Efma Article

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

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SME bankingCOVER STORY

The future of relationship management

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52 | July / August / September 2010 - N° 225 Efma journal

Cover Story ❘ SME banking

OTP Bank

Benefit from knowingyour customers

Roxana Maria HidanDeputy director, productmanagement directorate OTP Bank Româ[email protected]

More than ever before, during the crisis period, we haverealised that customers are the bank’s most important asset andthe value of the bank is the value generated by existing andfuture clients. Starting from this perspective, we have decidedto focus on understanding how to improve the bank’s value tocustomers and how to optimise the value of client relationshipin order to retain clients longer, grow them into bigger customersand make them more profitable.

ith fact-findings showing that it is always easier andless expensive to sell additional products andservices to existing customers than to acquire newones, especially in a market where the economicconditions are not as good as they werepreviously, we wanted to understand where we

stood and found out which of our clients offered the best opportunitiesfor growth. In this respect, we initiated a segmentation analysis to obtainmore information about our customers, for example: average number ofproducts 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 pointswere attributed to clients based on the behavioral patterns and on thevalue of these customers to the bank. The weights allocated to eachvariable were determined by ranking different variables using specialiseddecision-making software. The expert scorecard model helped us todefine how the various behavioral and customer value variables wouldplay out against each other and which would be more important to definethe type of customer that we want to have more of. A final score wascalculated for each client using both the benchmarks and the scorecardvariables weights. Based on the distribution of final scores, the customerswere 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 therevenues.

− Potential green –registering a good cross-selling ratio, these clients arethe 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 incomecontribution is not covering the operational costs.

W

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SME banking ❘ Cover Story

− 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 withinthe first two most profitable client segments. The purpose of this researchwas to gain additional insights about the profile of the clients in theidentified segments, what were the sources of satisfaction/dissatisfaction,and what were the motivational triggers and the opportunities for newproducts 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 theirtransactions through the accounts open with OTP Bank Romania;

• the good relationship with the staff of the bank is “the core” feature for48% of the “green” and “potential green” customers;

• the proactive approach of the bank representatives and good “wordof mouth” are very important criteria when choosing a bank. 43% ofthe companies started their relationship with OTP Bank because abank’s representative visited them, and 39% because they receivedgood references from their business partners. Only 28% paid a visitto the bank without being previously visited by a bank representativeor 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 customerssatisfaction. This part of the research was conducted by an independentresearch agency. The matrix used to rank customers’ satisfactionconfirmed that the aspects registering higher importance and highersatisfaction are:

23%

28%

40%

9% Green

Potential green

Orange

Red

Customer distribution




> I- “Friendly approach/kind personnel”;> R- “Very well trained personnel”;> S - “Electronic and on-line services”;> F - “Short waiting time”;> J - “Professional (financial) counseling”.

At the opposite side, D - “bonus points for loyalty” recorded the highestlevel of attractiveness but the same time the lowest level of satisfaction.The low level of satisfaction is given by the absence of a “bonus pointsfor loyalty” concept for the SME moment. The idea was proposed toresearch together with six other new products (loans, deposits, package,etc.), and it resulted that the “bonus points for loyalty” is “the missingpiece of the puzzle”.

Conclusions. The information acquired in the first two phases (data-mining and research) led us to design profitable strategies foreach segment.For the “green” and “potential green” segments the strategy will be toincrease service level and customer satisfaction in order to build loyaltyand clients retention (almost certain by implementing a “bonus points for

LOW SATISFACTION AND HIGH IMPORTANCE

HIGH SATISFACTION AND HIGH IMPORTANCE

HIGH SATISFACTION AND LOW

IMPORTANCE

LOW SATISFACTION AND LOW

IMPORTANCE

IMPORTANCE

SA

TIS

FAC

TIO

N




loyalty” scheme). These two segments are the most profitable for OTPand probably the most desired by the competition as well. Keeping theseclients is essential, and ensuring a positive banking experience willincrease OTP’s brand awareness through “the word of mouth”. The aim for the “orange” and “red” segments will be either to up-scalethe clients to more profitable segments by implementing a retentionstrategy with a low operational cost through standardised services, or toreduce the bank’s operational costs by closing inactive accounts. With regard to the “newcomers”, the approach will be to on-board theclients using a strategy which will impede them from becoming“Red clients”.The assessment of customers has to be a continuous process in order tofully understand where the best opportunities for growth are, and howwe can increase the probability that they will do more business with usand 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! ■

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Sweden

More or fewersegments?

Stefan AnderssonHead of SME, retail bankingSEB

In order to make the most out of the potential of the market forsmall-and medium-sized enterprises, SEB started a drive in2003. As a result, the bank has received several awards, manynew customers and increased market shares in the strategicallyimportant SME segment. One part of the success has been clearsegmentation. The question is whether there is a need of evenfurther segmentation in this market.

EB’s persistent drive to improve services and consultingfor Sweden’s small-and medium-sized enterprises hasbeen successful. It is with great pride that we have inthe latest years have accepted the award of Smallbusiness bank of the year in Sweden, even though SEBhis known to be a bank for large businesses. The

number of SME clients has increased with over 50% during the lastfive years, which has also given a considerable increase inrevenues.The global financial crisis has hit Sweden hard but has still beenmuch milder here than in many other European countries. A lot ofthis is due to the fact that the banking system learned from earliercrises during the 1990s. This has been a contributing reason towhy SEB has not tightened the credits to small businesses. On thecontrary, we have developed new fast and flexible financingsolutions for the smallest businesses and marketed these even whenthings looked the worst on the financial markets during 2009.Now, the future is looking brighter for the Swedish smallbusinesses, and SEB continues the drive with unchanged force.The SME Segment is very important to SEB. Here, there is anuntapped market potential where many banks often have a littleless focus on the quite sprawling target group. It consists ofcompanies in hundreds of different business areas, part-timeentrepreneurs, one-person businesses, start-ups, growingcompanies and organisations. What they all have in common isthat they often include the private business of owners, managementand employees, which makes the SME companies an excellentrecruitment base for new private customers. Another argument forbacking SME is that the bank can gain large cost coverage forproducts and services developed for slightly larger companies.

[email protected]

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By using the Internet office,the business owner can takecare of his/her business, butalso separate the privateeconomy from the business.


Furthermore, most of the big businesses have been small at onepoint. Tomorrow’s corporate banking clients are for this reasonprobably to be found among retail’s SME clients.

Less than 30 minutes. SEB applies a similar segmentationmodel for both private and corporate markets. Simplified, thecustomers are segmented according to small, medium or largeturnover or complexity. But it is always the client who decideswhich segment and which offer is the most appropriate. The centralsupport follows the model that small clients have a stronger centralsupport while the larger SME clients are mostly handled throughthe branches. We have focused very hard on securing that ourpromises are fulfilled. This has gradually transferred to securingthe quality of our offers, ensuring that they are interesting andcreate value for the clients. This is one of the driving forces behindSEB’s sales training programme that is going to be carried outduring 2010 for everyone working with SME clients,including managers.SEB’s concept for the smallest enterprise clients is built on apackage of the most common bank services that is both easy tobuy for the clients and easy to sell for our co-workers. In less than30 minutes the business owner will have access to the services thathe or she needs to start making business. The package containsaccounts, payment services, Internet-banking and even financing.By using the Internet office, the business owner can take care ofhis/her business, but also separate the private economy from thebusiness. Free-of-charge economic advice is included whennecessary, and everything is favourably priced. We have alsodecided that all tellers will be able to handle the smallestcompanies’ needs, including opening package solutions. In thisway we can help the client with the company’s basic needs andmost things concerning private economy at the same time.

External partners. For certain target groups among smallenterprises, we have found a need to develop our service and ouroffer. One example is start-ups –a target group that is steadilyincreasing thanks to economic upswing, but also as a result of achanged social structure where individual realisation, increaseddemand of services and streamlined big businesses are important




driving forces. SEB’s start-up offer guides the new entrepreneurthrough the most important stages on the road from business ideato fully functioning company; everything from the registration ofthe company, free of charge counselling for new companies andsimple bank package solutions, to counselling and help withfinancing and insurance solutions. We have also developed anumber of favourable offers from external partners in, for examplebookkeeping, marketing, administration, office supplies, e-businessand collection services.Other subsegments are female entrepreneurs and entrepreneurswith a foreign background. SEB does not have any special offersfor women, but we do try to adjust our market communication soit suits all target groups. With immigrant entrepreneurs, it is morea matter of attitudes and knowledge or understanding of differentcultures and business patterns. An activity we recently realised incollaboration with Swedish authorities is an interactive trainingprogramme for bank counsellors, where the participant gets totravel to different countries and meet local clients. The trainingprogramme is now mandatory for office co-workers in SEB, butalso open and free of charge for all banks.

Private economy and business enterprise go hand inhand. When it comes to larger businesses within retail that borderto the corporate division segment, we have regional businesscentres that support both the local offices for larger businesses andmore demanding customers, and have their own client

SEB is a North European financial group serving some 400,000 corporatecustomers and institutions and 5 million private customers. SEB offersuniversal banking services in Sweden, Germany and the Baltic countries:Estonia, Latvia and Lithuania. It also has local presence in the other Nordiccountries, Ukraine and Russia, and a global presence through itsinternational network in major financial centres. On March 31, 2010, SEBGroup’s assets under management totalled SEK 1.382 bn. The group hasabout 21,000 employees. Read more about SEB at ww.sebgroup.com.

Focus on SEB Group




SEB does not have any specialoffers for women, but wedo try to adjust our marketcommunication so it suits alltarget groups. With immigrantentrepreneurs, it is more amatter of attitudes andknowledge or understandingof different cultures andbusiness patterns.

responsibility. The work method and our offer is here similar to theone we have for larger clients within corporate banking, but withthe advantage that we have tied the private business close to theSME teams. In owner-lead businesses, the private economy is oftenstrongly related to the corporate economy. So, do we need more segments for SME? I do not believe inincreased segmentation, but I do believe in aiming the CRM andcertain activities at certain target groups. For example, newentrepreneurs, immigrant entrepreneurs, property owners andlarger SME clients. However, my experience is that it is best tosecure the basic segmentation and delivery of possible clientpromises before going too far in the subsegmentation. The mostimportant thing is to have a plan for which “breaks” to develop inthe CRM, and to not hope for too much. “Keep it simple” is oftena more successful method.The lesson we have learned from working with developing the SMEbusiness in SEB is, among other things, that private economy andbusiness enterprise go hand in hand, that the leaders play a crucialpart of the outcome, and that there is an advantage of having asmall team in the mapping, and strategy and tactics in the buildingphase. However, a small team is often a limitation when it comesto implementation. I think we have managed to balance this atSEB, which is one of the reasons behind the success of our smallenterprise business. ■




Survey

Winning model forsmall business

Bertrand LavayssièreManaging director, globalfinancial services Capgemini

Small-business banking has become an even more challengingbut critical activity for retail banks since the economic andfinancial crisis. To thrive, banks must get much closer to theircustomers while more actively managing the risks, according toresearch from the new report from Capgemini, UniCredit and Efma.

mall-business banking has long been a core segment forretail banks, but the systemic effects of the financial crisismean that banks will need more intimate knowledge oftheir customers’ operations and better risk-managementsystems to serve the segment effectively and profitablygoing forward.

“Small-Business Banking and the Crisis: Managing Development andRisk” is the seventh edition of the World Retail Banking Report. It drawson an extensive market survey and interviews with 58 large retailbanks in 21 countries to demonstrate why the small-business marketis attractive and strategic –but risky– for retail banks today, and it looksat ways in which banks can outperform competitors on bothdeveloping the business and managing its risks.

Strategic significance of small-business banking is rising.The economic and financial crisis has raised the stakes in small-business banking in several key ways:• By raising the macroeconomic and social profile of small

businesses. Small businesses make up 99% of all companies inEurope, Japan, and the US, and employ 51% of people working inthe private and non-financial sectors. Considering the importanceof small businesses to national economies, most governments havea 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 bankingeven tougher. With small-business clients going through hardtimes, there has been less demand for banking products, mainlycredit, because of investment freezes and, to a lesser extent, the useof alternative financing such as associative networks and publicfunds. The crisis has led to higher costs of financing. As a result, forthe first time since 2005, European bankers expected a decline in

STo win, retail banks will need todevelop two critical areas: therole of the relationship managerand the efficacy of credit riskmanagement systems.

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their revenues from the small-business marketin 2009.

• By increasing the risks. Small-businessbanking is inherently risky. Small businessesare more vulnerable than larger enterprises,because they tend to have, for instance, lowlevels of capitalisation, no or weak creditratings, and high bankruptcy rates –andthese factors make them especiallyvulnerable during economic slowdowns. Infact, our research shows small businessesaccount for 27% of net retail bankingincome, but 46% of total retail risk-weightedassets (see figure 1). At the same time, theincreased cost of risk was said by 86% ofsurveyed bankers to be a major threat totheir business resulting from the crisis. In fact,51% said it was the single most importantthreat 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 animportant but risky revenue stream that has significant potential todevelop further, especially since governments are urging banks toexpand their small-business propositions. However, the greatestopportunity for banks –and the biggest challenge– arguably lies inbecoming a small business’s main banker, capturing as much of theflows, credit, and savings as possible through cross-selling and up-selling, while actively managing the associated risks. Managing thosechallenges in the post-crisis landscape will force banks to adapt inorder to succeed.Banks will certainly need to better discern the varying needs and risksof their small-business customers, which are a highly heterogeneousgroup whose behaviours and needs tend to be part mass-market, partcorporate. Bankers will therefore need to develop an approach thatmixes elements of both standardisation and customisation– whilemanaging the associated risks.

The “winning bank” model. Given the evolving demands of thesmall-business segment, the “winning bank” model involves two key

-

-

-

Fig.

1

Weight of the small-businessmarket in retail banking

Source : Capgemini analysis from bank interviews 2010




elements: shifting the role of relationship managers (RMs) –to bringthem closer to clients and to empower them on credit-risk management–and implementing complete and fully integrated credit risk-managementsystems (figure 2).More specifically, banks will need to move along two dimensions tobecome a 'winning bank':1. Pushing relationship managers to develop a deeper understandingof each client’s line of business, needs and expectations, whileempowering those RMs to manage credit risk. To build robust client relationship, banks need to give their RMs thetime they need by limiting the number of clients each RM manages orlimiting the breadth of products and services each must handle. Bankscan also give RMs more time to act as bankers by providinginstitutional support. For example, they can lighten the administrativeand non-commercial workload of RMs by reinforcing middle-officepositions, such as sales assistants. To empower RMs on risk, banks will need to grant them more authorityand responsibility in the decision process as well as in creditunderwriting, credit portfolio management and loan rescheduling.Banks can provide additional support by continuously improving the

credit process, offeringdedicated coaching resources tohelp they manage sales andcredit decisions, andestablishing rigorousgovernance of RMs and theirdecisions. Notably, all thesemeasures are likely to make therole of RMs more empoweredand attractive, increasing thelikelihood that RMs will remainin their jobs for longer –makingcustomer relationships morerobust. 2. Implementing efficient andcomprehensive credit risk-management systems that canaccommodate the highlyspecific and complex risk-

The “winning bank”model

Fig. 2




management needs of the small-business market, including appropriategovernance, fully integrated credit risk-management processes, andcomplete and seamless supporting information systems. This “winningbank” model will enable banks to outperform their competitors on bothdevelopment 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-riskpressures.

• Mastering risk, based on wider usage and sophistication of rating-based scoring tools, strengthened proactive management ofperforming credit portfolios, and an improved credit collectionprocess with “soft” (amicable) collection processes that aim to returnfinancially deteriorating client relationships to “normal” without thebank losing money or an important customer relationship.

Conclusion. The “winning bank” model positions retail banks tooutperform competitors by unlocking the potential of the small-businessmarket –while also meeting growing calls from governments aroundthe world to better serve these businesses, which are a key driver ofeconomic growth. To win, though, retail banks will need to develop two critical areas:the role of the relationship manager and the efficacy of credit risk-management systems. And to achieve sustained success, each bankmust define a transformation strategy that is based on its starting pointas it relates to market position (retail versus corporate), culture andorganisation, as well as the existing role of RMs and the current stateof credit risk-management systems.To navigate this transformation effectively, banks will also need robustchange-management approaches to achieve alignment with the bank’soverall strategy, support from senior management, and buy-in fromemployees. It will be an important journey.For each bank, the ability to effectively serve small businesses is crucialnot 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 creditprocess, establish a smooth multichannel interface and gain the trustneeded to address the personal and savings dimensions ofthe entrepreneur.■

To empower RMs on risk,banks will need to grantthem more authority andresponsibility in the decisionprocess as well as incredit underwriting, creditportfolio management andloan rescheduling.

Small Business Banking and the Crisis:Managing Development and Risk.

A survey by Capgemini, UniCredit and Efma.




Portugal

Adjusting the commercialapproach to customers

Jose AraujoDirector of SME marketingMillennium bcp

The current economic and financial landscape is leading banksto adjust their commercial approach, especially regarding themarket for small-and medium-sized companies (SMEs):traditionally oriented towards credit concession, the strategy isnow shifting towards a more diversified offer, stronger customerrelationships and an increased focus on profitable, value-addedservices.

he new focus must be on margins, on capturing customerfunds and liquidity, on maximising cross-selling and cross-networking levels, while maintaining rigorous riskassessment policies through effective and simpleplanning.Moreover, in this climate of uncertainty, it is fundamental

to increase the number of customer visits and contacts in order toestablish a comprehensive understanding of the SME businessevolution, preventively detecting any sign of difficulties, presentingsolutions that protect the sustainability of the SME and therelationship with the bank.In that sense, a new model of approach to customers is needed...one that increases the commercial team’s proactivity throughtraining sessions, with the proper management tools and involvingall of the bank’s hierarchy.The main goal of this new commercial programme is to define asystematic approach towards the SME market, through theimplementation of a series of actions:

T

• Economic recession

• Lack of liquidity on financial markets, leading to an increase in funding costs

• Capital restrictions / credit shortage

• More regulatory pressure

Redefinition of commercial

Strategy

Rigorous management of credit

Increase profitability (spreads, fees, managing product “mix”) Better Collateralization

Review exposure levels at worst credit risks

Capture of SMEs funds and liquidity Increase cross-selling & cross-networking levels

New focus for 2010 Current context

New program -> “ Closer to the customers”

A new commercial plan

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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 predefinedcriteria:• customer’s risk grade » to best support the credit analysis;• economic income » enabling the visualization of the customer’scontribution to the bank’s profit & loss account (deducted from thecost of capital and expected loss);

• any previous credit incidents.Following this classification of customers and in order to direct theaction of the commercial area, a group of generic and specificguidelines were established, providing relationship managers withthe proper way to approach each customer regardingtheir portfolio.

A

B

C

D

E

Group Generic guidelines

Applicable to all customers

Specific guidelines

B

D

Mission

Maintain fidelization

The relationship manager can either, include these customers in one of the previous groups or simply decide to exclude them

A

C

improve profitability

Protect the credit risk

Reduce exposure

- Customers with a ratio “Direct Credit/Funds” 20%

- Customers with a ratio “Direct Credit/Funds” > 20% and a risk grade <= 7

- Customers with credit and risk grade 8 or 9

- With credit & risk grade of 10, 11 or 12 - Order to demobilize/Reduce credit exposure - Payment’s behind or litigation in the last 3 months

- With credit and no risk grade - With risk grade >= 13 - Without credit

and

Define a specific commercial policy per group. The genericguidelines reflect the global strategy established by the bank toapproach the SME market and the main areas of action:




Customer fundsTreasury

Costs

• Capture deposits (via the placement of value-added products)• When granting credit (mostly through state sponsored credit lines)

negotiate treasury or value-added products as a trade-off• Increase the transactional banking relation, via the Internet-banking site• Capture of time deposits

CreditMarginCostsFees

• Focus on the placement of state sponsored lines and mutual guaranteesfor credit concession (remembering the trade-off with treasury and insurance)

• Credit oriented to short-term operations, namely commercial credit and guarantees• Medium/long-term financing: use mainly leasing solutions• Pricing: - New operations: apply spreads according to defined ROIC and liquiditypremiums, and standard fees;

- Existing operations: check the possibilities for adjusting spreads and/or fees

Trade finance• Promote documentary operations and increase international transactions

(in or out), via the Internet-banking site• Focus on foreign guarantees, namely for Millennium bcp customers with

international operations

Cross-selling& cross-

networking

• Placement of products with a high potential for generating fees(insurance, cards, interest rate or change coverage solutions,investment banking products) as well as referral from other banking areas.

As for the specific guidelines, they present the commercial area with thepolicy that should be taken into account in the day-to-day relation:

Support tools to help implement the new commercial plan.The implementation of the commercial action plan is based on a group ofsupport tools and constant monitoring, in order to evaluate the resultsobtained and identify the need to redirect the set of actions. The commercial

Group A + BMaintain loyalty

& improve profitability

• Support SMEs in their investment projects, internationalisation andconsolidation in the current business sector;

• Increase cross-selling to an average of 5 products per customers (currently 4);• Establish a close connection with customers with reduced use of credit lines,

in order to reinforce share of market for treasury services.

Group CProtect the credit risk

• Reinforce collaterals• Adjust the credit exposure, eventually reduce to customers with

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 DReduce exposure

• Reduce credit exposure or increase collaterals• Replace financial with commercial credit




action plan of each classified customer is registered by the relationshipmanager 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 thecommercial area (branch manager, commercial director, networkcoordinator) with the monitoring capabilities to ensure the completion ofthe defined strategy…

Training and commercial events. The success of the commercialaction plan rests on a series of key drivers, designed to ensure that therelationship managers have full knowledge of strategic products andimprove the connection between bank and SMEs, which is even moreessential in these troubled times. For this reason it’s fundamental to includetraining sessions in the global plan, empowering RMs with moreinformation to consolidate knowledge about the strategic products, andadding value by a live exchange of experience between commercialmanagers from different branches, representing various regional marketsand sharing best practices. The training sessions include the presence ofcommercial directors, branch managers, RMs and assistants from severalbranches, in order to discuss “best and worst practices”, debate solutionson specific products (trade, cards and insurance) and close with a generaldebate, presenting suggestions for improvement and key commercialguidelines. Finally, a very important component of the new commercialaction plan is to strengthen the bonds between the commercial area andthe 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 representativecustomers, by invitation. They occur in all regional markets where the bankhas a branch and also serve as excellent opportunities for the board topresent the bank’s strategy for the SME segment and for customers to bestunderstand the economic environment, which naturally affects theSME/bank relationship. In conclusion, the new commercial plan ofapproach to the SME market is based on better planning, better supporttools, more training of the commercial area and increased interaction withcustomers, in order to grow as a bank and as a team.■

In this climate of uncertainty,it is fundamental to increase thenumber of customer visits andcontacts in order to establish acomprehensive understandingof the SMEs business evolution.




UBI Banca

Developing relationshipmanagement performance

Maria Angela AlbertottiArea retail responsabile segmentosmall businessUBI [email protected]

The small-business segment, where UBI has more than360,000 clients, manages the relations with the small-andmedium-sized enterprises (SMEs); in more detail, this segmentdeals with companies with a turnover of up to 5 million euros.

he small-business segment an extremely heterogeneousclient base, which represents diversified businesses andenterprises, both in terms of size and service requirements.As a result, the approach to understand clients and satisfytheir requirements must necessarily be suited to their diversecharacteristics. This is why UBI has decided to gradually

activate differentiated service models for SMEs and small economicoperators, as can be seen from the business strategy of the UBIretail market.In fact, the businesses in this segment are subdivided into twodifferent subsegments on the basis of their turnover: below300,000 euro for small economic operators and between300,000 euro and 5 million euros for SMEs. The two subsegmentsthus identified have clearly different characteristics, both for theirintrinsic particuliarities and number of clients and the extent of themargins produced for the bank (there are more small economicoperators but the produced unit margins are lower). A non-diversifiedbusiness model proved to be inappropriate, both from the point ofview of commercial efficiency and cost to serve, which was excessivefor a high number of clients.

“High-tech” and “high-touch” approach. In considerationof the fact that the commercial activity of the manager is alwaysbased on the exploration and satisfaction of the macro-requirementsin the proactive stage and the reactive stage, it became necessaryto find a more efficient method for managing commercial activitieswith the company clients. This led to the implementation of a newservice model with a differentiated approach for each subsegment,or rather, a “high-tech” approach for the small economic operatorsclients, and a “high-touch” approach for the SME clients.

T

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The businesses in this segmentare subdivided into twodifferent subsegments on thebasis of their turnover: below300,000 euro for smalleconomic operators and between300,000 euro and 5 millioneuros for SMEs.


The bank’s objective to satisfy the client. For the smalleconomic operators, which have simpler and less customisedrequirements, the bank’s objective to satisfy the client andconsequently enhance client loyalty is pursued by means of a(high-tech) “standardised” approach which is implemented by theparent company. The central departments have used a statisticalengine to draw up a series of parameters relating to the individualcounterparts and the results have made it possible to define clientsubgroups with uniform behavioural patterns (known as clusters).Through commercial campaigns, these clusters may be offered anideal basket of products and services with an industrial approach.This makes it possible to cover all of the client requirements and toreduce the cost to serve of the manager, while optimising marketingtimes, also thanks to the assistance of the contact centre whichdevelops specific contact campaigns.The time “saved” with the small economic operators is dedicated toSME clients. For this subsegment, which has more sophisticatedrequirements that are less easy to standardise, the client managementapproach is based totally on relations (high-touch). The bank’sobjective is to become the main reference partner for the client byglobally satisfying all of its requirements, thanks to constant relationswith the manager.

Differentiated campaigns. This differentiation makes it possibleto structure client management in an increasingly efficient manner,making the initiatives, the offer and the sales support more targetedand effective and, at the same time, allowing the bank to focus oncurrent and future relations with clients of high standing.The application of the new service model has also been reinforcedby the way the commercial campaigns are prepared: for both, onlyrelation campaigns are envisaged as opposed to “product”campaigns which are, in our opinion, an obsolete and inefficientway of approaching clients. The small economic operator and SMEcampaigns are differentiated in terms of frequency of the contact andin the tools available to the manager for exploring the requirementsof the clients.In fact, in the framework of the CRM interaction platform for smalleconomic operators, an ideal basket of products and services, forwhich the purchasing probability has been calculated, is provided




to each manager for each client in the portfolio. Therefore, themanager’s job consists in creating a unique global offer with the aimof completing the ideal basket, starting with the products or serviceswith the highest probability of being purchased.

Ad hoc solutions. For the SMEs, on the other hand, theopportunities signalled to the manager (on the basis of the potential)identified by the business intelligence analysis, are explored inquarterly proactive one-to-one meetings with the clients. During thesemeetings the various particularities of the business and thedevelopment potential of the company undergo an in-depth check-up with the client so as to pinpoint requirements that have not beenmet and translate these into opportunities. For these purposes, themanager has at his disposal the CRM interaction tools, which, inaddition to a central opportunity identification service, include acheck-up form which guides the manager through the negotiationswith the client. The check-up form is also used to report feedbackabout the meeting and as a record of personal opportunities. Thedetails in the individual check-up form that are then summarised inthe portfolio, where the manager can immediately see the entirerecord of open opportunities.Therefore, exploration of the client’s requirements is fundamental inboth segments, as well as the timely satisfaction of these requirementsby means of proposing ad hoc solutions.

UBI Banca is organised on the basis of a federal, polyfunctional andintegrated model. The group is structured as follows: a parent company,which centralises the governance, control, coordination and supportfunctions overseeing the nine network banks which are in charge of therelations with the traditional reference territory, and the broad range ofproduct companies of the group. The group doesmainly retail banking buthas a traditional presence in the small and medium-sized enterprises (SMEs)sector as well as a private banking activity, which places the groupamongst the top players on the Italian market.

Focus on UBI Banca

The opportunities are exploredby the manager in quarterlyproactive one-to-one meetingswith the clients.




The challenge taken up with the introduction of the new servicemodels is intended to be a tangible example of how knowledge ofthe client combined with the distinctive skills, experience and abilitiesof the managers can lead to an improvement in the level ofsatisfaction of our clients, which can give us leverage to sell better,more –and before our competitors. ■

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Best practices in retail financial services

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Survey

Why spend money onrelationship management?

Doug WilsonDirector Finalta

European banks employ over 40,000 staff as small businessrelationship managers (RMs). Taking the full costs of employingthem, it costs around 2.2bn euros a year to provide this serviceto customers. Why is so much money being spent?

Dedicated staff numbersAcross Europe, banks employ around three dedicated front line

staff per 1,000 small business customers

Dedicated front line staff per 1,000 SB Customers

0

1

2

3

4

5

6

7

Eastern Central Southern Northern

Region

Dedicated front line FTEs / 1,000

SB customers Upper Quartile

Lower quartile

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

his article explores the reasons for this expenditure –both goodand bad– and offers some guidelines for relationship managerusage. It is extracted from the fourth annual Finalta/Efma SmallBusiness in Europe report published in January 2010, usingresearch contributions from over 90 banks. Further commentcomes from Finalta’s ongoing benchmarking and best practice

work with major banks across Europe. For clarity, here we define smallbusinesses as those entities serviced within the retail bank (rather than incorporate banking) –typically below 3m euros turnover in Western Europeand 1.5m euros turnover in eastern Europe.

The issue. It is commonly accepted that relationships with high-valuesmall-business customers should be managed by dedicated, specialistbranch staff. Figure 1 shows the average to be around 3 dedicated staffper 1,000 customers though varying substantially both within andbetween regions.

T

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On average, RMs spendapproximately a third of theirtime on lending, a third on salesand acquisition and a third oncustomer servicing.


Across Europe, approximately 50% of small-business customers arerelationship managed, typically in portfolios of 150 to 250 customers.These customers are managed using a service model which defines acertain number of proactive contacts and face-to-fact meetings per year. To assess whether it makes sense for European banks to employ roughly40,000 people to make regular contact with around eight millioncustomers, we need to understand the role of the relationship manager.

The role of the relationship manager. There are three mainpurposes:• 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, athird on sales and acquisition and a third on customer servicing. Perhapsthis means everything is fine. However, we need to understand the abovein more detail.

Lending processes. Almost all small-business executives agree that thecredit authorisation process for small businesses in their bank is poor. Inmany banks, particularly in CEE, small-business loans of less than50,000 euros are decided using processes originally built for corporatelending decisions of over 1m euros. It takes many days to collect the datarequired to submit an application and then many more days to get adecision from credit control. On average, in CEE, the elapsed time is8.4 days for unsecured and 15.4 days for secured lending decisions. It isnot much better in many Western European banks.Not only does this lead to a terrible customer experience in a key momentof truth, it is also very expensive. Best practice allows most unsecured creditdecisions to be made within 24 hours and secured lending decisions within72 hours. For many banks, what the relationship manager is actually doing isattempting to make poorly designed systems work and to shelter thecustomer from too much pain and inconvenience. The relationship manageris an expensive “sticking plaster” for poor process design.




Customer acquisition and sales. Depending on the geography, newsmall-business customer acquisition rates can be upward by 20% per annum(though, sadly, attrition rates may be similar). Thus, a relationship managercan be kept very busy setting up and on-boarding new customers. However, is this a necessary and appropriate task for a relatively expensivesmall-business RM? For almost all banks, the vast majority of new customersare start-ups who have very simple banking needs and, in all probability,will continue to have simple needs. There is no good reason why accountscould not be opened by regular branch staff.Finalta is seeing an increasing movement to use non-dedicated staff forsimple account opening and reactive sales of other products (depositaccounts, debit cards, etc.) to allow the RM to focus on high-value salesand interactions. If a bank feels small-business account opening is too difficult for regularbranch staff, then the process is probably too complex and needs to be re-designed. Equally, on-boarding processes can be structured so contactcentre or non-specialist staff “filter” new customers to leave the specialistRM focused on those new customers of immediate or potential high value.

Building customer relationships. Most small-business customer surveysemphasise the importance of regular contact with a relationship manageralong with the ability to customise products and services for them. But doesthis factor always justifies the use of relationship managers? We believe some caution is needed. A customer may “value” contact witha relationship management and product customisation, but:

ConclusionA 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 decision making and monitoring process

To provide valuable relationship development with customers who both justify and need it

To allow the bank to expand the relationship to the personal needs of the customer, the family

and employees

To compensate for slow, complex and poorly managed lending processes

To ensure that someone in the branch has some knowledge of and cares about small

business customers

To identify and acquire high value existing businesses from competitors

To open current accounts for start-ups, most of whom will only ever have basic requirements

To compensate for other processes that don’t deliver a good customer experience

Direct channels for small business banking,January 2010. A joint Efma/Finaltaproduction. The study is available on ourwebsite: www.efma.com.




For almost all banks, the vastmajority of new customers arestart-ups who have very simplebanking needs. There is no goodreason why accounts could notbe opened by regular branchstaff.

• Is the “value” of the RM his ability to find a way through the complexprocesses of the bank for the customer? If so, this is another example ofRMs used as an expensive balm for poor processes.

• Does the value in relationship management require a local, branch-basedRM? An increasing number of banks across Europe are finding thatremote relationship management models provide at least as high customersatisfaction as the traditional model.

• Whilst the customer may wish for customisation, is this good for the bank?In searching for growth, many banks have customised offers and endedup with terribly complex systems, product sets and records – and thereforecosts. Customisation does not fit well with efficient, high volume processes.

Generally, a customer wants the basic products and services to work easilyand quickly. Only in key moments, such as lending requests, is the humaninteraction really vital.

Conclusions. We are not arguing that local small-business RMs shouldnot 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 processesthat are not fit for purpose.

• To build relationships with customers who both justify and value this. Thisis different from compensating for a poor service experience.

• To acquire and to on-board high-value “switchers”, but not to openaccounts for low-value start-ups when this could be done by regularbranch staff.

• To extend the relationship from the business to the personal needs of thecustomer. Unfortunately, few banks have successfully developed modelsto achieve this.

In the current economic environment, Finalta sees many banks reassessingtheir 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 betterprocesses. Perhaps a third of locally relationship managed customers donot require, nor justify, this model. Saving or redeploying this time and costcan support the business case for process improvement. ■




Subsegmentation

Capturing granulargrowth opportunities

Simone DaviSmall business clients, marketing& segments, CEE retailBank Austria UniCredit Group

The small-business segment segregates value which is every sooften difficult to spot and manage. The reason for it has to bescoured in the evolutionary pathway the segment has beengoing through over the last decades along with the search foran enhanced relationship between small-business customers andthe bank.

n the light of these evolved needs and being an important revenuecontributor, the small-business segment requires a concrete focus oncustomers’ needs together with their potential. Therefore, a dedicatedbusiness model has been designed and three mandatory features:a) Strategic subsegmentation: a ranking based on customer’s valuecreation 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’svalue creation potential.c) Product offer: bundling vs. simplified product offers properly tuned onto the customer’s value creation potential and real needs.Lately, credit risk management has been representing a key matter tohandle with care in the correct definition of a business model, regardlessof the customer’s own strategic value. Therefore, each and every one ofthe three features described above definitely embeds it.Hence, by putting all this together, granular growth opportunities can beseized and can deliver value in return to both the bank andits clientele.

Highly qualified relationship managers. Let’s now unveil thecharacteristics of this approach by providing a brief description of eachof the shortlisted features. Feature a) represents the core activity to asuccessful customer’s value (EVA or revenue potential) identification andmanagement, thanks to which four strategic groups can be outlined: topasset, top borrower, core and marginal. These strategic groups are theoutcome of specific statistical data analyses, ran at customer level; theseanalyses 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’sbanking behavioral patterns and needs. Thanks to these patterns, proxies

[email protected]

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Small-business banking requiresa concrete focus on thecustomers’ needs togetherwith their potential


of customer’s revenue potential are identified and ranked, for instance, bysector of industry, type of company, geography and so on. Should therevenue potential be unavailable to some customers or prospects, suchproxies help assign each customer or prospect to the most appropriatestrategic group. The final outcome of this process is to generate a matrixof priorities which sees customers lined up by revenue potential: the higherthe potential, the more profitable the customer, the more frequent andqualified the relationship.In general terms, where such analyses were carried out, it was noticed thatthe “Pareto principle” fitted with the customers base distribution by revenuegeneration/potential. It means that up to 20%/25% of the total customerbase, which corresponds to the upper quartile/top quartile of thedistribution by potential (named after the strategic segmentation topasset/top borrower customers), can generate about 70%/80% of thesegment’s total revenues and deliver even higher EVA values.Therefore, such high EVA values require a differentiated service model ascost to serve, sales approach and commercial tools must be meticulouslyaligned to the revenue potential. To follow the track, feature b) fits thepurpose by defining how to serve all groups of customers accordingly. Inpoor words, most valuable customers (namely those who have specificstructured needs for financial advisory –i.e. cross-border operations tofinance) have to be served by highly qualified relationship managers whoare sitting in so-called dedicated business centres or business corners,whereas customers having basic banking needs should be effectivelyserved by the means of portfolio pools through an extensive usage ofalternative sales and advisory channels (namely call centres/remoteadvisors, Internet portal or in-branch 24/7 banking areas) so as to lowerthe number of their physical step-ins or contacts with in-branch sales orfinancial advisors.Such a value-driven approach can deliver superior financial and bankingadvisory services and tailored solutions to each customer according to thedegree of sophistication of the respective banking needs (the customer’sbanking needs complexity ranking goes this way: top asset/top borrower> core > marginal). Such an approach can then generate an enhancedcustomer experience and level of satisfaction (wich is measurable throughTri*M index analyses). A customer’s new portfolio set-up comes out bycombaning feature a) with b) before running the sub-segmentation, topasset/top borrower, core and marginal customers belonged to a commonbasket and were managed ineffectively, being randomly assigned to senior,




junior or undefined relationship managers regardless of their value. It evenlead to portfolio overpopulation (having a much bigger portfolio size thanthose currently in place).

The right product to the right customer at the right time.Nowadays, thanks to the subsegmentation, portfolios have been properlybalanced and optimised with valued customers assigned to seniorrelationship managers (i.e. portfolios have a share of top asset/topborrower customers and/or core hiher than 80% and have an averagesize of 150/170 customers in total, whereas junior relationship managershave a share of valued customers lower than 10% (and an average of350/400 customers per portfolio, largely populated by marginalcustomers). In addition, a specialised small-business channel is eventuallyset up, which has its own dedicated services, personnel andbranding/communication.Then, feature c) is the third gluing element to a successful story. Asdescribed, each customer being ranked by revenue potential, the totalnumber of banking products/services owned by a customer becomes

fundamental to launch saleseffective campaigns. Therefore,once the customer’s bankingbehavior and needs are wellknown (as seen in feature a),by running subsegmentationanalyses by which needs arealso identified and clustered astransactional, financial, asset-related and protection), thebank can leverage on such acompetitive advantage (that isthe knowledge of your owncustomer indeed) andeffectively sell tailored bankingproducts/services by definingthe most adequate valuepropositions to each group.Thus, when you know yourcustomer, you can evenunderstand beforehand therelated needs and, for

We serve the SB segment according to a verystructured approach centered around segmentationand keeping an eye out on risk at all times

1 Sub- segmentation

Strategic sub-segmentation based on value creation potential

Commercial sub-segmentation based on customer value to drive campaigns, products, and acquisitions

SB segment business model

Service

model

2

Product

offer

3 Bundling

Simplified offer (one need-one product)

Targeted value proposition for top customers

Small ticket lending for marginal customers

Portfolio allocation optimized by customers' value to minimize cost-to-serve

Standardized/prescriptive sales approach and commercial tools

Credit

Risk Cost-effective underwriting process Automatic risk monitoring system

Key difficulties in CEE

Specific solutions for CEE

Extensive use of proxies cluster analysis

Low data availability, both market and customer Data collection

via external agencies

Costs difficult to allocate for EVA calculation

Use of marginal contribution instead of EVA

Low granularity and quality of internal databases

Crosschecks between different databases, information clean-up

Methodology

Bank data

External data

Client demo-graphics

Data analysis engine

Core

Top

Marginal

EVA/ Revenue potential

Needs

Identify highest potential sub-segment of customers 1




1 Sub- segmentation

Strategic sub-segmentation based on value creation potential

Commercial sub-segmentation based on customer value to drive campaigns, products, and acquisitions

SB segment business model

Service

model

2

Product

offer

3 Bundling

Simplified offer (one need-one product)

Targeted value proposition for top customers

Small ticket lending for marginal customers

Portfolio allocation optimized by customers' value to minimize cost-to-serve

Standardized/prescriptive sales approach and commercial tools

Credit

Risk Cost-effective underwriting process Automatic risk monitoring system Mini branch

Main branch

A specialized small business channel

SB zone with waiting areas/meeting rooms

Services for SB owners High performance transaction services

Increased branch manager attention

Detailed support staff

Differentiated logo/ branding

Increased visibility Marketing/promotion efforts

Layout & offering

Organiza-tion

Commu-nication

SB Center

SB Corner

Outlet/ Individual branch Referral to SB center/ corner

Define value proposition to each segment to fill product gaps

Segment New product Benefit

Top borrower

Pre-approved loan

Increased loan penetration and share of wallet

Top asset Asset bundle Increase share of wallet

Attract business owner’s assets

Marginal Migration package

Retain customers Manage costs – migrate to remote channels

Core Working capital bundle Quick small-ticket loan pckg

Innovative product to increase loan penetration Hook product to attract new customers

2

3

instance, offer to a top borrower a pre-approved loan to expand his/herturnover, facilitate his/her business operations and increase the bank’sloan 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 customersby attracting business owner’s assets through asset bundling products, forexample by offering an alluring beat-the-market interest rate on termdeposits. The other way round, the bank can grant quick small-ticket loanpackages as hook products to attract new customers or increase loanpenetration for instance, or offer a migration package to those marginalcustomers (lower potential customers) in order to retain and manage themefficiently via remote channels.Let’s draw a conclusion on this brief article by answering to this simplequestion: what does the bank gain by setting up and following such a state-of-the-art subsegmentation approach? It simply allows the bank to manageboth effectively and efficiently its customers (the right product to the rightcustomer at the right time) and its resources (employees and bankingsolutions), as well as to run acquisition campaigns aimed at attractingvaluable and reliable customers. ■


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Efma Article