Small Is Beautiful

SMEs are profitable business for the banks and maximising the revenue from this sector is important. Doug Wilson analyses the effectiveness of techniques used to achieve this end.
For most European banks, servicing Small and Medium Enterprises (SMEs) is an important source of revenues and profit. Some retail banks derive up to 25% or more of revenues from SME banking while profit can exceed this percentage. For most European banks their focus on this segment has increased in the last three years.
To understand the nature of SME banking in Europe today, The European Financial Management and Marketing Association (EFMA) and Finalta conducted an online survey of EFMA members and other senior banking executives towards the end of 2006. In total 53 participants from 20 different European countries took part. Between them, their banks manage over seven million SME customer relationships.
Some major opportunities for revenue and performance enhancement appear to be:
• Increasing the use of remote channels for sales activities, as well as servicing and transactions. Whilst most make limited use of this channel, some pioneers are gaining 15% or more of revenues remotely. Particularly in Northern Europe, we see increasing use of online loan application and fulfilment.
• Increasing the pro-activity of relationship managers. Meetings are correlated with sales. Some banks’ relationship managers carry out more than 12 meetings a week whilst others achieve less than four. Clearly there are other factors to consider, such as the value of the existing book. But there seems to be a major upside, especially for those banks that separate the SME business from the retail bank, in increasing advisor sales efforts.
• Ensuring that efforts to centralise the credit process, as well as other benefits, do actually lead to an increase in customer sales focus by front line staff. This does not appear to be happening at present.
• Using reward systems to ensure that performance gets rewarded and that high performance gets high reward. The classic way to gain share is to recruit the best relationship managers from competitors. If rewards are averaged, these staff will be more at risk to offers from competitors.
It is worth noting that 94% of banks in the survey are increasing their emphasis on the SME segment. There are also numerous examples of new entrants to the market in many countries, or regional competitors expanding nationally. Whilst there may be inherent growth in the market, it follows that achieving organic growth will require gaining share.
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