I was recently speaking with a colleague who focuses on international work, primarily in what is commonly termed the developing markets. I asked him about the state of small business and middle market banking (SME) in the geographies in which he focuses. His comments indicate that the need for increased segmentation remains a worldwide issue, one on which bank managements need to place increased focus whether they operate in the Middle East, Asia, or the mid-west of the U.S.
My colleague commented that while banks often state that they segment by size or other criteria, in reality he has found that little discipline exists around implementing these supposed strategic decisions. For example, he cited one bank in which the branch system continues to handle accounts that should be in the corporate area while the corporate group still houses companies that based on their asset size are in reality small businesses and should be served elsewhere. At that bank, management avoids requiring that agreed to segmentation policies are put into practice.
Frankly, my experience is that ignoring segmentation decisions is more the rule than the exception. I remember one regional bank in which the bank’s middle market group continued to handle many small business accounts despite attempts at shifting them into a lower cost and more appropriate delivery channel. The middle market group received the revenue that these small accounts generated but largely ignored them instead, appropriately, focusing on larger accounts with greater potential. But they kept the revenues they generated while failing to focus on growing them further.
Initiatives to implement segmentation decisions usually start off strong with some accounts quickly moved but then slows down under banker resistance and management’s lack of resolve. Why does developing a segmentation strategy and then insisting on it being implemented matter? For one, banks need to be more productive than ever before. One aspect of that productivity is getting the greatest leverage possible from each banker and selling more products and services to each customer. In many cases we have found that the misplaced account (for example, the commercial account housed in the branch) does not receive the optimal level of relationship coverage. The branch bankers are happy to benefit from the deposits and related fee income that the business generates, but they hesitate to bring in other parts of the bank that could deepen the relationship. Worse yet, in many cases the branch banker may be clueless about which services are most appropriate. These issues are so basic it seems inexcusable for management to fail to act on moving customers into the most appropriate channels.
We are currently preparing a report on the growth of commercial banks in leasing and equipment finance. In most every case the leasing company operates with some sort of segmentation strategy and executes rigorously against it. Obviously, some players focus on industry verticals but others consider themselves generalist lenders. In one case a lessor ignores industry type and instead segments its approach based upon the operational complexity of a particular leasing program. They have developed internal capabilities of operational excellence that allow them to manage transactions others avoid. Not surprisingly, those types of transactions also generate higher margins, a benefit particularly prized in today’s environment of squeezed margins and looser credit terms.
Another bank has seen its leasing cross-sell ratio jump as a result of bank management insisting that all equipment finance or leasing transactions must be handled by the specialist group rather than the commercial bankers. The leasing bankers possess the expertise required to assess equipment and its current and residual value. They are much better positioned to avoid losses, as the leasing industry’s performance during the recent downturn showed. In this case the importance of segmentation and the value it provides is apparent. However, to get commercial bankers to cooperate rather than drag their feet in referring deals, bank management instituted compensation policies that in effect encourage the banker to hand over these types of deals to the leasing group. Implementation of the segmentation decisions never would have succeeded without management support and compensation changes.
In summary, at least four key reasons exist to determine segmentation criteria within a bank and then enforce a disciplined approach to its implementation:
1. Customer service. Big-ticket bankers ignore the smaller accounts in their portfolios. Branch personnel lack the training and time to serve the needs of complex commercial customers. Poor segmentation harms customer service and the quality of the customer experience, opening up the possibility of losing the account.
2. Productivity. The best performing banks have established consistent job definitions based in part on the segment that banker serves. The productivity gains that can be achieved with this approach are lost when segments are jumbled up.
3. Reduced net income. Without a disciplined segmentation approach, banks operate with increased costs to serve different customer types and reduce their potential to generate revenues. What more compelling argument exists than this one!
4. Senior management reputation and respect. Many bankers view management initiatives with the view “This too shall pass.” Senior management that does not follow through on its decisions is undercutting its own credibility and internal respect.
Yes, bankers and perhaps even some customers (often enlisted by the bankers) will push back against segmentation. And, yes, sometimes (increasingly rare, by the way, maybe 1% of the time) circumstances exist that should modify established segmentation decisions.
Having worked in about 20 countries, some of them far from the U.S., I have had the opportunity to see how some issues exist almost universally. The value of segmentation and the need for management to step up its implementation surfaces as one of those issues.