Small medium enterprises, or SMEs, form a core sector of the Indonesian economy and contribute significantly to economic growth, job creation and innovation.
Given the importance of this segment to the country's economy, the Indonesian government has been pushing hard to promote growth of SMEs, including by encouraging banks to increase their SME portfolio.
However, most banks regard the SME segment as relatively unattractive — thanks to its high levels of risk and little potential for growth.
They also say the segment is too costly to maintain.
But now a case can be made for the opposite. With the right business model, banks can transform their relationship with SMEs into one that fits their risk model and offers more opportunities for profits.
A well-thought-out digital strategy will especially allow banks to build smarter sales operations and streamline processes, generating unexpected rewards and gaining significant commercial advantage.
Some players in Indonesia's financial industry have already shown renewed optimism in SME banking.
Since 2000, for example, financial technology (fintech) providers have directed more than 50 percent of their investments into corporate banking, including the SME segment.
Meanwhile, some banks have started to offer more digital solutions for smaller businesses.
With stronger competition, major banks should take action if they want to keep pace with their peers and maintain their advantage against non-bank entrants into the industry.
Keys to Winning
Lending has been the primary focus for many banks to the extent that they have downplayed opportunities in other areas such as transactions.
In most markets, however, one-half to two-thirds of SMEs require little or no lending.
Banks' unwillingness to change their business model to meet SMEs' needs has definitely hindered their performance.
They should pay attention to the fact that the most profitable banks are focusing less and less on lending.
Choosing the right digital strategy has also become even more crucial, since a stronger deposit and payment franchise can generate valuable transaction data from customers.
Banks can analyze the big data to better understand customer activity, a key learning process that will allow them to offer more effective service models and better pricing.
Analyzing data will also enable banks to improve credit risk modeling and loan tracking, helping them to resolve the historical bugbear of SME banking: high levels of non-performing loans.
Income from SMEs accounts for almost 20 percent of Indonesian banking revenue.
Boston Consulting Group’s Corporate Banking Performance Benchmarking report showed banks have a significant opportunity to turbocharge their performance in the sector.
If they take all four actions recommended by the report, banks can expect to boost their SME revenues by 20 percent to 25 percent, reduce costs to serve customers by 30 percent to 50 percent and pare down the number of their nonperforming loans from SMEs.
1. Tailored Products and Services
Banks should divide up their SME customers into segments according to their economic values, gain a deep understanding of the needs of each segment and then tailor their service models and product portfolios accordingly.
High-value customers should be offered more-personalized services and products, while low-value clients should be provided with more online services that provide access to a portfolio of basic services and products.
Banks can also take several steps to help their sales force offer more effective services for high-value customers.
More integrated analytics will allow relationship managers (RM) to prioritize high-value customers, tailor sales scripts and marketing communication and proactively offer services and products that reflect changes in customers’ needs and credit status.
Implementing digital tools that help centralize decision-making, enabling a more cohesive performance review process and systematic monitoring of sales force effectiveness will also help RMs refine their efforts and spend more time in front of customers.
These steps will allow banks to help RMs increase the number of customers they contact each day by 20 percent to 25 percent, and lift daily sales per RM by 15 percent to 20 percent.
To improve performance even further, banks can radically simplify their portfolio by eliminating redundant, overlapping or low-impact items — such as safe deposit boxes and many types of lending products.
Simplification will not only reduce operating costs but also increase cross-selling opportunities.
A streamlined portfolio makes it easier to create product bundles.
It will also help a bank's sales force to complete sales, a crucial factor since the industry suffers from a high turnover of staff and a lack of skills and training.
2. Digital Platforms
Responding to high demand for digital access, many banks already have one-stop digital shops up and running, helping SME customers access products and services, secure fast credit decisions (often within hours, and sometimes instantly), connect with professionals (accountants and lawyers) and obtain research results.
To remain competitive, banks must improve and expand their digital platforms.
They can do so by tasking internal teams with the job, building a center of excellence or an innovation lab, or seeking acquisitions.
Whichever route they go for, the first step is to listen to their SME customers, whose perspectives and priorities will allow the banks to create a detailed roadmap to improve the digital experience they offer.
Leading banks can better understand what SMEs need by conducting deep ethnographic researches, whose results can inform the way the banks redesign the customer journey.
Partnerships are another way to advance digital platforms.
Some banks are collaborating with fintech companies to improve and expand services in areas such as cash management, foreign currency exchange, invoice scanning and payroll.
Other banks are partnering with consultants to experiment with concierge-style services that include consulting, specialized employee training and procurement support.
Partnering can be mutually beneficial: it can help banks accelerate innovation and launch new services at lower cost, while giving partners the opportunity to significantly scale up their solutions.
A collaboration like this also tends to lead to more cross-selling opportunities.
3. Optimize Pricing, Fix Disparities
Setting and maintaining realistic prices are also a major challenge for banks going for the SME segment.
Anomalous discounting practices, limited pricing transparency and a lack of benchmarking lead to inconsistent industry pricing.
To make matters worse, RMs are often unable to compare pricing tables, performance reports or other pricing data that would help identify normal price ranges for segments and products.
As a result, it is common practice to see 20 percent to 40 percent leakage on interest charges and 40 percent to 60 percent leakage on loan fees.
Billing slippage is another problem: RMs often omit or waive fees, such as management or exit fees.
Leakage and slippage lead to sizable revenue losses and wild fluctuations in sales performance.
To combat sub-optimal pricing, banks should initially focus on the "long tail," which is the 90 percent to 95 percent of customers that represent close to 50 percent of revenues.
Lacking industry measures, internal benchmarks can help generate target prices per product and client.
In addition, pilot programs can help determine the best way to manage and control discounting and waivers.
Short-term actions should be paired with longer-term, technology-based solutions that provide data-driven sales support and price realization metrics.
4. Digitize Processes, Improve Speed
Internal processes often rely heavily on manual input, which can hinder other functions such as sales and increase costs to serve customers.
Digitizing them will help banks boost staff efficiency and, in the end, bring better efficiency across the board, including reducing costs to serve customers.
Simplified, digital processes can also dramatically reduce decision turnaround time, the one thing that SMEs look for when selecting their main financial service provider.
To start with, banks should look to fix partially digitized processes which create discontinuities for customers.
Particular attention should be paid to partially digitized processes that customers use for routine requests.
Banks should also digitize sales activities — critical to improve performance.
Sales systems help RMs monitor their pipeline and plan follow-ups to clients.
Systems are also used to track call center engagement and trigger points for outreach initiatives.
To speed up credit applications, banks can digitize risk assessment and scoring algorithms and combine them with easy-to-access customer analytics to create early-warning systems that enhance decision making and facilitate credit upselling.
The outlook: banks can obtain returns that are comfortably over the cost of capital in the SME segment, with some caveats.
Those that go for the SME market will have to recognize not only its potential value but also the segment’s crucial role in shaping the future of corporate banks.
Only banks that have this awareness will be able to create and maintain a competitive advantage.
Ernest Saudjana is a partner and managing director at Jakarta-based Boston Consulting Group.