This document discusses strategies for banks to effectively target and serve professional practices such as doctors, lawyers, and accountants as customers. It notes that professional practices have unique financial needs and risk profiles compared to regular small businesses. These include needs for transaction processing, credit products tailored to equipment and expansion needs, investment products for retirement and succession planning that integrate personal and business finances, and understanding malpractice risk. The document recommends that banks understand industry differences, develop tailored value propositions, break down organizational silos, target future professionals as potential long-term customers, and optimize underwriting to meet the specific needs of professional practices.

1. 12 | November / December 2009 - N°222Efma(g)
Products and markets
uch reactive strategies are
perpetrated by prejudiced
perceptions of the unknown
or rather lack of adaptability
in the face of the unknown. Since the
SME lending paradigm is fraught with
unknowns, evidenced by the relative
dearth of consensus among
academics and professionals dealing
with standardised banking approaches to SME financing,
the response is not surprising.
Lending to SME clients offers a highly lucrative opportunity
for banks in the CEE to pursue growth and profitability.
However, if not pursued strategically it can squander great
amounts of economic capital and represents a substantial
credit risk.
As banks strive to develop a more surgical approach to
pursuing high value SME customers to diversify their loan
and deposit mix and salvage their post credit crisis
portfolio, one attractive segment involves serving the
professional practices in medicine, law and public
accounting.
Banks wishing to serve this specialised sub-segment within
SME need to understand the key factors impacting the
success of bank-professional customer relations so as to
design an approach that allows them to provide value-
added solutions to professionals. As professional practice
characteristics vary according to jurisdiction, location
(urban versus rural), specialisation, revenue streams
(government subsidized insurance or private) and
education/licensing requirements which contribute to
unique risk profiles, bankers should position their products
accordingly.
• Transaction products. Medical professions tend to
be more sensitive to cash flow given their overreliance to
government and private insurance as their main revenues
has lengthened collection times for receivables often
resulting in negative cash flow characteristics. For lawyers
trust/escrow accounts require knowledge of local fiduciary
responsibilities as dictated by regulatory laws. Attention
should be paid to those jurisdictions within the CEE which
obligate legal professionals to use the state bank or the
financial services arm of their licensing bodies.
• Credit products. Like regular SMEs overdraft or
revolvers are important to most practices to run day to day
operations. However unlike regular SMEs, capital leasing
of specialized equipment particularly for physicians and
mortgages for clinics are growing exponentially in demand
within the post credit crisis CEE. For those practices
involved in expansion by acquisition or partnership buy-
ins, longer terms and loans with variable repayment
options are the de-rigueur in professional lending.
• Investment products. Retirement and succession
planning are uniquely important to professionals. One
critical difference involves the degree to which personal
and business finances overlap. While many SMEs view
their business and personal requirements as interlinked,
professionals in the CEE who have relied on personal credit
and investment products to fund their professional
operations are particularly more prone to do so. Care
should be taken to offer truly distinctive investment options
for both their personal and professional practice objectives
without conflict.
While regular SMEs, particularly within the CEE lack reliable
sources for customer and industry performance statistics,
professionals through their licensing bodies have relatively
more useful and meaningful data. Most SMEs particularly
sole proprietorships are more susceptible to unpredictable
longevity either closing operations within their first five years
or morphing into diverse business activities that are not
easily anticipated, while professionals are typically defined
by their homogeneous long term sustainable growth with
multiple expansion and succession opportunities.
Affiliations with professional associations tend to be
stronger with professionals than regular SMEs
licensing/regulatory bodies represent the interests of
professionals, provide continuing education, serve as
networks, and create standards of ethical conduct. This
S
A. Garcia Monterde
SME banking
Success requires selectivity
in targeting products
While recovery strategies are the main focus in SME banking today, little has been done with
underwriting strategies in the pursuit of the new sub-segments. The credit crisis has regrettably
provoked a reactive response by the CEE banking community through underwriting restrictions
rather than developing a more proactive response through underwriting optimisation.
By Alejandro Garcia Monterde SME risk team Raiffeisen International Bank-Holding
alejandro.garcia-monterde@ri.co.at
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2. Products and markets
offers financial institutions with opportunities in terms of
partnering their brand with said professional associations.
• Break the organisational Chinese Walls. Banks
tend to have a divide between the commercial/SME area,
personal products or affluent banking areas. Professionals
and their financial advisors will react favorably to a suite
of products that appears tailored to their joined business
and personal needs. Success with this SME subsegment
requires selectivity in targeting the products offered and
focus on service model basics. More importantly, referral
service models which rely on ‘one facilitator’ as the sole
representative between the professional and experts within
a bank’s sub-segments will pave the way to a sustainable
and profitable long term relationship.
• Define the value proposition. Bank management
needs to determine what the nature of their offer is to a
professional, in effect, why a professional should deal with
them rather than their many other choices. This proposition
must be as concrete as possible and ensuring that the
bank can deliver on it will provide internal direction and
can result in external reputation building that in the long-
run will sustain multiple customer referrals.
Unlike most SMEs the lifecycle of a professional is more
predictable enhancing a bank’s ability to anticipate the
firm’s financial requirements. These can be categorized as
1) Founding or acquiring of an existing practice 2) Practice
Expansion & Partnership Buy-in 3) Succession Planning
M & A. Overall the professional’s career plan begins from
protecting their assets, client list and supporting the growth
of the firm ultimately for succession or sale.
Underwriting optimisation means understanding your target
group’s unique credit, operational risks and enterprise
financing needs to provide competitive and optimal pricing,
repayment conditions, tailored products via industry
specific risk scoring criteria.
Arguably the single distinguishing operational cost not
normally considered in risk profiling among regular SMEs
is malpractice vulnerability risk. The severity of malpractice
risk is also determined by the development of the local
legal infrastructure, jurisprudence and regulations
surrounding ethical and fiduciary responsibilities within the
target country. Access to data bases that track pending
lawsuits or suspension of licenses should be added to
credit bureaus and company registry searches.
Dentists have higher sunk costs in equipment purchase
or leasing than lawyers or accountants. While their median
base annual salary is lower as it is considered an ‘elective
medical procedure’ which is not subsidised by government
social insurance as general practitioners this puts a further
strain on revenue sourcing.
Specialised knowledge of this equipment is often lacking
among most banking service personnel and adequately
assessing collateral value and operating life cycles to
maximize tenors and pricing are potentiality hazardous.
A crucial marketing element to a bank’s professionals
segment is attracting and cultivating those customers
about to enter the legal, medical and accounting
professions. The student subsegment is the critical ‘hook’
by which to attract future professional customers. This
customer demographic however, if not properly understood
within each CEE jurisdiction in terms of risk profiling for
future potential customers can become an unprofitable
and risky proposition.
An understanding of the educational, apprenticeship and
licensing requirements in each of the CEE jurisdictions
which grant professionals the privilege to practice
independently is essential. For example a law student has
a lower probability of becoming licensed as a lawyer than
an articling law graduate about to take the bar exam. A
bank’s decision to target the law student versus the
articling graduate should be closely tied to a bank’s
particular risk appetite, product characteristics and long
term customer relationship model.
Each CEE country within Raiffeisen’s network differs vastly
in the process for actual licensing with equally divergent
time frames. For each CEE jurisdiction research is required
to design PI products best suited to each pre-professional
candidate based on their likelihood of successfully
completing their formal qualification before they become
licensed independent practitioners and thus potential long
term professional banking customers.
Just like their western counterparts CEE educated
professionals who wish to establish their own practice,
acquire an existing one or purchase an interest in a new
practice further contributing to large sunk costs. According
to Raiffeisen’s network bank in Romania which has one
of our most developed professionals subsegment targeting
doctor’s and lawyers are increasingly buying, rather than
leasing, their clinic or buildings.
All of this and much more creates opportunities for lenders
and financial advisors within the professionals
financing market. ■
N°222 - November / December 2009 |13Efma(g)
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