal | 53
  4. 4. Cover Story ❘ SME banking > I- “Friendly approach/kind personnel”; > R- “Very well trained personnel”; > S - “Electronic and on-line services”; > F - “Short waiting time”; > J - “Professional (financial) counseling”. HIGH SATISFACTION HIGH SATISFACTION AND LOW AND HIGH IMPORTANCE IMPORTANCE SATISFACTION LOW SATISFACTION LOW SATISFACTION AND LOW AND HIGH IMPORTANCE IMPORTANCE IMPORTANCE At the opposite side, D - “bonus points for loyalty” recorded the highest level of attractiveness but the same time the lowest level of satisfaction. The low level of satisfaction is given by the absence of a “bonus points for loyalty” concept for the SME moment. The idea was proposed to research together with six other new products (loans, deposits, package, etc.), and it resulted that the “bonus points for loyalty” is “the missing piece of the puzzle”. Conclusions. The information acquired in the first two phases (data- mining and research) led us to design profitable strategies for each segment. For the “green” and “potential green” segments the strategy will be to increase service level and customer satisfaction in order to build loyalty and clients retention (almost certain by implementing a “bonus points for 54 | July / August / September 2010 - N° 225 Efma journal
  5. 5. SME banking ❘ Cover Story loyalty” scheme). These two segments are the most profitable for OTP and probably the most desired by the competition as well. Keeping these clients is essential, and ensuring a positive banking experience will increase OTP’s brand awareness through “the word of mouth”. The aim for the “orange” and “red” segments will be either to up-scale the clients to more profitable segments by implementing a retention strategy with a low operational cost through standardised services, or to reduce the bank’s operational costs by closing inactive accounts. With regard to the “newcomers”, the approach will be to on-board the clients using a strategy which will impede them from becoming “Red clients”. The assessment of customers has to be a continuous process in order to fully understand where the best opportunities for growth are, and how we can increase the probability that they will do more business with us and that when they call for a product or service, “it is ours they choose.” Creating win-win circumstances is the only way to profitable growth! ■ Efma has moved to new premises New address 8, rue Bayen F-75017 Paris Phone: +33 1 47 42 52 72 Fax: +33 1 47 42 56 76 Best practices in retail financial services July / August / September 2010 - N° 225 Efma journal | 55
  6. 6. Cover Story ❘ SME banking Sweden More or fewer segments? In order to make the most out of the potential of the market for small-and medium-sized enterprises, SEB started a drive in 2003. As a result, the bank has received several awards, many new customers and increased market shares in the strategically important SME segment. One part of the success has been clear segmentation. The question is whether there is a need of even further segmentation in this market. S Stefan Andersson EB’s persistent drive to improve services and consulting Head of SME, retail banking for Sweden’s small-and medium-sized enterprises has SEB been successful. It is with great pride that we have in the latest years have accepted the award of Small business bank of the year in Sweden, even though SEB his known to be a bank for large businesses. The number of SME clients has increased with over 50% during the last five years, which has also given a considerable increase in revenues. The global financial crisis has hit Sweden hard but has still been much milder here than in many other European countries. A lot of this is due to the fact that the banking system learned from earlier crises during the 1990s. This has been a contributing reason to why SEB has not tightened the credits to small businesses. On the contrary, we have developed new fast and flexible financing solutions for the smallest businesses and marketed these even when things looked the worst on the financial markets during 2009. Now, the future is looking brighter for the Swedish small businesses, and SEB continues the drive with unchanged force. The SME Segment is very important to SEB. Here, there is an untapped market potential where many banks often have a little less focus on the quite sprawling target group. It consists of companies in hundreds of different business areas, part-time entrepreneurs, one-person businesses, start-ups, growing companies and organisations. What they all have in common is that they often include the private business of owners, management and employees, which makes the SME companies an excellent recruitment base for new private customers. Another argument for backing SME is that the bank can gain large cost coverage for products and services developed for slightly larger companies. 56 | July / August / September 2010 - N° 225 Efma journal
  7. 7. SME banking ❘ Cover Story Furthermore, most of the big businesses have been small at one point. Tomorrow’s corporate banking clients are for this reason probably to be found among retail’s SME clients. Less than 30 minutes. SEB applies a similar segmentation model for both private and corporate markets. Simplified, the customers are segmented according to small, medium or large turnover or complexity. But it is always the client who decides which segment and which offer is the most appropriate. The central support follows the model that small clients have a stronger central support while the larger SME clients are mostly handled through the branches. We have focused very hard on securing that our promises are fulfilled. This has gradually transferred to securing the quality of our offers, ensuring that they are interesting and create value for the clients. This is one of the driving forces behind SEB’s sales training programme that is going to be carried out during 2010 for everyone working with SME clients, including managers. SEB’s concept for the smallest enterprise clients is built on a By using the Internet office, package of the most common bank services that is both easy to the business owner can take buy for the clients and easy to sell for our co-workers. In less than care of his/her business, but 30 minutes the business owner will have access to the services that also separate the private he or she needs to start making business. The package contains economy from the business. accounts, payment services, Internet-banking and even financing. By using the Internet office, the business owner can take care of his/her business, but also separate the private economy from the business. Free-of-charge economic advice is included when necessary, and everything is favourably priced. We have also decided that all tellers will be able to handle the smallest companies’ needs, including opening package solutions. In this way we can help the client with the company’s basic needs and most things concerning private economy at the same time. External partners. For certain target groups among small enterprises, we have found a need to develop our service and our offer. One example is start-ups –a target group that is steadily increasing thanks to economic upswing, but also as a result of a changed social structure where individual realisation, increased demand of services and streamlined big businesses are important July / August / September 2010 - N° 225 Efma journal | 57
  8. 8. Cover Story ❘ SME banking driving forces. SEB’s start-up offer guides the new entrepreneur through the most important stages on the road from business idea to fully functioning company; everything from the registration of the company, free of charge counselling for new companies and simple bank package solutions, to counselling and help with financing and insurance solutions. We have also developed a number of favourable offers from external partners in, for example bookkeeping, marketing, administration, office supplies, e-business and collection services. Other subsegments are female entrepreneurs and entrepreneurs with a foreign background. SEB does not have any special offers for women, but we do try to adjust our market communication so it suits all target groups. With immigrant entrepreneurs, it is more a matter of attitudes and knowledge or understanding of different cultures and business patterns. An activity we recently realised in collaboration with Swedish authorities is an interactive training programme for bank counsellors, where the participant gets to travel to different countries and meet local clients. The training programme is now mandatory for office co-workers in SEB, but also open and free of charge for all banks. Private economy and business enterprise go hand in hand. When it comes to larger businesses within retail that border to the corporate division segment, we have regional business centres that support both the local offices for larger businesses and more demanding customers, and have their own client Focus on SEB Group SEB is a North European financial group serving some 400,000 corporate customers and institutions and 5 million private customers. SEB offers universal banking services in Sweden, Germany and the Baltic countries: Estonia, Latvia and Lithuania. It also has local presence in the other Nordic countries, Ukraine and Russia, and a global presence through its international network in major financial centres. On March 31, 2010, SEB Group’s assets under management totalled SEK 1.382 bn. The group has about 21,000 employees. Read more about SEB at 58 | July / August / September 2010 - N° 225 Efma journal
  9. 9. SME banking ❘ Cover Story responsibility. The work method and our offer is here similar to the one we have for larger clients within corporate banking, but with the advantage that we have tied the private business close to the SME teams. In owner-lead businesses, the private economy is often strongly related to the corporate economy. So, do we need more segments for SME? I do not believe in SEB does not have any special increased segmentation, but I do believe in aiming the CRM and offers for women, but we certain activities at certain target groups. For example, new do try to adjust our market entrepreneurs, immigrant entrepreneurs, property owners and communication so it suits all larger SME clients. However, my experience is that it is best to target groups. With immigrant secure the basic segmentation and delivery of possible client entrepreneurs, it is more a promises before going too far in the subsegmentation. The most matter of attitudes and important thing is to have a plan for which “breaks” to develop in knowledge or understanding the CRM, and to not hope for too much. “Keep it simple” is often of different cultures and a more successful method. business patterns. The lesson we have learned from working with developing the SME business in SEB is, among other things, that private economy and business enterprise go hand in hand, that the leaders play a crucial part of the outcome, and that there is an advantage of having a small team in the mapping, and strategy and tactics in the building phase. However, a small team is often a limitation when it comes to implementation. I think we have managed to balance this at SEB, which is one of the reasons behind the success of our small enterprise business. ■ July / August / September 2010 - N° 225 Efma journal | 59
  10. 10. Cover Story ❘ SME banking Survey Winning model for small business Small-business banking has become an even more challenging but critical activity for retail banks since the economic and financial crisis. To thrive, banks must get much closer to their customers while more actively managing the risks, according to research from the new report from Capgemini, UniCredit and Efma. S Bertrand Lavayssière mall-business banking has long been a core segment for Managing director, global financial services retail banks, but the systemic effects of the financial crisis Capgemini mean that banks will need more intimate knowledge of their customers’ operations and better risk-management systems to serve the segment effectively and profitably going forward. “Small-Business Banking and the Crisis: Managing Development and Risk” is the seventh edition of the World Retail Banking Report. It draws on an extensive market survey and interviews with 58 large retail banks in 21 countries to demonstrate why the small-business market is attractive and strategic –but risky– for retail banks today, and it looks at ways in which banks can outperform competitors on both developing the business and managing its risks. To win, retail banks will need to Strategic significance of small-business banking is rising. develop two critical areas: the The economic and financial crisis has raised the stakes in small- role of the relationship manager business banking in several key ways: and the efficacy of credit risk • By raising the macroeconomic and social profile of small management systems. businesses. Small businesses make up 99% of all companies in Europe, Japan, and the US, and employ 51% of people working in the private and non-financial sectors. Considering the importance of small businesses to national economies, most governments have a strong interest in supporting this fast-growing market, and as such, banks have added pressure to make development a top priority. • By making the economics of small-business banking even tougher. With small-business clients going through hard times, there has been less demand for banking products, mainly credit, because of investment freezes and, to a lesser extent, the use of alternative financing such as associative networks and public funds. The crisis has led to higher costs of financing. As a result, for the first time since 2005, European bankers expected a decline in 60 | July / August / September 2010 - N° 225 Efma journal
  11. 11. SME banking ❘ Cover Story their revenues from the small-business market Weight of the small-business in 2009. • By increasing the risks. Small-business market in retail banking banking is inherently risky. Small businesses are more vulnerable than larger enterprises, because they tend to have, for instance, low - levels of capitalisation, no or weak credit ratings, and high bankruptcy rates –and these factors make them especially - vulnerable during economic slowdowns. In fact, our research shows small businesses account for 27% of net retail banking income, but 46% of total retail risk-weighted - assets (see figure 1). At the same time, the increased cost of risk was said by 86% of Fig. 1 surveyed bankers to be a major threat to Source : Capgemini analysis from bank interviews 2010 their business resulting from the crisis. In fact, 51% said it was the single most important threat caused by the crisis –more so than declining demand (31%), pressure on prices (10%) or better-armed competitors (8%). For banks, then, the small-business segment currently represents an important but risky revenue stream that has significant potential to develop further, especially since governments are urging banks to expand their small-business propositions. However, the greatest opportunity for banks –and the biggest challenge– arguably lies in becoming a small business’s main banker, capturing as much of the flows, credit, and savings as possible through cross-selling and up- selling, while actively managing the associated risks. Managing those challenges in the post-crisis landscape will force banks to adapt in order to succeed. Banks will certainly need to better discern the varying needs and risks of their small-business customers, which are a highly heterogeneous group whose behaviours and needs tend to be part mass-market, part corporate. Bankers will therefore need to develop an approach that mixes elements of both standardisation and customisation– while managing the associated risks. The “winning bank” model. Given the evolving demands of the small-business segment, the “winning bank” model involves two key July / August / September 2010 - N° 225 Efma journal | 61
  12. 12. Cover Story ❘ SME banking elements: shifting the role of relationship managers (RMs) –to bring them closer to clients and to empower them on credit-risk management– and implementing complete and fully integrated credit risk-management systems (figure 2). More specifically, banks will need to move along two dimensions to become a 'winning bank': 1. Pushing relationship managers to develop a deeper understanding of each client’s line of business, needs and expectations, while empowering those RMs to manage credit risk. To build robust client relationship, banks need to give their RMs the time they need by limiting the number of clients each RM manages or limiting the breadth of products and services each must handle. Banks can also give RMs more time to act as bankers by providing institutional support. For example, they can lighten the administrative and non-commercial workload of RMs by reinforcing middle-office positions, such as sales assistants. To empower RMs on risk, banks will need to grant them more authority and responsibility in the decision process as well as in credit underwriting, credit portfolio management and loan rescheduling. The “winning bank” Banks can provide additional support by continuously improving the model credit process, offering dedicated coaching resources to help they manage sales and credit decisions, and establishing rigorous governance of RMs and their decisions. Notably, all these measures are likely to make the role of RMs more empowered and attractive, increasing the likelihood that RMs will remain in their jobs for longer –making customer relationships more robust. 2. Implementing efficient and comprehensive credit risk- management systems that can Fig. 2 accommodate the highly specific and complex risk- 62 | July / August / September 2010 - N° 225 Efma journal
  13. 13. SME banking ❘ Cover Story Small Business Banking and the Crisis: Managing Development and Risk. A survey by Capgemini, UniCredit and Efma. management needs of the small-business market, including appropriate governance, fully integrated credit risk-management processes, and complete and seamless supporting information systems. This “winning bank” model will enable banks to outperform their competitors on both development and risk management by: • Accelerating business development by increasing client satisfaction and loyalty, and enhancing the bank’s ability to cross-sell successfully, thereby supporting revenue generation despite increased cost-of-risk pressures. • Mastering risk, based on wider usage and sophistication of rating- based scoring tools, strengthened proactive management of performing credit portfolios, and an improved credit collection process with “soft” (amicable) collection processes that aim to return financially deteriorating client relationships to “normal” without the bank losing money or an important customer relationship. Conclusion. The “winning bank” model positions retail banks to To empower RMs on risk, outperform competitors by unlocking the potential of the small-business banks will need to grant market –while also meeting growing calls from governments around them more authority and the world to better serve these businesses, which are a key driver of responsibility in the decision economic growth. process as well as in To win, though, retail banks will need to develop two critical areas: credit underwriting, credit the role of the relationship manager and the efficacy of credit risk- portfolio management and management systems. And to achieve sustained success, each bank loan rescheduling. must define a transformation strategy that is based on its starting point as it relates to market position (retail versus corporate), culture and organisation, as well as the existing role of RMs and the current state of credit risk-management systems. To navigate this transformation effectively, banks will also need robust change-management approaches to achieve alignment with the bank’s overall strategy, support from senior management, and buy-in from employees. It will be an important journey. For each bank, the ability to effectively serve small businesses is crucial not only for its profitability, but also for its reputation and legitimacy. To be successful with small businesses, banks must stabilise RMs, continuously invest in their competence, bring innovations to the credit process, establish a smooth multichannel interface and gain the trust needed to address the personal and savings dimensions of the entrepreneur.■ July / August / September 2010 - N° 225 Efma journal | 63
  14. 14. Cover Story ❘ SME banking Portugal Adjusting the commercial approach to customers The current economic and financial landscape is leading banks to adjust their commercial approach, especially regarding the market for small-and medium-sized companies (SMEs): traditionally oriented towards credit concession, the strategy is now shifting towards a more diversified offer, stronger customer relationships and an increased focus on profitable, value-added services. T Jose Araujo he new focus must be on margins, on capturing customer Director of SME marketing funds and liquidity, on maximising cross-selling and cross- Millennium bcp networking levels, while maintaining rigorous risk assessment policies through effective and simple planning. Moreover, in this climate of uncertainty, it is fundamental to increase the number of customer visits and contacts in order to establish a comprehensive understanding of the SME business evolution, preventively detecting any sign of difficulties, presenting solutions that protect the sustainability of the SME and the relationship with the bank. In that sense, a new model of approach to customers is needed... one that increases the commercial team’s proactivity through training sessions, with the proper management tools and involving all of the bank’s hierarchy. The main goal of this new commercial programme is to define a systematic approach towards the SME market, through the implementation of a series of actions: A new commercial plan Current context New focus for 2010 • Economic recession Rigorous management of credit Increase profitability (spreads, • Lack of liquidity on financial fees, managing product “mix”) markets, leading to an increase Better Collateralization Redefinition of in funding costs Review exposure levels at worst commercial • Capital restrictions / credit credit risks shortage Strategy Capture of SMEs funds and liquidity Increase cross-selling & cross- • More regulatory pressure networking levels New program -> “ Closer to the customers” 64 | July / August / September 2010 - N° 225 Efma journal
  15. 15. SME banking ❘ Cover Story 1. establish groups of customers, according to predefined criteria; 2. define a commercial policy for each group; 3. adjust support tools to ensure the correct implementation of these policies; 4. implement initiatives at several levels (training, monitoring and commercial events) to help achieve the expected results. Customer classification. To best focus the commercial action, the customers have been classified according to specific predefined criteria: • customer’s risk grade » to best support the credit analysis; • economic income » enabling the visualization of the customer’s contribution to the bank’s profit & loss account (deducted from the cost of capital and expected loss); • any previous credit incidents. Following this classification of customers and in order to direct the action of the commercial area, a group of generic and specific guidelines were established, providing relationship managers with the proper way to approach each customer regarding their portfolio. Generic Group guidelines Specific guidelines Mission A - Customers with a ratio “Direct Credit/ A Maintain fidelization Funds” 20% B and - Customers with a ratio “Direct Credit/ Funds” > 20% and a risk grade <= 7 Applicable to B improve profitability all customers C - Customers with credit and risk grade 8 or 9 C Protect the credit risk D - With credit & risk grade of 10, 11 or 12 - Order to demobilize/Reduce credit exposure D Reduce exposure - Payment’s behind or litigation in the last 3 months E The relationship manager can either, include - With credit and no risk grade these customers in one of the previous groups - With risk grade >= 13 or simply decide to exclude them - Without credit Define a specific commercial policy per group. The generic guidelines reflect the global strategy established by the bank to approach the SME market and the main areas of action: July / August / September 2010 - N° 225 Efma journal | 65
  16. 16. Cover Story ❘ SME banking • Capture deposits (via the placement of value-added products) Customer funds • When granting credit (mostly through state sponsored credit lines) Treasury negotiate treasury or value-added products as a trade-off Costs • Increase the transactional banking relation, via the Internet-banking site • Capture of time deposits • Focus on the placement of state sponsored lines and mutual guarantees for credit concession (remembering the trade-off with treasury and insurance) Credit • Credit oriented to short-term operations, namely commercial credit and guarantees Margin • Medium/long-term financing: use mainly leasing solutions Costs Fees • Pricing: - New operations: apply spreads according to defined ROIC and liquidity premiums, and standard fees; - Existing operations: check the possibilities for adjusting spreads and/or fees • Promote documentary operations and increase international transactions Trade finance (in or out), via the Internet-banking site • Focus on foreign guarantees, namely for Millennium bcp customers with international operations Cross-selling • Placement of products with a high potential for generating fees & cross- (insurance, cards, interest rate or change coverage solutions, networking investment banking products) as well as referral from other banking areas. As for the specific guidelines, they present the commercial area with the policy that should be taken into account in the day-to-day relation: • Support SMEs in their investment projects, internationalisation and Group A + B consolidation in the current business sector; Maintain loyalty • Increase cross-selling to an average of 5 products per customers (currently 4); & improve profitability • Establish a close connection with customers with reduced use of credit lines, in order to reinforce share of market for treasury services. • Reinforce collaterals Group C • Adjust the credit exposure, eventually reduce to customers with Protect the credit risk a high credit market share • Maximise cross-selling and cross-networking levels; • If treasury market share is inferior to credit market share, increase treasury market share or increase credit pricing Group D • Reduce credit exposure or increase collaterals Reduce exposure • Replace financial with commercial credit Support tools to help implement the new commercial plan. The implementation of the commercial action plan is based on a group of support tools and constant monitoring, in order to evaluate the results obtained and identify the need to redirect the set of actions. The commercial 66 | July / August / September 2010 - N° 225 Efma journal
  17. 17. SME banking ❘ Cover Story action plan of each classified customer is registered by the relationship manager in this support tool which reflects: - The defined approach strategy for each customer. - A document, summarising the generic and specific guidelines. The process is completed with a solution that provides all levels of the commercial area (branch manager, commercial director, network coordinator) with the monitoring capabilities to ensure the completion of the defined strategy… Training and commercial events. The success of the commercial In this climate of uncertainty, action plan rests on a series of key drivers, designed to ensure that the it is fundamental to increase the relationship managers have full knowledge of strategic products and number of customer visits and improve the connection between bank and SMEs, which is even more contacts in order to establish a essential in these troubled times. For this reason it’s fundamental to include comprehensive understanding training sessions in the global plan, empowering RMs with more of the SMEs business evolution. information to consolidate knowledge about the strategic products, and adding value by a live exchange of experience between commercial managers from different branches, representing various regional markets and sharing best practices. The training sessions include the presence of commercial directors, branch managers, RMs and assistants from several branches, in order to discuss “best and worst practices”, debate solutions on specific products (trade, cards and insurance) and close with a general debate, presenting suggestions for improvement and key commercial guidelines. Finally, a very important component of the new commercial action plan is to strengthen the bonds between the commercial area and the SMEs, in order to: - establish a closer connection with the customer; - provide the RM with a greater knowledge of the customer’s needs; - identify business opportunities and define the best solutions; - achieve better preparation for customer contact. These events are attended by around 50/60 of the most representative customers, by invitation. They occur in all regional markets where the bank has a branch and also serve as excellent opportunities for the board to present the bank’s strategy for the SME segment and for customers to best understand the economic environment, which naturally affects the SME/bank relationship. In conclusion, the new commercial plan of approach to the SME market is based on better planning, better support tools, more training of the commercial area and increased interaction with customers, in order to grow as a bank and as a team.■ July / August / September 2010 - N° 225 Efma journal | 67
  18. 18. Cover Story ❘ SME banking UBI Banca Developing relationship management performance The small-business segment, where UBI has more than 360,000 clients, manages the relations with the small-and medium-sized enterprises (SMEs); in more detail, this segment deals with companies with a turnover of up to 5 million euros. T Maria Angela Albertotti he small-business segment an extremely heterogeneous Area retail responsabile segmento client base, which represents diversified businesses and small business UBI Banca enterprises, both in terms of size and service requirements. As a result, the approach to understand clients and satisfy their requirements must necessarily be suited to their diverse characteristics. This is why UBI has decided to gradually activate differentiated service models for SMEs and small economic operators, as can be seen from the business strategy of the UBI retail market. In fact, the businesses in this segment are subdivided into two different subsegments on the basis of their turnover: below 300,000 euro for small economic operators and between 300,000 euro and 5 million euros for SMEs. The two subsegments thus identified have clearly different characteristics, both for their intrinsic particuliarities and number of clients and the extent of the margins produced for the bank (there are more small economic operators but the produced unit margins are lower). A non-diversified business model proved to be inappropriate, both from the point of view of commercial efficiency and cost to serve, which was excessive for a high number of clients. “High-tech” and “high-touch” approach. In consideration of the fact that the commercial activity of the manager is always based on the exploration and satisfaction of the macro-requirements in the proactive stage and the reactive stage, it became necessary to find a more efficient method for managing commercial activities with the company clients. This led to the implementation of a new service model with a differentiated approach for each subsegment, or rather, a “high-tech” approach for the small economic operators clients, and a “high-touch” approach for the SME clients. 68 | July / August / September 2010 - N° 225 Efma journal
  19. 19. SME banking ❘ Cover Story The bank’s objective to satisfy the client. For the small economic operators, which have simpler and less customised requirements, the bank’s objective to satisfy the client and consequently enhance client loyalty is pursued by means of a (high-tech) “standardised” approach which is implemented by the parent company. The central departments have used a statistical engine to draw up a series of parameters relating to the individual counterparts and the results have made it possible to define client subgroups with uniform behavioural patterns (known as clusters). Through commercial campaigns, these clusters may be offered an ideal basket of products and services with an industrial approach. This makes it possible to cover all of the client requirements and to reduce the cost to serve of the manager, while optimising marketing times, also thanks to the assistance of the contact centre which develops specific contact campaigns. The time “saved” with the small economic operators is dedicated to The businesses in this segment SME clients. For this subsegment, which has more sophisticated are subdivided into two requirements that are less easy to standardise, the client management different subsegments on the approach is based totally on relations (high-touch). The bank’s basis of their turnover: below objective is to become the main reference partner for the client by 300,000 euro for small globally satisfying all of its requirements, thanks to constant relations economic operators and between with the manager. 300,000 euro and 5 million euros for SMEs. Differentiated campaigns. This differentiation makes it possible to structure client management in an increasingly efficient manner, making the initiatives, the offer and the sales support more targeted and effective and, at the same time, allowing the bank to focus on current and future relations with clients of high standing. The application of the new service model has also been reinforced by the way the commercial campaigns are prepared: for both, only relation campaigns are envisaged as opposed to “product” campaigns which are, in our opinion, an obsolete and inefficient way of approaching clients. The small economic operator and SME campaigns are differentiated in terms of frequency of the contact and in the tools available to the manager for exploring the requirements of the clients. In fact, in the framework of the CRM interaction platform for small economic operators, an ideal basket of products and services, for which the purchasing probability has been calculated, is provided July / August / September 2010 - N° 225 Efma journal | 69
  20. 20. Cover Story ❘ SME banking to each manager for each client in the portfolio. Therefore, the manager’s job consists in creating a unique global offer with the aim of completing the ideal basket, starting with the products or services with the highest probability of being purchased. The opportunities are explored Ad hoc solutions. For the SMEs, on the other hand, the by the manager in quarterly opportunities signalled to the manager (on the basis of the potential) proactive one-to-one meetings identified by the business intelligence analysis, are explored in with the clients. quarterly proactive one-to-one meetings with the clients. During these meetings the various particularities of the business and the development potential of the company undergo an in-depth check- up with the client so as to pinpoint requirements that have not been met and translate these into opportunities. For these purposes, the manager has at his disposal the CRM interaction tools, which, in addition to a central opportunity identification service, include a check-up form which guides the manager through the negotiations with the client. The check-up form is also used to report feedback about the meeting and as a record of personal opportunities. The details in the individual check-up form that are then summarised in the portfolio, where the manager can immediately see the entire record of open opportunities. Therefore, exploration of the client’s requirements is fundamental in both segments, as well as the timely satisfaction of these requirements by means of proposing ad hoc solutions. Focus on UBI Banca UBI Banca is organised on the basis of a federal, polyfunctional and integrated model. The group is structured as follows: a parent company, which centralises the governance, control, coordination and support functions overseeing the nine network banks which are in charge of the relations with the traditional reference territory, and the broad range of product companies of the group. The group doesmainly retail banking but has a traditional presence in the small and medium-sized enterprises (SMEs) sector as well as a private banking activity, which places the group amongst the top players on the Italian market. 70 | July / August / September 2010 - N° 225 Efma journal
  21. 21. SME banking ❘ Cover Story The challenge taken up with the introduction of the new service models is intended to be a tangible example of how knowledge of the client combined with the distinctive skills, experience and abilities of the managers can lead to an improvement in the level of satisfaction of our clients, which can give us leverage to sell better, more –and before our competitors. ■ The only European publication dedicated to retail financial services Your new quarterly magazine Best practices in retail financial services download Efma journal on July / August / September 2010 - N° 225 Efma journal | 71
  22. 22. Cover Story ❘ SME banking Survey Why spend money on relationship management? European banks employ over 40,000 staff as small business relationship managers (RMs). Taking the full costs of employing them, it costs around 2.2bn euros a year to provide this service to customers. Why is so much money being spent? T Doug Wilson his article explores the reasons for this expenditure –both good Director and bad– and offers some guidelines for relationship manager Finalta usage. It is extracted from the fourth annual Finalta/Efma Small Business in Europe report published in January 2010, using research contributions from over 90 banks. Further comment comes from Finalta’s ongoing benchmarking and best practice work with major banks across Europe. For clarity, here we define small businesses as those entities serviced within the retail bank (rather than in corporate banking) –typically below 3m euros turnover in Western Europe and 1.5m euros turnover in eastern Europe. The issue. It is commonly accepted that relationships with high-value small-business customers should be managed by dedicated, specialist branch staff. Figure 1 shows the average to be around 3 dedicated staff per 1,000 customers though varying substantially both within and between regions. Dedicated staff numbers Across Europe, banks employ around three dedicated front line staff per 1,000 small business customers Dedicated front line staff per 1,000 SB Customers 7 6 5 Dedicated front line FTEs / 1,000 4 SB customers Upper Quartile 3 2 Lower quartile 1 0 Eastern Central Southern Northern Region Dedicated front line FTEs: Relationship managers, dedicated SB centre managers, hunters, assistants Regions. North: UK, Ireland, Benelux, Scand, Germany, France. South: Portugal, Spain, Italy, Greece. Central: Poland, Czech, Hungary, Slovakia, Croatia, Slovenia. East: Bulgaria, Romania, Serbia, Ukraine. Source: Finalta / Efma 2010 small business study 72 | July / August / September 2010 - N° 225 Efma journal
  23. 23. SME banking ❘ Cover Story Across Europe, approximately 50% of small-business customers are relationship managed, typically in portfolios of 150 to 250 customers. These customers are managed using a service model which defines a certain number of proactive contacts and face-to-fact meetings per year. To assess whether it makes sense for European banks to employ roughly 40,000 people to make regular contact with around eight million customers, we need to understand the role of the relationship manager. The role of the relationship manager. There are three main purposes: • to play a major role in the lending process –initial authorisation, ongoing monitoring and, normally, collections; • to acquire and on-board new customers and to sell further products and services to existing customers; and • to build and maintain relationships to increase loyalty, satisfaction and referrals. On average, RMs spend approximately a third of their time on lending, a third on sales and acquisition and a third on customer servicing. Perhaps this means everything is fine. However, we need to understand the above in more detail. Lending processes. Almost all small-business executives agree that the On average, RMs spend credit authorisation process for small businesses in their bank is poor. In approximately a third of their many banks, particularly in CEE, small-business loans of less than time on lending, a third on sales 50,000 euros are decided using processes originally built for corporate and acquisition and a third on lending decisions of over 1m euros. It takes many days to collect the data customer servicing. required to submit an application and then many more days to get a decision from credit control. On average, in CEE, the elapsed time is 8.4 days for unsecured and 15.4 days for secured lending decisions. It is not much better in many Western European banks. Not only does this lead to a terrible customer experience in a key moment of truth, it is also very expensive. Best practice allows most unsecured credit decisions to be made within 24 hours and secured lending decisions within 72 hours. For many banks, what the relationship manager is actually doing is attempting to make poorly designed systems work and to shelter the customer from too much pain and inconvenience. The relationship manager is an expensive “sticking plaster” for poor process design. July / August / September 2010 - N° 225 Efma journal | 73
  24. 24. Cover Story ❘ SME banking Direct channels for small business banking, January 2010. A joint Efma/Finalta production. The study is available on our website: Customer acquisition and sales. Depending on the geography, new small-business customer acquisition rates can be upward by 20% per annum (though, sadly, attrition rates may be similar). Thus, a relationship manager can be kept very busy setting up and on-boarding new customers. However, is this a necessary and appropriate task for a relatively expensive small-business RM? For almost all banks, the vast majority of new customers are start-ups who have very simple banking needs and, in all probability, will continue to have simple needs. There is no good reason why accounts could not be opened by regular branch staff. Finalta is seeing an increasing movement to use non-dedicated staff for simple account opening and reactive sales of other products (deposit accounts, debit cards, etc.) to allow the RM to focus on high-value sales and interactions. If a bank feels small-business account opening is too difficult for regular branch staff, then the process is probably too complex and needs to be re- designed. Equally, on-boarding processes can be structured so contact centre or non-specialist staff “filter” new customers to leave the specialist RM focused on those new customers of immediate or potential high value. Building customer relationships. Most small-business customer surveys emphasise the importance of regular contact with a relationship manager along with the ability to customise products and services for them. But does this factor always justifies the use of relationship managers? We believe some caution is needed. A customer may “value” contact with a relationship management and product customisation, but: Conclusion A lot of money is spent on relationship management. Is this with good reason? Good reasons Not so good reasons To demonstrably add value to the lending To compensate for slow, complex and poorly decision making and monitoring process managed lending processes To provide valuable relationship development To compensate for other processes that don’t with customers who both justify and need it deliver a good customer experience To identify and acquire high value existing To open current accounts for start-ups, most of businesses from competitors whom will only ever have basic requirements To allow the bank to expand the relationship to To ensure that someone in the branch has the personal needs of the customer, the family some knowledge of and cares about small and employees business customers 74 | July / August / September 2010 - N° 225 Efma journal
  25. 25. SME banking ❘ Cover Story • Is the “value” of the RM his ability to find a way through the complex processes of the bank for the customer? If so, this is another example of RMs used as an expensive balm for poor processes. • Does the value in relationship management require a local, branch-based RM? An increasing number of banks across Europe are finding that remote relationship management models provide at least as high customer satisfaction as the traditional model. • Whilst the customer may wish for customisation, is this good for the bank? For almost all banks, the vast In searching for growth, many banks have customised offers and ended majority of new customers are up with terribly complex systems, product sets and records – and therefore start-ups who have very simple costs. Customisation does not fit well with efficient, high volume processes. banking needs. There is no good Generally, a customer wants the basic products and services to work easily reason why accounts could not and quickly. Only in key moments, such as lending requests, is the human be opened by regular branch interaction really vital. staff. Conclusions. We are not arguing that local small-business RMs should not be used. There are good reasons for keeping them: • If they truly add value to the lending and monitoring process. However, in many situations, they are actually compensating for lending processes that are not fit for purpose. • To build relationships with customers who both justify and value this. This is different from compensating for a poor service experience. • To acquire and to on-board high-value “switchers”, but not to open accounts for low-value start-ups when this could be done by regular branch staff. • To extend the relationship from the business to the personal needs of the customer. Unfortunately, few banks have successfully developed models to achieve this. In the current economic environment, Finalta sees many banks reassessing their usage of relationship managers and asking: • What is the purpose of local relationship management? • Which customers should be managed in this model? • What is the real value that is being added? • What are the right measures and targets? Perhaps a third of a typical small-business RM’s time can be saved by better processes. Perhaps a third of locally relationship managed customers do not require, nor justify, this model. Saving or redeploying this time and cost can support the business case for process improvement. ■ July / August / September 2010 - N° 225 Efma journal | 75
  26. 26. Cover Story ❘ SME banking Subsegmentation Capturing granular growth opportunities The small-business segment segregates value which is every so often difficult to spot and manage. The reason for it has to be scoured in the evolutionary pathway the segment has been going through over the last decades along with the search for an enhanced relationship between small-business customers and the bank. I Simone Davi n the light of these evolved needs and being an important revenue Small business clients, marketing contributor, the small-business segment requires a concrete focus on & segments, CEE retail Bank Austria UniCredit Group customers’ needs together with their potential. Therefore, a dedicated business model has been designed and three mandatory features: a) Strategic subsegmentation: a ranking based on customer’s value creation potential. b) Service model: how to serve the customers through an effective cost-to- serve, sales approach and commercial tools all bound to the customer’s value creation potential. c) Product offer: bundling vs. simplified product offers properly tuned on to the customer’s value creation potential and real needs. Lately, credit risk management has been representing a key matter to handle with care in the correct definition of a business model, regardless of the customer’s own strategic value. Therefore, each and every one of the three features described above definitely embeds it. Hence, by putting all this together, granular growth opportunities can be seized and can deliver value in return to both the bank and its clientele. Highly qualified relationship managers. Let’s now unveil the characteristics of this approach by providing a brief description of each of the shortlisted features. Feature a) represents the core activity to a successful customer’s value (EVA or revenue potential) identification and management, thanks to which four strategic groups can be outlined: top asset, top borrower, core and marginal. These strategic groups are the outcome of specific statistical data analyses, ran at customer level; these analyses extract and elaborate data from both internal (bank databases) and external (banking system databases and other statistical databases – i.e. credit bureau) in order for the bank to identify the so-called customer’s banking behavioral patterns and needs. Thanks to these patterns, proxies 76 | July / August / September 2010 - N° 225 Efma journal
  27. 27. SME banking ❘ Cover Story of customer’s revenue potential are identified and ranked, for instance, by sector of industry, type of company, geography and so on. Should the revenue potential be unavailable to some customers or prospects, such proxies help assign each customer or prospect to the most appropriate strategic group. The final outcome of this process is to generate a matrix of priorities which sees customers lined up by revenue potential: the higher the potential, the more profitable the customer, the more frequent and qualified the relationship. In general terms, where such analyses were carried out, it was noticed that the “Pareto principle” fitted with the customers base distribution by revenue generation/potential. It means that up to 20%/25% of the total customer base, which corresponds to the upper quartile/top quartile of the distribution by potential (named after the strategic segmentation top asset/top borrower customers), can generate about 70%/80% of the segment’s total revenues and deliver even higher EVA values. Therefore, such high EVA values require a differentiated service model as Small-business banking requires cost to serve, sales approach and commercial tools must be meticulously a concrete focus on the aligned to the revenue potential. To follow the track, feature b) fits the customers’ needs together purpose by defining how to serve all groups of customers accordingly. In with their potential poor words, most valuable customers (namely those who have specific structured needs for financial advisory –i.e. cross-border operations to finance) have to be served by highly qualified relationship managers who are sitting in so-called dedicated business centres or business corners, whereas customers having basic banking needs should be effectively served by the means of portfolio pools through an extensive usage of alternative sales and advisory channels (namely call centres/remote advisors, Internet portal or in-branch 24/7 banking areas) so as to lower the number of their physical step-ins or contacts with in-branch sales or financial advisors. Such a value-driven approach can deliver superior financial and banking advisory services and tailored solutions to each customer according to the degree of sophistication of the respective banking needs (the customer’s banking needs complexity ranking goes this way: top asset/top borrower > core > marginal). Such an approach can then generate an enhanced customer experience and level of satisfaction (wich is measurable through Tri*M index analyses). A customer’s new portfolio set-up comes out by combaning feature a) with b) before running the sub-segmentation, top asset/top borrower, core and marginal customers belonged to a common basket and were managed ineffectively, being randomly assigned to senior, July / August / September 2010 - N° 225 Efma journal | 77
  28. 28. Cover Story ❘ SME banking junior or undefined relationship managers regardless of their value. It even lead to portfolio overpopulation (having a much bigger portfolio size than those currently in place). The right product to the right customer at the right time. Nowadays, thanks to the subsegmentation, portfolios have been properly balanced and optimised with valued customers assigned to senior relationship managers (i.e. portfolios have a share of top asset/top borrower customers and/or core hiher than 80% and have an average size of 150/170 customers in total, whereas junior relationship managers have a share of valued customers lower than 10% (and an average of 350/400 customers per portfolio, largely populated by marginal customers). In addition, a specialised small-business channel is eventually set up, which has its own dedicated services, personnel and branding/communication. Then, feature c) is the third gluing element to a successful story. As described, each customer being ranked by revenue potential, the total number of banking products/services owned by a customer becomes fundamental to launch sales We serve the SB segment according to a very effective campaigns. Therefore, structured approach centered around segmentation once the customer’s banking behavior and needs are well and keeping an eye out on risk at all times known (as seen in feature a), by running subsegmentation SB segment business model analyses by which needs are 1 Identify highest potential sub-segment of customers Credit also identified and clustered as Risk Key Specific Cost-effective underwriting process difficulties solutions for transactional, financial, asset- Automatic risk monitoring system Methodology in CEE CEE 1 related and protection), the Low data Extensive use Sub- 2 Portfolio allocation Bank External Client demo- availability, of proxies bank can leverage on such a Service optimized by data data both market cluster segmentation graphics model customers' value to minimize cost-to- and analysis competitive advantage (that is customer Strategic sub- Data collection segmentation serve Standardized/ via external the knowledge of your own Data analysis engine agencies based on prescriptive sales approach customer indeed) and value creation and commercial potential tools Costs difficult to Use of marginal effectively sell tailored banking Commercial 3 allocate for EVA contribution instead of EVA products/services by defining Bundling sub- calculation segmentation Product Simplified offer the most adequate value offer (one need-one based on product) Top EVA/ Low Crosschecks propositions to each group. customer Targeted value Revenue granularity between value to drive proposition for top Core potential and quality different Thus, when you know your campaigns, customers of internal databases, Needs products, and Small ticket lending Marginal databases information clean-up customer, you can even for marginal acquisitions customers understand beforehand the related needs and, for 78 | July / August / September 2010 - N° 225 Efma journal
  29. 29. SME banking ❘ Cover Story instance, offer to a top borrower a pre-approved loan to expand his/her turnover, facilitate his/her business operations and increase the bank’s loan penetration as well as the bank’s share of wallet with that customer. Likewise, the bank can increase its share of wallet on top-asset customers by attracting business owner’s assets through asset bundling products, for example by offering an alluring beat-the-market interest rate on term deposits. The other way round, the bank can grant quick small-ticket loan packages as hook products to attract new customers or increase loan penetration for instance, or offer a migration package to those marginal customers (lower potential customers) in order to retain and manage them efficiently via remote channels. Let’s draw a conclusion on this brief article by answering to this simple question: what does the bank gain by setting up and following such a state- of-the-art subsegmentation approach? It simply allows the bank to manage both effectively and efficiently its customers (the right product to the right customer at the right time) and its resources (employees and banking solutions), as well as to run acquisition campaigns aimed at attracting valuable and reliable customers. ■ 2 A specialized small business channel SB segment business model Layout & SB zone with waiting areas/meeting Main branch offering rooms Credit Services for SB owners Risk SB Center High performance transaction services Cost-effective underwriting process Automatic risk monitoring system Mini branch Organiza Increased branch manager attention 1 -tion Detailed support staff Sub- 2 Portfolio allocation SB Corner Service optimized by Commu- Differentiated logo/ branding segmentation nication model customers' value to Increased visibility Marketing/ minimize cost-to- Outlet/ Individual promotion efforts Strategic sub- serve branch segmentation Standardized/ Referral to SB based on prescriptive sales center/ corner approach value creation and commercial potential tools 3 Define value proposition to each segment to fill product gaps Commercial 3 Bundling Segment New product Benefit sub- Product Simplified offer segmentation (one need-one Top Pre-approved Increased loan penetration and share of offer borrower loan wallet based on product) customer Targeted value Asset bundle Increase share of wallet value to drive proposition for top Top asset Attract business owner’s assets campaigns, customers products, and Small ticket lending Working capital Innovative product to increase loan for marginal Core acquisitions bundle penetration customers Quick small- Hook product to attract new customers ticket loan pckg Migration Retain customers Marginal package Manage costs – migrate to remote channels July / August / September 2010 - N° 225 Efma journal | 79