World Retail Banking Report: Special Edition 2010

Small BuSinESS Banking and thE CRiSiS:
Managing developMent and risk
World Retail Banking Report Special Edition

2010

Contents
3 Preface

5 Principal Findings

7 Introduction

1
1 Chapter 1
The Winning Bank Model in the Small Business Market

2
1 Chapter 2
Key Benefits of the Winning Bank Model

3
1 Chapter 3
Moving Forward: Transforming the Business to Reach the Winning Bank Model

3
7 Methodology

3
8 About Us

© 2010 Capgemini. All Rights Reserved. Capgemini, UniCredit and Efma, their services mentioned herein as well as their respective logos, are
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of their respective owners and are used herein with no intention of trademark infringement. No part of this document may be reproduced or copied
in any form or by any means without written permission from Capgemini.

Disclaimer
The information contained herein is general in nature and is not intended, and should not be construed, as professional advice or opinion provided
to the user. This document does not purport to be a complete statement of the approaches or steps, which may vary according to individual
factors and circumstances, necessary for a business to accomplish any particular business goal. This document is provided for informational
purposes only; it is meant solely to provide helpful information to the user. This document is not a recommendation of any particular approach and
should not be relied upon to address or solve any particular matter. The information provided herein is on an “as-is” basis. Capgemini, UniCredit
and Efma disclaim any and all warranties of any kind concerning any information provided in this report.

Preface
Capgemini, UniCredit, and Efma (European financial marketing association) are pleased to present this
seventh edition of the World Retail Banking Report. Because the financial and economic crisis has had a
tremendous impact on bank operating models and their ability to handle liquidity, manage risk and compliance,
and generate revenue, we have focused this year on evaluating the effect of the global financial crisis and how
to deal with it. We especially highlight trends in the small business market, which is a very important strategic
market for retail banks.

This year’s study, therefore, investigates the challenge small business banking faces to master risk while
accelerating business development, which was brought to the fore by the crisis. As detailed in the Methodology,
our analysis is based on 58 in-depth interviews with senior executives from leading banks in 21 countries:
Austria, Belgium, China, Croatia, Czech Republic, France, Germany, Hong Kong, India, Ireland, Italy, the
Netherlands, Poland, Romania, Russia, Slovakia, Sweden, Turkey, United Arab Emirates, United Kingdom,
and United States.

Our report provides bankers with an overview of the challenging but critical small business market, proposes a
winning model to overcome today’s risk management and development challenges, highlights the major benefits
of this model, and suggests practical next steps to reach and implement it successfully.

It is with great pleasure that we publish this 2010 edition of the World Retail Banking Report. We trust its
findings will help answer key questions and stimulate debate. Most of all, we want to provide useful information
that helps retail bankers deal more effectively with the difficult operational and strategic issues they will face in
the post-crisis period.

Bertrand Lavayssière Roberto Nicastro Patrick Desmarès
Managing Director Group Deputy CEO & Secretary General
Global Financial Services Head of Retail Strategic Business Area European financial
Capgemini UniCredit S.p.A. marketing association

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

5

Principal Findings
Small Business Banking and the Crisis:
Managing Development and Risk

The global financial and economic crisis—with the ƒ Accelerating development through increased client
increasing cost of risk, the drop in demand, and the satisfaction and the bank’s ability to cross-sell
rising pressure on banks to support the economy—has successfully, thereby supporting revenue generation
highlighted the major challenge that small business under the increased cost-of-risk pressure.
bankers face: how can they both accelerate business ƒ Mastering risk, based on wider usage and
development and manage risk? sophistication of rating-based scoring tools,
strengthened proactive management of performing
To cope with this challenge, successful retail banks
credit portfolios, and an improved credit collection
will develop along two key dimensions to reach what
process with “soft collection”.
we call the “winning bank” model (see matrix below):
ƒ Move the role of their relationship managers (RMs) To reach and implement the winning bank model,
towards closer relationships with their clients, a deep successful banks will design an appropriate
understanding of each client’s needs and expectations, transformation strategy (see matrix):
and increased empowerment on risk management
ƒ Transformation paths depend on a bank’s
issues, fully in line with policies and practices defined
starting point on both axes, on its original market
by the risk management department.
positioning (retail versus corporate), and on its
ƒ Implement an efficient and complete credit culture and organisation.
risk management system—characterised by an
ƒ These transformation paths will be a combination
appropriate governance scheme, fully integrated
of technical, organisational, and HR measures
processes, and a complete and efficient supporting
implemented through quick wins, incremental steps,
information system—that meets the highly specific
or longer term actions.
and complex risk management needs of the small
business market. ƒ To succeed in this transformation, banks will have
to set up robust change-management approaches to
This model will enable banks to outperform achieve alignment with the bank’s overall strategy,
their competitors on both development and risk support from senior management, and buy-in
management, by: from employees.

Complete and fully integrated
processes and information system
aligned with risk management needs

“Top-Down,
inTegraTeD bank”
“winning bank”

Credit risk
management system

“TraDiTional “branCh as a
bank” bank”

Incomplete and not fully integrated

relationship manager role
Low level of empowerment on High level of empowerment on
risk management and/or lack of risk management and close
closeness in client relationships relationships with clients

7

Introduction
The financial and economic crisis has
brought to the fore small business
banking’s key challenge:
How can banks master the cost of risk
and also accelerate development?

FinAnCing ThE SMAll BUSinESS MARkET This is a high-growth market. In Europe between
iS A kEy FACToR in ThE woRlD’S 2002 and 2007, the number of small and medium
EMployMEnT AnD EConoMy enterprises grew by 11%, and their number of
Small businesses play a major role in the world employees went up by 9% (versus 4% and 3% for the
economy. In Europe, Japan, and the USA, 99% of larger enterprises). The line-of-business diversification
the enterprises belong to the small business market of small businesses helps mitigate the impacts of
and are responsible for 51% of the employment in the macroeconomic downturns at the national or global
private and non-financial economy (see Methodology level. That is why, when added to the fact that small
for how we define the small business market). Small businesses employ such a large portion of a nation’s
business employment is more than 50% in the EU27 people, governments often rely on small businesses to
and approximately 40% in the USA (see Figure 1). boost economic recovery in times of crisis.

Figure 1 Contribution, by size category, in terms ThE SMAll BUSinESS MARkET iS A vERy
of number of enterprises, employees, ATTRACTivE AnD STRATEgiC MARkET
and value added FoR RETAil BAnkS
According to our interviews, while representing less
1% than 10% of the retail banking client portfolio, the
7% small business market accounts for almost a third of
retail banks’ net banking income (NBI) (see Figure 2).
32%
42%

Figure 2 weight of the small business market
17%
in retail banking
99% 92% 18%

21%
Proportion of small
business clients in 10%
19% retail banking
51%
40%
30%
Proportion of small
21% business net banking 27%
income in retail banking
Number of Number of Value added at
enterprises persons employed factor cost
Proportion of small
I Large-sized enterprises I Medium-sized enterprises business risk-weighted 46%
I Small-sized enterprises I Micro-sized enterprises assets in retail banking

Small Business

Source: EIM/European Commission, Annual Report on EU Small and
Medium Enterprises (first section), January 2009. Source: Capgemini analysis from bank interviews, 2010.


Small businesses rely mainly on banks for their Figure 3 Small business net banking income
financing needs, because they have very limited access product structure
to equity. Credit and loans, therefore, are at the heart
of small businesses’ relationships with their banks, 5%
and represent 40% of the total retail banking NBI in
this market (see Figure 3).
26%
40%
Small business clients also represent a high
development potential for banks. One of the primary
challenges is to become the client’s main banker and
capture as much of the flows, credit, and savings as 29%
possible through cross-selling and up-selling. But
part of the challenge also lies on the private side, as I Loans and credit I Deposits and savings
bankers try to cross-sell products to the entrepreneur I Operations and transactions I Other
and secure client loyalty.
Source: Capgemini analysis from bank interviews, 2010.
ThE SMAll BUSinESS MARkET iS A hARD nUT
To CRACk BECAUSE iT iS RiSky AnD CoMplEx
The small business market is risky. Small businesses
are more vulnerable than larger enterprises (low
The tremendous increase in the cost of risk has
capitalisation and no credit ratings, for instance) and
forced banks to strengthen their risk management.
have high bankruptcy rates. As Figure 2 showed,
In particular, one of the challenges banks now face
although small business represents 27% of retail NBI,
is to continue assessing correctly the new credit
it accounts for 46% of total retail risk-weighted assets.
applications for underwriting. The traditional way of
assessing creditworthiness is questioned in times of
Yet small business is a complex market to deal with. crisis, because the analysis of most borrowers’ financial
Spread across retailers, artisans, farmers, associations, statements or liquidity behaviours has deteriorated.
liberal professions, and small enterprises, it features Faced with this reality, banks have to define a cost-
behaviours and needs from both the mass and effective way to develop predictive or business planning
corporate markets. To handle this market, successful analyses adapted specifically to the small business
bankers will develop a mixed approach between market.
standardisation and customisation in their offers.
The drop in demand is mainly for credit, resulting
ThE EConoMiC AnD FinAnCiAl CRiSiS
highlighTED RETAil BAnkS’ ChAllEngE
from investment freezes and, to a lesser extent, from
oF MAnAging RiSk whilE ACCElERATing the use of such alternative financing as associative
DEvElopMEnT networks and public funds.
The global financial and economic crisis strongly
affected small businesses. They endured severe cuts in The global financial crisis has led to higher costs
turnover and profit, and an increase in the number of of financing. As a result, for the first time since
defaults, insolvencies, and bankruptcies. Considering 2005, European bankers expected a decline in their
the high importance of small businesses in national revenues from the small business market in 2009 (see
economies, most governments and other public Figure 5).
sectors have implemented measures to help them
face the crisis, including supporting sales, cash flow, As a first reaction to the financial crisis, many
and working capital; enhancing access to finance; banks were forced to slow down their credit activity
supporting investment; strengthening capital; and in response to a peak in the cost of risk. This was
the like. only temporary, however, as the double pressure of
governments’ commands and banks’ own growth
With small business clients going through hard times, needs made development a top priority.
bankers face two difficult threats: (1) a rise in the cost of
risk; and (2) a drop in demand. According to the banks Banks have always faced the challenge of
we surveyed, cost of risk is the first threat caused by managing risk while accelerating development.
the crisis (51% of respondents), followed by the drop in In this time of crisis, however, the challenge has
demand (31%), well ahead of pressure on prices (10%) dramatically increased.
and better-armed competitors (8%) (see Figure 4).

INTRODUCTION 9

Figure 4 Main threats caused by the crisis, according to bankers (% of banks interviewed)

Increasing cost of risk 51% 35% 86%

Decreasing demand 31% 37% 68%

Pressure on prices 10% 35% 45%

Better-armed competitors 8% 26% 34%

I Most important threat I Quite important threat


Figure 5 Five-year revenue growth for European small business banking

20%
18% 18%

14%
15%

11%

10% 10%

5%
4%

0%
2005–2006 2006–2007 2007–2008 2008–2009e

-5%
-7%
-8%

-10%
Western Europe Central and Eastern Europe

Source: Efma/Finalta study, “Direct Channels for Small Business Banking”, January 2010.

11

Chapter 1
The winning Bank Model
in the Small Business Market

Based on our own experience and on the bank ƒ To ensure the efficiency of these first two
interviews we conducted for this report, we are characteristics, banks also need to implement an
convinced that to perform well in risk management effective and complete credit risk management
and develop the small business market, and eventually system that meets the highly specific and complex
become what we call here a “winning bank”, risk management needs of the small business
successful retail banks will improve the role of their market. This system relies on fully integrated
relationship managers (RMs) and beef up their credit processes and an efficient supporting
risk management systems (see Figure 6). information system.

This winning bank model has three primary This first chapter of the report will describe these
characteristics: three characteristics. Chapter 2 will highlight the
ƒ RMs with client relationships based on a deep benefits of the winning bank model. In Chapter 3,
understanding of each client’s line of business, we will specify the possible paths to reach and
needs, and expectations, as well as substantial implement this winning model.
relationship strength.
ƒ RMs empowered to act on risk management issues,
in terms of both underwriting and active credit
portfolio management, fully aligned with risk
management department policies and supported by
appropriate systems and organisation.

Figure 6 Four models for retail banks operating in the small business market

Complete and fully integrated
aligned with risk management needs

“Top-Down,
inTegraTeD bank”
“winning bank”

Credit risk
management system

“TraDiTional “branCh as a
bank” bank”

Incomplete and not fully integrated

relationship manager role
Low level of empowerment on High level of empowerment on
risk management and/or lack of risk management and close
closeness in client relationships relationships with clients

Source: Capgemini analysis, 2010.


RMs nEED To DEvElop CloSE CliEnT As shown in Figure 7, we identified four RM
RElATionShipS relational models that trade off differently between
By close client relationships we mean proximity, the three critical factors in solid relationship
availability, and stability of the relationship, management: portfolio size, expertise level, and close
along with genuine concern for the success of the relationships. Two of them—B and D—favour close
customer’s business. Moreover, deep knowledge client relationships.
and understanding of each client’s line of business,
needs, and expectations—and of the entrepreneurship Model B enables the RM to build strong client
issues behind them—are key success factors in the relationships, because the RM is fully available
small business market (unlike corporate banking, and deeply aware of each client’s business needs.
where knowledge of the client’s industry is much These RMs are experts on most of the products and
more relevant). services small businesses need. Their client portfolios,
however, must be limited.
Among all distribution channels, RMs are—and will
In model D, RMs also develop very close relationships
remain—the linchpin of client relationships. For the
with their clients while managing a larger number of
surveyed banks, 93% of their small-sized clients will
clients than in model B. As a consequence, however,
be assigned to an RM portfolio in the near future,
they are in a position to sell a smaller number of
versus 89% today. Several banks that have developed
products and services unless they get help from
call centres too far, disrupting the relationship between
product experts offering technical sales support.
clients and RMs, are now coming back to a more
RM-centric, multi-channel scheme, giving priority
to face-to-face interactions. (For micro-sized clients, These two models are used most by banks in the
however—given their simpler needs—RMs can also small business market, especially for small-sized
interact by telephone or through other direct channels.) clients who require more RM time to build close
client relationships. For these clients, 66% of surveyed
This is one good reason why banks have to review banks are already operating one of these two models
and strengthen the role and profile of their RMs. To or will implement one of them in the near future
enable such RM positioning, lengthening the RM’s job (versus 38% for micro-sized clients) (see Figure 8).
duration is a key success factor. Ideally, RMs should stay
four or five years in their job. Today, based on what we
observed in the market, RMs average three years.

Banks need to give their RMs the time they need to
build very strong relationships. As a consequence,
banks can limit the number of clients an RM
manages, or limit their assignment in terms of
expertise with products and services so that RMs do
not have to sell all products and services in the small
business range.

THE WINNING BANK MODEL IN THE SMALL BUSINESS MARKET 13

Figure 7 Four relationship manager models, with two models favouring close client relationships

Model a PORTFOLIO SIzE Model b PORTFOLIO SIzE

ExPERTISE CLOSE ExPERTISE CLOSE
LEvEL RELATIONSHIPS LEvEL RELATIONSHIPS

RMs manage a medium number of clients with whom they RMs build strong and close relationships with clients and are fully
are fairly close. They have an average expertise on the available and aware of the clients’ needs. They manage a more limited
majority of products and services. number of clients and are experts in most products and services.

Model C PORTFOLIO SIzE Model D PORTFOLIO SIzE

ExPERTISE CLOSE ExPERTISE CLOSE
LEvEL RELATIONSHIPS LEvEL RELATIONSHIPS

RMs manage a large number of clients and do not have time RMs build close and strong relationships with clients and manage
to build close relationships with them. They have a more a large number of clients. As a consequence, they can sell only
limited level of expertise on products and services. a few products and services without expert support.


Figure 8 percentage of surveyed banks using model A, B, C, or D

Small-sized clients 25% 9% 46% 20% I Model A
I Model C
I Model B
I Model D
Micro-sized clients 22% 40% 16% 22%



Accordingly, most banks interviewed intend to reduce surveyed, 40% intend to simplify their product
the size of their RMs’ client portfolio, as shown in range, while 20% intend to make it more
Figure 9, which is consistent with model B. sophisticated (40% will leave the situation as is).
As an illustration of a reduced product range, a large
Especially for banks implementing model D, technical European bank that formerly proposed 250 products
sales support resources (such as product experts) can be for savings and deposits is working to reduce it to
set up for the most complex and sophisticated products 15 key products.
and services, such as electronic payments, trade
ƒ Continuing to improve sales and after-sales
finance, internationalisation, and private banking.
process efficiency.
These product experts are used more and more by
retail banks, and of banks we surveyed, 55% said they Banks will continue to encourage RMs to intensify
were already using them “today”, and 12% said they their relationships with clients, and adopt closer
would set them up “in the near future”. management of the client portfolio, by increasing the
number of client meetings (taking care to improve
Beyond the implementation of these two models—
meeting quality to avoid being perceived as intrusive),
with the reduction of client portfolio size or the
and by integrating this dimension into their objectives
creation of technical sales experts—banks need to
system.
enhance supporting measures designed to free up
time for RMs, such as: Finally, banks can help their RMs develop their
ƒ Reinforcing and professionalising middle-office skills and understanding of client needs by regularly
positions (such as sales assistants) to support updating and enriching an intranet dedicated to the
RMs, primarily by lightening RMs’ workload on small business market. The aim will be to capitalise
administrative and non-commercial tasks. on the knowledge that banks are continuously
ƒ Simplifying the range of products and services developing about such important topics as markets,
they offer to small business clients, along with business lines and professions, products, credit
simplifying the process that helps RMs access policies, processes and tools, and the like.
and choose the right products. Of the banks we

Figure 9 Client portfolio size per relationship manager (average number of clients)

371

305

233

I Current
160 I Expected

Small-sized clients Micro-sized clients



RMs nEED A high lEvEl oF EMpowERMEnT level of the bank (local, regional, national; sales and
on RiSk MAnAgEMEnT risk organisations). Strong RM training on decision
Two opposite risk-empowerment profiles can be de- processes (credit scoring interpretation, decision
fined: RM as a sales manager and RM as a small banker. scheme, level of authorisation, scaling process) and
High-performing banks will select the second profile. data management processes are also mandatory for this
profile.
The first profile, RM as a sales manager, emphasises
the “four-eye” principle: most of the credit decisions, In the profile RM as a small banker, banks need to: (1)
especially underwriting or loan rescheduling, must be strengthen the RMs’ risk management skills; (2) free
double-checked by a risk analyst, or at least a regional up time for RMs, continuously improve the credit
or national sales manager. The level of empowerment process, and provide dedicated coaching resources
RMs have in this commonly found scenario is rather to help them manage sales and credit decisions; (3)
limited, and these RMs are focused on sales and establish measures aimed at controlling the resulting
customer service. risk of such a profile; and (4) create durable client
relationships.
The second profile, and the one that leads to
the winning bank model, is the RM as a small First, to ensure relevant and accurate decisions,
banker. It gives RMs substantial responsibility and excellent RM training on risk management is required
empowerment on risk management, as well as for in this profile, including credit scoring interpretation,
credit underwriting, behavioural monitoring,1 and loan risk assessment, behavioural monitoring, and loan
rescheduling. In this scenario, the RM is regarded rescheduling.
as the person playing the key role to make the right
decision on credit underwriting or even rescheduling, Second and above all, because it is difficult for RMs to
because he or she is responsible for the day-to-day deal with sales and credit risk issues at the same time,
client relationship and has the best knowledge of a bank will have to free up RM time by reinforcing
the client’s needs and economic situation. In times support from middle-office resources, which will
of crisis, this point is all the more important because relieve the RM of administrative credit tasks, and
it becomes crucial to predict whether a client’s also improve credit process efficiency. (Banks might
difficulties are temporary or structural. also extend an automated decision process to a wider
micro-loan scope.) In addition, RMs will need to be
Depending on the profile adopted, successful banks supported and coached by dedicated resources on all
will implement appropriate measures, tools, and these issues (we develop this good practice further in
processes aimed at ensuring performance, controlling the next chapter).
the resulting risk, and supporting RMs.
Third, appropriate reporting, or more thorough
In the profile RM as a sales manager, above all, a management by objectives (MBO) systems, are
bank needs to invest in process efficiency, especially also necessary to highlight the cost-of-risk factor
aimed at avoiding time-to-decision delays, since at the RM level. These systems allow banks to
more people are involved in the decision at different assess RMs’ risk management performance so
levels and places in the company. Moreover, in this they can appropriately structure the RMs’ level of
profile, efficient client data management (credit empowerment, their incentives, their training, and
relationship management tools, data knowledge even their career evolution. Such measures act as a
management processes, and so on) is necessary to barrier against potentially bad assessments or, even
ensure the availability of accurate information, both more critical, connivance with clients.
qualitative and quantitative, at any time and at any

1
“Behavioural monitoring” entails the RM reviewing (usually monthly) his or her credit portfolio, client by client, to catch early-warning signals of deterioration
and decide what actions are needed for that particular client.


Finally, reduced sales force turnover to maintain ƒ Developing scenario analyses for the main risk
durable client relationships is also a key success factor. parameters, to accurately plan, budget, and forecast
It will strengthen RMs’ client knowledge for relevant loan-loss provisions, new non-performing loans,
credit decisions, and ensure accurate cost-of-risk and expected losses.
reporting at the portfolio level. The RM as a small ƒ Developing specific risk strategies and policies
banker profile might help a bank lengthen the RM job in terms of risk appetite for each type of client,
duration, as well, because it gives every RM the power product, risk class, industry, geography, and
to better help their clients in their businesses, making distribution channel.
the RM job more attractive.
ƒ Monitoring the credit portfolio, producing a set of
Figure 10 summarises the key measures that ensure reports (tableau de board), analyses, studies, surveys,
each model will be effective and support the RM, and simulations, and detailed forecasts, to measure
Sidebar 1 is a short case study of a large European credit risk, identify any anomalies or built-in
bank using the RM as a small banker profile. problems to be communicated to the appropriate
levels of management, and propose corrective
Top BAnkS will hAvE An EFFiCiEnT AnD actions aimed at constantly improving overall credit
CoMplETE CREDiT RiSk MAnAgEMEnT quality.2
SySTEM ƒ Arranging a constructive and regular dialogue
The winning bank model also relies on a bank’s between the sales and risk organisations.
ability to implement a complete risk management
system closely fitting the highly specific and complex Second, the credit risk management system relies
needs of managing small business credit risk. By risk on several key macro-processes in risk operations
management system, we mean three major elements: (underwriting, behavioural monitoring, and credit
(1) governance; (2) macro-processes; and (3) a collection) and in risk management (such as risk
supporting information system. strategies, portfolio monitoring, credit policies,
credit models, credit data management, regulatory
First, it is crucial to set up a clear and efficient and compliance, audit and control). They must
governance scheme aimed at ensuring the right be constantly improved by the risk management
decisions are made on policies, processes, and tools department. (In Chapter 2, we will develop the three
by involving the appropriate level of management, main best practices at stake following the crisis: wider
depending on the financial stakes. Efficient usage and sophistication of rating-based scoring tools,
governance relies on several key success factors: strengthened proactive management of performing
ƒ Setting up an appropriate committee scheme, credit portfolios, and an improved credit collection
differentiating committees focusing on operations process with “soft collection”.)
from committees dealing with credit policy issues.

Figure 10 Appropriate measures for the two risk-empowerment relationship manager profiles

process efficiency iT supporting tools Coaching, management rM training rM stability in the job
by objectives

Underwriting Decision process,
rM as and rescheduling CRM tools, scoring scoring interpretation, Durable client
MBO focusing mainly on
a sales decision process, tools, early-warning
client contacts and sales
understanding risk relationships with low
manager client data management indicators, etc by line of business or RM turnover, etc
process, etc market, etc

Underwriting Scoring interpretation,
rM as and rescheduling CRM tools, scoring Reporting of cost of risk at understanding risk by line Durable client
a small decision process, tools, early-warning RM level, with integration of business or market, relationships with low
banker client data management indicators, etc of this dimension in MBO behavioural monitoring RM turnover, etc
process, etc and rescheduling, etc

Strong need Significant need


2
“Portfolio monitoring” is performed centrally by risk management analysts.


Sidebar 1
Illustration of a large European bank operating with the
RM as a small banker profile for risk management

This cooperative bank is one of the leaders in the small business market, with a 24% penetration rate.
The bank delegates risk management decisions to the relationship managers, both for underwriting
and for rescheduling, to ensure fast and accurate decisions.

nEw loAn UnDERwRiTing: To EnSURE RiSk MAnAgEMEnT pERFoRMAnCE
AnD ConTRol, ThE BAnk hAS SET Up SUCh
ƒ Most of the decisions (85%) are made at the
MEASURES AS:
local level by RMs (or branch managers).
ƒ Maintaining stringent reporting of cost of risk
ƒ The other decisions (15%) are commonly
at the RM portfolio level, integrated in the MBO
made at the regional level by sales and risk
system, to personalise the RM’s incentive and
departments.
level of authorisation for underwriting and
ƒ The bank does not use scoring tools, and the rescheduling. Recurrent or high cost of risk may
only decisions that are made automatically (15% affect the RM’s career evolution.
of the new loans) correspond to pre-approved ƒ Giving priority to sales force skills and client
loans (RMs may contact some clients to offer a knowledge in underwriting (scoring system
pre-defined credit line). improvement and process efficiency are not
priorities).
ExiSTing loAn MAnAgEMEnT AnD RESChEDUling:
ƒ For existing portfolio management,
ƒ RMs are fully involved in their loan portfolio tracking early-warning indicators (EWIs), such
monitoring. They are directly responsible for as increasing past-due payments, decreasing
managing (including restructuring) the 15% of the transactions or operations, increasing utilisation
riskiest performing loans. of credit lines, etc.
ƒ Collection is managed by a regional (or ƒ Inducing RMs to stay on the job at least five
interregional) dedicated entity attached to the years; current average duration is four years,
risk department. the range being three to eight.


Third, banks have to implement a complete and ƒ Wide and appropriate diffusion to guarantee full
fully integrated credit risk management information data accessibility by credit information systems and
system, attuned with business needs through the specialists. This system also takes advantage of a
entire credit risk management value chain, as shown service-oriented architecture (SOA) to perform the
in Figure 11. seamless integration of datamarts and applications
specific to the small business market, as well as
This system will leverage existing tools of other those shared with other markets. It provides final
markets as well as applications specifically developed users (such as sales forces, sales managers, risk
for the small business market. It will enable full analysts, and risk managers) with a comprehensive
integration—along all stages of the credit sales and portal on their workstations that allows access to all
risk-management value chain (from underwriting to relevant tools and information with a user-friendly
behavioural monitoring and credit collection)—of Web 2.0 interface.
all processes linked to client management, internal
decision-making, prudential reporting feeds, and Finally, by using collaborative tools, such as instant
audit trail constraints. messaging, forums, wikis, and peer-to-peer solutions,
banks will be able to spread across the community
Such a system will help banks cope with the primary of their small business specialists the best practices
credit data management challenges they are facing developed in their network.
in the small business market today (see challenges
in Figure 12). It will ensure that several major By combining RM closeness to customers, high RM
considerations are covered: empowerment on risk management, and an efficient
ƒ Relevancy and deepness of data gathered from and complete credit sales and risk-management
internal and external sources (e.g. diversified data system, successful banks will be able to master risk
for scorecards: financial data, predictive data, while maintaining high business development and
qualitative information, and so on). outperform their competitors in the small business
market. In the next chapter, we will develop the
ƒ Quality of data regularly validated and updated.
benefits that implementing the winning bank model
ƒ Integration of data to avoid redundancy or the can achieve.
necessity to capture repeatedly the same data at
different stages (e.g. the underwriting decision
process, credit origination process, and regulatory
compliance/Basel II process).
ƒ Knowledge management over time to enable trend
and historic analyses (e.g. follow-up of a loan from
origination to servicing and recovery—especially
efficient collection).


Figure 11 Complete and fully integrated credit risk management information system for the small
business market

CREDIT RISK OPERATIONS AND RISK MANAGEMENT KEY MACRO-PROCESSES

Credit Policies and Underwriting Behavioural and Credit Regulatory and Audit and
Credit Risk Strategies and Pricing Portfolio Monitoring Collection Compliance Control
(Dashboards and reporting, (Scorecards, RAROC [risk-adjusted (Performance reporting, (Performance reporting, (Internal rating,
profitability analyses, etc) return on capital] pricing, sales EWIs, loan restructure loan life history, loan relevant PD and LGD
reporting, process efficiency, etc) history, etc) restructure reporting, etc) reporting, etc)

User-friendly workstations Sales force Risk analysts,
Sales Risk
customised for each actor involved collection
(RMs, credit managers managers
in small business marketing, experts, etc) staff, etc
commercial, and risk departments

Business process
work ow management Service Integration
and audit trail

Client Needs

service-oriented architecture (SOA)
Risk scoring Portfolio
Requesting and

Seamless integration based on
All relevant relationship analysis, product Sales monitoring and Prudential
and risk-adjusted collaborative
systems and management catalogue and reporting early-warning reporting feed
pricing tools tools
databases: (CRM) configuration tool indicators

Specific to
small business
market Master Data Management
Shared with
retail, private,
or corporate
market
Clients and other Risk-oriented Marketing information Small business
Risk information
counterparts' general internal and and recommended specialists sharing a
about economic
information, including external information offerings based on data warehouse and
sectors
links to private data about borrower business lines knowledge database


Figure 12 Credit data management challenges (% of banks interviewed)

Issues with data quality 26% 39% 65%

Lack of integration (work ow from
origination and servicing to 25% 28% 53%
close or recovery)

Limited capability to compile
34% 15% 49%
trends and history
I Most important challenge
I Quite important challenge
Manual data gathering 30% 17% 47%

Issues with data
35% 11% 46%
accessibility and availability

Isolated and redundant databases 20% 15% 35%


21

Chapter 2
key Benefits of the winning Bank Model

We identified three major benefits of the winning client’s line of business and entrepreneurship issues, to
bank model: the top of the small business client’s expectations list.
1. It contributes to higher small business client
satisfaction, especially since the crisis. As shown in Figure 13, 58% and 52% of our surveyed
2. It better leverages a cross-selling strategy, which is banks put these expectations high on their list of
at the heart of retail banks’ development efforts in most important expectations. Easy access to credit
the small business market. and brand image and reputation are also important
expectations for small business clients.
3. It enhances a bank’s ability to develop and use risk
management best practices.
A highly empowered RM profile, furthermore, will
help satisfy clients, who usually prefer to deal directly
ThE winning BAnk MoDEl BETTER with a decision-maker rather than a messenger and
SATiSFiES SMAll BUSinESS CliEnTS, appreciate receiving a quick answer concerning their
ESpECiAlly SinCE ThE CRiSiS credit requests. Our winning bank model meets all
The global financial crisis has pushed closeness with of these expectations.
customers (proximity, availability, stability of the
relationship), along with an understanding of each

Figure 13 key small business client expectations, and impact of the crisis, according to bankers
(% of banks interviewed)

Close relationship
(proximity, availability, stability) 29% 19% 10% 58%

Understanding of customers’ line of
36% 6% 10% 52%
business and entrepreneurship issues

Easy access to credit (fast decisions, 10% 19% 18% 47%
clear granting conditions)

Reputation and brand image 16% 19% 8% 43%

Service quality 6% 3% 23% 32%

Pricing competitiveness
(credit, operations and ow, etc) 9% 13% 22%

Customisation of 16% 5% 21%
products and services
Pricing and billing
3% 8% 11%
readability and simplicity

Customised multi-channel relationship 3% 5% 8%

I 1st expectation I 2nd expectation I 3rd expectation

Increasing importance due to the crisis Decreasing importance due to the crisis



ThE winning BAnk MoDEl EnABlES A BAnk billing policies through such innovations as fixed-
To lEvERAgE iTS CRoSS-SElling STRATEgy price contracts, to satisfy clients’ expectations for
Because it can make the most of a deep understanding more simplicity, clarity, and transparency.
of client needs, the winning bank model fully supports
customer-centric development strategies currently Another key success factor to help banks develop
favoured by retail banks, aiming at becoming the business and make the most of cross-selling is the use
client’s principal bank in a win-win relationship. Of of relevant commercial/relational segmentation aimed
the banks we interviewed, 73% viewed cross-selling at designing the best commercial organisation to
or up-selling as a priority, both on professional and serve various client categories (such as RM generalists
private offers, as shown in Figure 14. or specialists, professional or private relationships,
or a multi-channel model). Almost 80% of the
RMs are clearly at the forefront of cross-selling banks we interviewed said they use commercial/
strategies. Among all marketing levers for cross- relational segmentation. To do so effectively requires
selling, sales action is the first to succeed in this availability and relevancy of client data. Generally
strategy, well ahead of product improvement or speaking, we found 40% of surveyed banks followed
pricing innovation, as shown in Figure 15. a segmentation sophistication trend (versus 20% of
banks intending to simplify their segmentation and
As an illustration of good practice in sales action for 40% expecting to keep it unchanged).
credit, defining pre-approved credit lines for some
clients can create demand. To develop sales in current As illustrated in Sidebar 2, banks are using different
account operations and transactions, many banks types of commercial/relational segmentation, built on
are proposing unbundled offers, or simplifying their diverse criteria.

Figure 14 Development strategies favoured by banks (% of banks interviewed)

20%*
New products
PRODUCT INNOvATION
and services

68%*
CROSS-SELLING ON
PROFESSIONAL OFFERS

36%* 48%*
Existing products CROSS-SELLING ON
73%** CONqUEST
and services PRIvATE OFFERS

45%*
UP-SELLING

Existing clients New clients

* Percentage of banks that selected this strategy as a priority.
** 73% of banks surveyed have selected at least one of the three cross-selling or up-selling strategies.

Figure 15 Cross-selling marketing levers by category of product (% of banks interviewed)

sales action product improvement billing or pricing innovation price reduction

Short-term financing (working capital, factoring, etc) 75% 48% 20% 8%
Current account operations and transactions 78% 43% 23% 3%
Long-term financing and investment loans 80% 70% 15% 10%
Insurance products 67% 61% 17% 0%
Deposits and savings 68% 38% 16% 10%

More than 75% of respondents 50–75% of respondents 25–49% of respondents Less than 25% of respondents


KEY BENEFITS OF THE WINNING BANK MODEL 23

Sidebar 2
Illustrations of commercial/relational segmentation
Objective: Commercial/relational segmentation aims at defining client clusters with homogeneous needs and
expectations, allowing banks to design for each:
ƒ An optimal commercial organisation (RM’s role and client portfolio size)
ƒ An appropriate relational model and policies (e.g. development objectives, and frequency of contact,
types of contact, and channels of contact)

Criteria: Segmentation criteria differ greatly from bank to bank, and may include:
ƒ Client’s line of business (e.g. farmer, retailer, liberal ƒ Nature of the relationship
professional, small enterprise, association) and market (business or personal banking)
segment (e.g. health, building, financial, food, trade) ƒ Client’s annual banking income or
ƒ Client’s annual turnover profitability (current and potential)
ƒ Client’s level of risk (e.g. credit rating) ƒ Seniority of the relationship
ƒ Enterprise life cycle (creation, development, transmission) ƒ Complexity of the business cycle

illUSTRATion 1: SEgMEnTATion AiMED AT DEFining DiFFEREnTiATED RElATionAl AnD CoMMERCiAl poliCiES

segmentation associated Commercial policy sample actions
Support client investments, create barriers preventing
High banking income
Maintain loyalty transfer of business to competitors, cross-sell value-
and cash only or low credit risk
added products and services
Low banking income Support client investments, review when possible
Raise profitability
and cash only or low credit risk pricing for selected products, increase cross-selling

Evaluate economic outlook, require more collateral,
High credit risk Protect credit risk
reduce exposure, review credit pricing

very high credit risk Impose stricter credit conditions and require more
Reduce exposure or exit
or risk of payment default collateral, stop proactive commercial actions

illUSTRATion 2: SEgMEnTATion AiMED AT DEFining DiFFEREnTiATED RElATionAl/BUSinESS MoDElS
segmentation associated relational/business Model

High annual turnover and high total credit ƒ Face-to-face management
outstanding with all banks ƒ One RM handles client’s business and personal banking

Low annual turnover and high total credit ƒ Remote management: relationship almost entirely managed by phone and e-mail
outstanding with all banks ƒ Two different RMs handle client’s business and personal banking

ƒ Remote management: relationship almost entirely managed by phone and e-mail
Low total credit outstanding with all banks
ƒ One RM handles client’s business and personal banking

illUSTRATion 3: SEgMEnTATion BASED on CliEnT’S linE oF BUSinESS AnD AiMED AT oRgAniSing SAlES FoRCES
segmentation associated Commercial organisation
Farmers RM specialist* or
RM generalist
Liberal professionals RM specialist* or or
branch manager (BM)
Other micro-sized enterprises RM specialist* or

Small-sized enterprises RM specialist*

* For branches or business centres with large client portfolios.

Source: Capgemini analysis, 2010; bank interviews by Capgemini, 2009; bank presentation at Efma SME Business Banking Conference (Amsterdam, October 2009).


ThE winning BAnk MoDEl EnhAnCES A As shown in Figure 17, banks use three primary
BAnk’S ABiliTy To DEvElop AnD USE BEST types of information about the borrower and the loan:
pRACTiCES in RiSk MAnAgEMEnT (A) external financial information (mainly based
We identified the following best practices to perform on financial statements, rating when available, and,
on risk management in the small business market: more rarely, business planning to integrate predictive
ƒ Wider usage and sophistication of rating-based analysis); (B) external qualitative information about
credit scorecards to support underwriting and the borrower (such as experience, competitive
monitoring decisions. position, and the like); and (C) internal information
ƒ Enhanced proactive management of the performing about the borrower’s relationship and behaviour
credit portfolios. with the bank (liquidity analysis, revenues and
profitability, proportion of past-due payments or
ƒ Improved collection policy, with development of
NPL history, utilisation of credit lines, and so on).
soft collection (or “amicable” collection).
This last criterion (C) is considered a good indicator
by which to assess a client’s situation, and 62% of the
Thanks to its strengthened RM role, the winning
banks we surveyed see it as the most important source
bank model raises the quality of gathered data
for scoring.
(producing more relevant credit scores and reporting)
and improves the quality of solutions and negotiations
With the crisis, however, the backward-looking
with clients for proactive credit management and
analysis of financial statements and the observation
collection.
of clients’ behaviour and liquidity profile are less
relevant. In times of crisis, most small business
The effective credit risk management system of this
clients’ financial statements and liquidity ratios
model makes the most of credit scorecards’ accuracy
deteriorate. The problem for banks today is to decide
and relevance, improves the quality of early-warning
whether or not these difficulties are only temporary.
indicators, and enables integrated loan follow-up for
This is why banks will succeed only if they integrate
efficient collection, throughout the loan’s life. The
more predictive considerations into their decision
model also helps banks develop a set of analyses and
process, such as business planning approaches.
reporting that supports credit policy governance.
However, it is quite difficult, costly, and time-
Wider usage and sophistication of rating-based
consuming to extend the use of business planning to
scorecards to support the underwriting decision
a lot of clients. This is why it is important to rely on
Having relevant scorecards is a key competitive
RMs’ client knowledge and proximity to select clients
advantage for underwriting, especially when it comes
requiring a thorough business planning assessment.
to mass-market credit. In the small business market,
Beyond that, banks should think about developing
assembling sufficient statistics is all the more difficult
innovative tools, processes, and RM training to use in
because it is a fragmented market. This obviously
business planning approaches in a cost-effective way.
provides a big advantage to leading banks.
Enhanced proactive management of performing
Since the beginning of the crisis, most banks have
credit portfolios
increased their use of scoring tools; 69% of the banks
By proactive management, we mean quickly
we surveyed told us that underwriting decisions are
identifying loans showing the first signs of
now or soon will be supported by new scoring tools,
deterioration. Only in this way can a bank agree
versus 63% before the crisis (see Figure 16).
with a client on a solution and prevent these loans
from becoming non-performing. Today, proactive
To increase the relevance of scoring tools, the management of a credit portfolio is becoming even
best retail banks will continue to search for more more crucial, because the crisis has produced a large
accurate and diversified data. Almost half of the increase in both the cost of risk and the number of
banks we surveyed believe that scoring improvement non-performing loans in the small business market.
is among the most important factors to ensure
underwriting effectiveness, and 53% of surveyed
banks plan to strengthen the data underlying their
clients’ credit scores.


Figure 16 Use of scoring tools in underwriting decision-making (average % of loans of banks interviewed)

12% 13%

63%
69%
51% 56%

37%
31%

Before the crisis Current or expected

I Decision fully automated
I Decision supported by rating and/or other scoring tools
I Decision made manually (expert’s judgment)


Figure 17 Most important criteria (among three types) used by surveyed banks to establish their borrowers’
credit scores (% of banks interviewed)

External information about the borrower and the loan Internal and behavioural information about the borrower

a. b. C.
Financial information Qualitative information
ƒ NBI and profitability
ƒ Annual financial statements ƒ Line of business
(P&L, balance sheet, etc) ƒ Past and current behaviour on lending (e.g.
ƒ Business experience,
payment defaults, past-due payments, NPL) and
ƒ Business plan particularly on similar projects
current account (e.g. increased use of credit lines)
ƒ Credit bureau notations ƒ Competitive position

C. Internal information (about borrower’s 62%
relationship and behaviour with bank)

A. External nancial information 53%

B. External qualitative information 30%



We believe all banks should proactively manage their the existing portfolio and coach the RMs. Even
portfolios, but 11% of the banks we surveyed still do further, 46% of interviewed banks are relying on
not, as shown in Figure 18. We think banks should proactive management indicators in the MBO and
even extend the scope of proactively managed loans. incentive systems to improve RM effectiveness.
On average, the banks we surveyed are planning to
proactively manage 43% of their total performing Improved collection policy with soft collection
credit portfolios in the near future. (or amicable collection)
Despite banks’ efforts to deal with deteriorating loans
Efficient proactive management relies on having as early as possible through proactive management
more accurate early-warning indicators that help the of a performing portfolio, the crisis has pushed
bank quickly identify borrowers facing difficulties more and more small business clients, even the most
(note the nature of EWIs used by banks in Figure valuable of them, towards insolvency difficulties.
19). Because of the crisis, 55% of surveyed banks plan
to improve their EWIs. Traditional collection policies, usually focused on
simply recovering money, have their limits and could
The main challenge for banks is to identify whether break the client relationship. Soft collection is a
the difficulties facing their clients are structural consistent answer to one of the key success factors for
and long-term, or temporary. RMs are in the best small business banking—to care about the customer’s
position to assess their clients’ difficulties. Top banks business success—and also an answer to governments’
will involve their RMs to manage their portfolios pressure on banks to support the economy.
proactively through situation analysis, solution
design, and negotiation with the client. As a result, many banks have implemented soft
collection processes, which aim at returning client
To do so, it is essential that banks raise RMs’ relationships to “normal” without losing money while
ability to proactively manage their portfolios. Here maintaining a trustful relationship. Since the crisis
again, they need to increase the number of contacts began, 43% of banks surveyed have softened their
with clients and keep close tabs on their clients’ existing collection policies (see Figure 21).
economic situations to detect quickly the first signs
of difficulty. Most RMs must be trained on this Generally speaking, a soft collection process can be
issue and have a clear understanding of the potential applied to all clients as an intermediate stage between
solutions to suggest to clients, whether those solutions proactive management and collection. Yet 13% of
be payments postponement or even loan rescheduling banks surveyed use soft collection only for their most
(see used solutions in Figure 20). valuable clients.

To help them succeed with deteriorating loans, many
banks have implemented dedicated resources—
usually attached to a risk organisation—to monitor


Figure 18 Banks proactively managing their Figure 19 Types of early-warning indicators (Ewis)
performing credit portfolios with small banks use or soon will use
business, versus those that do not (% of banks interviewed)

11% Increasing past- 81%
due payments

Increasing use of
69%
credit lines

Decreasing number or
amounts of transactions 48%
89% and operations

I Banks with dedicated process to manage Other 29%
loans showing rst signs of deterioration
I Banks with no dedicated process

Source: Capgemini analysis from bank interviews, 2010. Source: Capgemini analysis from bank interviews, 2010.

Figure 20 Solutions to manage performing loans Figure 21 Extent of collection policy softening
showing first signs of deterioration (% of banks interviewed)

Additional 79% 14%
collateral required

Credit term extended 74%
29% 57%

Non-payment 64%
period granted

Other 36% I Not at all I Slightly I Signi cantly

Source: Capgemini analysis from bank interviews, 2010. Source: Capgemini analysis from bank interviews, 2010.


According to our experience, having a dedicated Even for a bank with an efficient and dedicated soft
organisation in charge of soft collection is most collection organisation, it is important to maintain,
efficient, and 60% of banks surveyed also consider as long as possible, the RM’s contact with the client
this as an important factor in soft collection before transfer to a collection unit (according to 57%
effectiveness (see Figure 22). Having a dedicated of banks interviewed).
organisation lightens RMs’ workload, and it is done
by dedicated staff with specific empathy and listening
skills that are different from the skills required in
the traditional collection process. That is why some
banks choose former RMs to handle their soft
collections. This dedicated organisation is most often
attached either to the risk organisation (true for 56%
of surveyed banks) or to the commercial organisation.

Figure 22 key levers in soft collection (% of banks interviewed)

Create a dedicated structure for
“soft collection” (different from 27% 33% 60%
“traditional” collection)

Maintain as long as possible contact
30% 27% 57%
with the relationship manager

Develop relational skills (such as listening
and empathy) of the collection staff 18% 30% 48%

Slow down the transfer from one stage
to another (delinquency to non- 6% 15% 21%
performing loan, NPL to bad debt, etc)

Other 12%

I Most important lever I Quite important lever



Sidebar 3
Illustration of a large European bank’s credit risk
management organisation at the local level

ƒ In this large European bank, the credit department and RMs are jointly managing behavioural
monitoring of credit portfolios. Every month, they review each RM’s credit portfolio to identify the
deteriorating loans to be:

1. “Rescheduled” by the RM, supported by a “rescheduling” expert.

2. Transferred to the soft collection unit.

3. Transferred to the collection entity.

ƒ Soft collection is managed by a dedicated and centralised unit overseen by the risk department;
collection is managed by a dedicated company overseen by the banking group:

regional Credit Department
(Part of the risk department)

Underwriting behavioural monitoring “rescheduling”
Assessment of Screening of credit portfolios, Assessment of creditworthiness
creditworthiness and decision client by client and relationship manager support

Monthly review of each RM’s
credit portfolio to identify “soft collection”
deteriorating loans and to define (Dedicated and centralised unit
solutions between rescheduling, overseen by the risk organisation)
soft collection, or collection

“Collection”
(Dedicated company overseen by
the banking group)

Source: Bank interview by Capgemini, 2009.

World Retail Banking Report: Special Edition 2010

World Retail Banking Report: Special Edition 2010

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