To accelerate business development while managing risk, retail banks must strengthen the role of the relationship manager and improve their credit risk management system, according to 'Small Business Banking and the Crisis,' a report from Capgemini, UniCredit and the European financial marketing association (Efma).
The report, which was drawn on an extensive market survey and interviewed with 58 large retail banks in 21 countries, confirmed that the small business market is attractive and strategic for retail banks.
Small businesses represent 99% of all companies (in Europe, Japan and the US) and 51% of employment (in the private and non-financial economy). Considering the importance of small businesses to national economies, most governments have a strong interest in supporting this fast-growing market, and as such, banks have added pressure to make development a top priority.
Despite its development potential, the small business market remains risky and complex, and requires strong risk management from retail banks due to factors such as low capitalization, no credit ratings and high bankruptcy rates in comparison to larger enterprises.
According to interviewees, increased cost of risk is considered the number one threat caused by the crisis (86%) followed by a drop in demand (68%). These outweighed other challenges such as pressure on prices (45%) and better-armed competitors (34%). The drop in demand and higher costs of risk seen in the post-crisis landscape will force banks to adapt in order to succeed.
Patrick Desmares, secretary general of Efma, said: “As the report validates, the small business market accounts for almost a third of retail banks’ net banking income, yet represents nearly half of their total retail risk-weighted assets. The small business market is, therefore, necessary but challenging.”
Key to the report’s findings is the emergence of the “winning bank” model, which prescribed methods for retail banks to outperform competitors on both managing risk and development of the small business market.
Banks must ensure strong client relationships through a deep understanding of each client’s line of business, needs and expectations. Banks must also empower relationship managers to manage credit risk – by granting them more authority and responsibility in the decision process as well as in credit underwriting, credit portfolio management and loan rescheduling.
In addition, banks’ credit risk management system will need to meet the highly specific and complex risk management needs of the small business market, including accurate governance, efficient organizational credit risk management processes, and complete and seamless supporting information systems.
Establishing the winning bank model will enable retail banks to achieve high levels of client satisfaction from small business clients and to better leverage cross-selling strategies, which are at the core of any retail bank’s development efforts in the small business market. The winning bank model will also enhance a bank’s ability to develop and leverage risk-management best practices, including sophisticated credit scoring tools, enhanced proactive management of performing portfolio and “soft collection.”
Bertrand Lavayssiere, MD of global financial services at Capgemini, said: “To overcome these increased threats, successful retail banks will develop two critical areas: the role of the relationship manager and the credit risk management system. Shifting the role of the relationship manager towards closer client relationships and increased empowerment on credit risk management, paired with the implementation of a complete and effective credit risk management system are the keys to success.”
Roberto Nicastro, group deputy CEO and head of retail strategic business area of UniCredit, said: “The capability of each bank to effectively serve small businesses is crucial not only for its profitability, but also for its reputation and legitimacy. To be successful with small businesses, banks must stabilize relationship managers, continuously invest in their competence, bring innovations to the credit process, establish a smooth multi-channel interface and gain the trust needed to address the personal and savings dimension of the entrepreneur.”