Opportunities for Action in Financial Services. Winning Jack Back: New Challenges in Small-Business Banking

Transcription

1 Opportunities for Action in Financial Services Winning Jack Back: New Challenges in Small-Business Banking

2 Winning Jack Back: New Challenges in Small-Business Banking Meet Jack. He runs a small computer-training and office-services business with about 50 employees. His company is growing fast, and he hopes to hire 15 to 20 more employees within a year. He s proud of the relationships he builds with customers relationships that generate most of his revenues through repeat business. But if you get Jack talking about one of his own major business relationships, it soon becomes clear that all is not well. That relationship is with his bank. According to Jack, his bank is charging him higher and higher fees but giving him a lower level of personal service. He isn t happy, but he feels trapped. It will cost him money to change his banking relationship, and he isn t sure it would make any difference. As far as he knows, all banks are the same. There are lots of Jacks out there. Small and mediumsized enterprises (SMEs) play a crucial role in most national economies and drive big profits for banks. They are important customers, but surveys clearly reveal that they feel their banks don t value them. Data show that in some countries up to 20 percent of SME customers are switching banks every two years. What has happened to sour that relationship? An Increasingly Disenfranchised Segment Part of the problem can be traced to the heavy cost cutting of the 1990s, when banks in many regions

3 closed local branches. With the closures came the departure of many banking managers who had built deep relationships with their local business customers. Industry consolidation also contributed to higher manager turnover. At the same time, many banks were increasing their transaction and service fees to offset declining interest margins and migrate customers away from high-cost channels. For SME customers, the higher fees represented a hefty increase in the cost of banking, with no compensating increase in service. In addition, the SME sector itself has been changing. Many newer SMEs, particularly in the growing professional-services sector, no longer require local branch service or traditional banking products. They have limited cash transactions, are more likely to require receivables than property finance, and prefer online and telephone channels but only if they offer good functionality and service. To make matters more complicated, financial products have proliferated, as have the channels that provide them (which now include accountants, independent financial advisers, trade associations, and online services that offer products from both traditional bank and nonbank sources). This evolution has created more choice in the market but also the potential for more confusion, increasing SME customers need for navigational help and trustworthy advice. All of these forces have combined to create an increasingly disenfranchised SME segment. Many customers feel that their banks are overcharging them, underservicing them, or both. In the United States, nonbank players such as GE Capital, American Express, and Merrill Lynch have stepped into this breach and taken share from incumbents. Even UPS, the parcel delivery service, has bought a bank to target SME sales opportunities.

4 The implications of these developments for banks economics are significant. A recent BCG benchmarking survey of 65 global banks showed that many institutions are leaving money on the table in the SME segment, with significant profitability gaps between the global leaders (which generate ROE of between 20 and 40 percent) and the rest of the pack. 1 In continental Europe, where margins have been particularly low for this segment, profitability is increasingly sluggish as restructuring and Basle II pricing disciplines are being applied. If SME market shares shift, many dollars of banking profit will go with them. Banks need to find ways not only to keep their current SME customers but also to identify and attract new ones. How can they address this challenge? Five Critical Questions BCG research shows that different SME business strategies and operating practices rather than bank size in a particular market are the most powerful drivers of varying profitability. In our view, institutions that want to increase retention, gain share, and improve returns should begin by asking themselves the following questions. 1. How can we build the right sales and service models? Most banks claim to segment their sales and service approaches for SME customers. But many could strive for a finer level of segmentation that would help them match products and service levels with real customer needs and enable them to improve margins. Jack might well be overcharged and underserviced 1. See The Path to Value Creation: Global Corporate Banking 2003, BCG report, November Available at

5 paying for an unresponsive, undertrained relationship manager, for example, or enduring long waits for credit decisions. But his bank could also be overservicing its less profitable customers and failing to effectively target high-potential prospects. The key is to segment by customer value, aligning the resources expended on specific clients with the revenues that the bank gains (or is likely to gain) from them. A thorough analysis of customers past profitability patterns is a useful tool in this process. Our benchmarking found that relationship managers in some banks look after around 60 SME customers while managers in others are responsible for up to 1,400. Many practical choices have an impact on a gap like this: Which activities can be addressed by telephone or online, and which should be dealt with in person? How much face time does each SME client really need, given its profitability level for the bank? In our view, institutions that are winning the SME challenge are those that attain the most granular segmentation, identify the most attractive client groups, strive to understand their individual needs, and then design finely tuned value propositions (which can include product bundling). Execution, also, must be crisp. An experienced relationship manager must deliver highly specialized service to the customers that desire it (and will pay for it); similarly, the functionality of call centers and Web sites must be smooth for customers who prefer those channels. 2. How can we meet our SME customers personal banking needs? SME banking has enormous worth in itself, but a small-business owner s personal financial holdings can also add great value. SME customers personal banking needs are often commingled with those of

6 their business. The two sets of needs tend to have a similar underlying credit risk and are usually tax optimized as a whole by the business owner. The bank s goal must be to provide one-stop shopping and to maximize cross-selling opportunities. Most banks routinely refer SME customers personal banking needs to their retail division, but handoffs are often poorly executed. A common reason is that competition between the retail- and business-banking groups can create disincentives for effective cooperation. Our experience suggests that organizational initiatives can help address this problem. We know one North American bank, for example, that has been successful in this area by collocating wealth management advisers and business-banking relationship managers, and providing both manager groups with effective incentives to jointly acquire SME customers full range of accounts. We have observed, moreover, that capturing an SME customer s personal banking business can increase the bank s profitability from that customer fivefold. In addition, some banks are figuring out how to bundle business and retail products in ways that meet SME customers specific needs. Such bundling can help increase loyalty and profitability. In loan products, banks can deepen relationships by weighing credit histories on both the business and personal side if doing so benefits the customer. In insurance offerings, personal-pension and life-insurance products can be linked to key-man protection in the business. The opportunities in this area are many, but close coordination among different areas of the bank is critical to seizing them. 3. How can we offer tailored solutions? SME customers particularly the largest ones increasingly want customized solutions to their banking

7 needs, and some banks have rushed to provide them. But the results have often been disappointing for banks and customers alike. Relationship managers need to be knowledgeable about a very broad range of products if they are to identify opportunities along a client s entire value chain. In practice, most are not. Conventional wisdom would suggest investing in manager training, minimizing frontline turnover, and introducing industry focus (where feasible) to improve performance. In our experience, however, these steps alone are insufficient. In fact, most banks would benefit by taking a very different approach: investing more in well-designed, aggressive product campaigns and coupling them with upgrading the sales capabilities of generalist relationship managers. Doing so would require product specialists to take offerings used in the more sophisticated institutional segment, simplify them, and then roll out the product to relevant customers through generalist relationship managers. Customers often find that these proactive offers are useful in meeting a specific business need and perceive the bank as offering tailored service. UniCredito Italiano, Italy s second-largest banking group, has enjoyed considerable success with just such an approach. It has attained a 60 percent share of Italy s 160 billion corporate-derivatives market and has succeeded in targeting SMEs, offering solutions to insure them against changes in interest rates, currency-exchange rates, and other risks. UniCredito s success has been partly the result of tight management of its derivatives specialists in addition to its ability to make derivatives understandable to SME clients. Indeed, in a general sense, the simplification for SMEs of products originally designed for large corporations such as derivatives or loans with complicated structures can bring banks significant benefits.

8 Another tactic is designing products for specialized groups of SMEs. In rural areas, for example, some banks have succeeded in targeting small farming businesses whose financial needs revolve around the time lag between planting crops and actually being paid for them. Banks should strive to design such highly specialized offerings so that they are compatible with core back-office processes. To minimize costs, the innovation should be at the front end, not the back end, of the product. 4. How can we grow outside our core geography? Strategies to grow market share outside a bank s core geography are challenging to get right. If the strategy is not designed to meet specific customer needs and leverage competitive advantage, it will fail. A successful attack strategy requires a willingness to carry short-term acquisition costs, to formulate an entrepreneurial sales proposition, and to learn by trial and error. For example, BankWest, the Australian subsidiary of HBOS, has cleverly gained share from incumbents outside its home region by targeting SME customers that are willing to split their banking among more than one institution or that have low over-the-counter branch service needs. Its customers report very high satisfaction with a service model of telephone-based, industry-specialist relationship managers and on-theground mobile bankers. Without branches and with focused sales and service propositions, BankWest is able to offer very competitive prices to a select segment of customers. Other banks have fruitfully pursued certain SME clients through their trade associations. If a connection with a trade association can be made, business relationships with its individual members often follow, even if those members are in farflung regions.

9 5. How can we break the business-as-usual stranglehold? Successful SME banking businesses are learning environments. Some of the most profitable players manage change in a very sophisticated way. They measure where value is created in different parts of the business to identify management issues and opportunities. They constantly try alternative customer-acquisition propositions, channel-referral models, and sales and service offers and can quickly and flexibly apply the lessons learned from those trials. They also employ increasingly sophisticated, retail-like analytical approaches to target their offers and make informed cost-benefit decisions on segmented sales and service models. Some cutting-edge organizations, for example, are using statistically driven methods to profile potential customers, determine how their banking share of wallet is allocated, and formulate specific offers based on the products they are likely to need. For banks, part of such a process is accurately perceiving the gaps in their product portfolios and figuring out how best to fill them. In a broader sense, breaking the business-asusual stranglehold is about being unafraid to experiment, learning from mistakes, and having an organizational structure in place that fosters innovation and creativity. Seizing the Challenge The above questions aren t easy to answer. Many banks are only now realizing that protecting not to mention growing their SME business is more complex and difficult than it has ever been. SME customers are becoming bolder, more flexible, and more willing to bear switching costs if they are dissatisfied

10 with the services and prices they receive. And few banking CEOs would deny that a failure to protect their SME businesses will destroy significant shareholder value. One of Jack s friends recently recommended an independent financial adviser who could help Jack decide how best to invest the surplus funds that his business is generating. Jack is finding that it makes a refreshing difference to be treated like a known and valued customer. The adviser has plenty of good ideas, some of them about how Jack could change his financial arrangements and break his relationship with his bank. Jack is seriously considering the move. Do you know how many Jacks you have in your SME business? Nicholas Glenning Jürgen E. Schwarz Massimo Busetti Nicholas Glenning is a vice president and director in the Melbourne office of The Boston Consulting Group. Jürgen E. Schwarz is a vice president and director in the firm s Toronto office. Massimo Busetti is a vice president and director in BCG s Milan office. You may contact the authors by at: glenning.nicholas@bcg.com schwarz.juergen@bcg.com busetti.massimo@bcg.com The Boston Consulting Group, Inc All rights reserved.

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