Last week, I traveled to New Delhi, India to lead a World Bank workshop on how best to apply credit scoring to small and mid-sized enterprises (SME), particularly in a market that lacks the information transparency enjoyed in the US. The discussions at and around the meetings touched on topics beyond scoring alone to include how best to market to and serve this client base as well as the key factors influencing the buying decisions of SMEs.

 

 

Increasingly, whether in the Mid-West of the US or the Middle East, SMEs are receiving the attention of senior bankers. While, thankfully, given the rigors of travel, most of our work as strategy consultants remains US-based, in the last few years we have been privileged to conduct projects in both the developed and developing world from Canada and the UK to Bangladesh, China, Egypt, India, Indonesia, Kenya, Mexico, Nigeria, Russia, and other countries.

 

The specific challenges of working in these countries differ both from country to country and versus the US. When I was in Nigeria, more than once the lights went off during meetings and a few moments later would return when the generator kicked in. I was told that virtually all bank branches have their own generators and that brown-outs are a fact of life there. In another African country, entering the branch is hardly welcoming. Rather than someone greeting you, someone with a rifle checks you out. Driving in Cairo makes New York or Boston traffic seem very dull.

 

Remarkably, however, the issues facing bankers with SMEs have great commonality whether they are operating in the developed or developing world. At this conference, I had conversations with Indian bankers that could have taken place in Indiana.

 

What is driving the global interest in SMEs?

As in the US and the west, SMEs represent the vast majority of companies around the world, oftentimes 95 percent or even more. In most countries, they serve as a current or anticipated growth engine for the economy and for employment. Governments are pushing increased SME activity by the banks. The stated goal with India is to double the banks’ SME business within five years. A greater incentive for action is that SMEs offer high profit opportunities for banks. In all the countries we work in, bankers discuss the squeeze on profitability in the corporate arena, as more competitors have moved in and spreads are down. Conversely, banks see greater opportunity in the small business and low-end middle market segments and rightly consider them to be a natural bank franchise, albeit one that is increasingly being eroded by credit unions, brokers, and private equity firms.

 

In short, whether in Los Angeles or Lagos, SMEs represent a large, growing, and profitable segment.

 

What are some of the universal issues?

Here are several that emerged during discussions in India but clearly echo what others around the world are considering:

 

Organization. In most cases, the SME group reports to retail but some are part of the corporate banking environment. Most US bankers would agree that being housed in corporate results in a more cumbersome decision process and a cost environment that is misaligned with the revenue opportunity. The degree of streamlining and standardization that small business requires benefits from a retail environment and goes against the grain of most corporate bankers (it should not but it does).

 

The role of the banker. The bankers had some good discussions concerning the role of the branch manager and other bankers in the sales and underwriting process. One issue with centralizing credit decisions is that the branch manager can feel left out of the decision process and suffer from a diminished status. Instead, communication to the bankers needs to center on the opportunity that this change affords the banker (doing more business, increasing personal compensation) as well as the time freed up for direct customer contact.

 

Training and cultural change. Within the US, much discussion centers on the need to upgrade the business bankers and branch staff.  Indian bankers appear much more willing than their American counterparts to pursue some type of certification process for bankers. While a few US banks have an internal program of designation, bankers have deflected most initiatives either due to concern about an unnecessary hurdle being established for them or, perhaps, concern about their ability to leap over that hurdle. Indian (and other emerging market) bankers without a long history in this business seem less tied to past approaches. American bankers could learn from them in this and other instances.

 

Credit scoring as a tool not an answer. The purpose of this workshop was to discuss how to introduce credit scoring to business banking. One of the surprises of the meeting concerned the extent to which banks were already using credit scoring with this segment. Several banks had developed screens and scores based on internal data and their local market knowledge. One bank was auto decisioning all loans up to $50,000. While some US banks are auto decisioning up to $100,000 or $250,000, we estimate that 65 percent or more of all banks are not auto decisioning any loans at all. The typical approval methodology, whether in the US or elsewhere, remains “score plus”, scoring the loan and then having an underwriter review it.

 

For the near term, many banks within India will have no choice but to pursue the “score plus” approach. While some individual banks have the wherewithal to develop detailed custom models, most do not. And third party databases still have a long way to go. A D&B speaker noted that they had 600,000 companies on their database (this excludes the large informal sector) but only about 22,000 are rated.

 

Best practices exist internationally. Five years ago, virtually all SME related best practices emanated from the US. That is no longer the case.  We have seen creative and effective segmentation approaches in Egypt, differentiating marketing approaches in Kenya, excellent product development approaches occurring in multiple emerging market countries in Asia and Africa, and the use of advanced technology to serve banking needs in countries that many would view as technologically backward. In fact, their restlessness with the past, strong desire to succeed with this segment, and sense of personal commitment, all suggest that increasingly new ideas will come from offshore.

 

Concluding thoughts

SME banking now has an international scope that will continue to expand. Even regional US banks should take the opportunity to learn from what foreign banks are doing, whether it involves credit scoring, organizational approaches, segmentation, product development, or other areas. The issues are largely the same across the globe, but it is understanding the creativity of the solutions offered that should provide the greatest value.