CPG's January/February 2011 Wire Newsletter
CPG's January/February 2011 Wire Newsletter
Finding Growth in Small Business Banking
While the worst of the economic storm appears to have passed, banks left standing are confronted with limited avenues for growth. The housing market is moribund and the commercial real estate market remains soft. Although preliminary figures indicate commercial loan demand increased in the fourth quarter, it remains to be seen if this trend is sustainable.
That leaves revenue-hungry banks across the country looking at the small business sector with renewed interest. We think it’s a propitious time for banks willing to lend to creditworthy small business borrowers – especially those borrowers who found their primary bank unwilling to do so when they needed it most or whose credit card provider jacked up fees and interest rates.
We suggest four key strategies for accomplishing this:
View the branch as the distribution focal point. Train branch managers to identify different types of business customer needs and upgrade the skill sets of branch personnel. Augment branch-based expertise with dedicated small business credit specialists and, where appropriate, business development officers out in the marketplace who work closely with branch managers.
Capture the client’s entire relationship – both deposits and credit. Offer a simple suite of products such as basic checking, savings and bill pay with pre-packaged options to simplify cross sales. There are real advantages for small businesses in terms of ease of doing business and savings of both time and money when they “link” deposit, cash management, and credit accounts with the same provider. Require that new business credit customers bring their entire deposit relationship to the bank to better monitor the credit and improve the overall profitability of the relationship.
Use the credit process to identify cross-sell/up-sell opportunities. A lot of great information about business finances and operating results are shared with banks as part of the credit underwriting process. Few banks really leverage this wealth of information to advise their business clients on strategies to improve their businesses and personal financial situations.
Provide robust online information and transaction capabilities (and get ready to do the same for mobile). Online banking platforms should be designed to minimize the time spent performing basic banking transactions and enable business owners and financial managers to conduct a variety of more sophisticated transactions, access detailed account histories, manage payments and move funds across accounts and to other financial providers.
With limited opportunities for growth and profitability in consumer banking and commercial real estate lending, small business banking could be a real battlefield in coming years. Winning the battle will take more than just resolve; bankers need to arm themselves with better products, customer management protocols and online banking capabilities.
In 2011, commercial lenders must continue to find ways to improve operating efficiency while simultaneously improving their ability to compete for loan opportunities. Both of these goals can be accomplished by undertaking simple steps to improve the credit process.
- Analyze existing portfolios to identify opportunities to establish differentiated underwriting and approval processes that are consistent with the institution’s definition of what constitutes a material loss.
- Institute an expedited underwriting process for loans that fall below the bank’s definition of a material loss. Loan renewals and lines of credit are often additional opportunities where expedited underwriting can be instituted.
- Review the required documentation and eliminate documents that are not needed for underwriting or not required by competitors. A standard checklist of required documentation should be established.
- Remove and centralize any aspect of the loan officer’s job that adds no value to the customer. These responsibilities should be placed in specialized units or with portfolio maintenance and monitoring assistants.
- Reevaluate the adequacy of the technology platform. Vendor solutions to support elements of the credit process are proliferating and several provide automated solutions that can improve efficiency and effectiveness.
- Leverage the credit process to facilitate the bank’s chosen value proposition to attain competitive advantage
CPG can help you evaluate and improve the credit process at your institution. Call Claude Hanley at 202-337-7875 for more information.
China is the fastest growing of the group of countries commonly known as BRIC (Brazil, Russia, India, China), having experienced estimated GDP growth of 10.2% in 2010. It represents the second largest global economy in terms of GDP and is expected to add another $1 trillion of GDP in 2011. Retail companies from the western world have already made inroads in this market. Volkswagen and other companies from the U.S. and Europe are developing market-specific brands to address the preferences of Chinese consumers. Should American banks follow suit?
China’s banking sector remains very tightly controlled by the government and lacks a robust supervisory infrastructure. The Engage China Coalition, a group of 12 financial services trade associations, has documented several key concerns with the current state of the financial services sector in China. (For more information, please visit www.engagechina.com). The organization has engaged in dialogues with American and Chinese government officials to attempt to address these concerns; however, further reform is needed. Nevertheless, this has not discouraged many U.S. banks from beginning to build a presence on the other side of the Pacific Ocean.
In 2010, institutions such as Northern Trust, State Street, and BONY Mellon sought to establish themselves in China. These banks hoped to augment income from asset management and other fee-generating lines of business by providing similar services to Chinese individuals and institutions looking to invest funds abroad. These institutions and other larger banks seek to take advantage of strong growth in China’s commercial sectors – and the need for assistance with M&A transactions, global investments, and global transactions that has come with it.
The commercial, wholesale, and investment banking opportunities associated with operating in China are well documented. At first glance, it would appear that there is also an opportunity on the retail side of the house. Many consumers, especially in the China’s more rural interior, remain unbanked. Chinese consumers also have high savings rates, typically saving as much of a third of their income. Many financial products that are well known to U.S. markets are not widely available in China. Of the country’s more than 1.3 billion people, for example, only 1 million have a credit card. Financial products such as pensions, insurance, credit cards, and mortgages will need to be more fully developed if China is to move towards a more market-driven economy.
The ability of U.S. banks to both participate in China’s development and take advantage of the country’s banking opportunity will be hampered in the near-term by restrictions on foreign bank participation in the Chinese financial services sector. Entry via acquisition is complicated by the fact that foreign banks are limited to purchasing stakes of no greater than 20% in local lenders. While foreign banks can form partnerships with more than one of the over 100 smaller city commercial banks in China – and while a partnership of this type may be adequate for a smaller U.S. bank looking to gain entry into the market – this represents an inefficient way to build scale in the country.
QUICK FACTS
Population of 1.3 billion; second largest global economy in terms of GDP. The economy grew by 10.2% in 2010 and is expected to add roughly $1 trillion of GDP in 2011.
RECENT EVENTS
- September 14th, 2010: Northern Trust opens a branch in Beijing (following similar moves by State Street and BONY Mellon earlier that year). Northern Trust plans to provide asset servicing to institutional clients and focus on helping Chinese institutional investors to place funds outside of the country.
- September 16th, 2010: MasterCard announces partnership with China’s sole payments network, China UnionPay. Since its launch in 2002, China UnionPay has become the largest issuer of cards worldwide, with 2.1 billion payment cards in circulation.
- January 21st, 2011: Industrial and Commercial Bank of China agrees to obtain an 80% stake in Bank of East Asia’s U.S. arm.
- January 24th, 2011: The CEO of SVB Financial Group steps down to focus on the company’s planned expansion in China.
- Late January 2011: The Engage China Coalition meets with Chinese government and business leaders in China to discuss continued financial sector reforms.
According to Phoenix Marketing International:
- Almost six million households or 42% of all U.S. households that have exited the credit card market (either voluntarily or involuntarily) have done so over the past two years.
- While credit card ownership is declining, mobile banking is on the rise. Cell phone ownership in the U.S. has increased from 71% in 2006 to 89% in 2010, and today, 11% of households use their cell phones for mobile banking, but indications are that additional services need to be developed as base product offerings do not meet the needs of most users.
- Not surprisingly mobile banking participation rates are highest in the younger age groups; however, rates are also highest among upper-income households (18% for $150K+ households).
Phoenix Marketing International publishes syndicated research for the financial services industry on payment systems’ usage and share of wallet tracking, and provides a host of other services and products. Phoenix Marketing International is a long-time partner of Capital Performance Group. For more information, visit www.phoenixmi.com.
Announcements
Read Vanessa Mambrino’s article on marketing in lean times in the March issue of ABA Bank Marketing.
Read Gary Stein’s article on the future of checking rewards programs in the April issue of the ABA Bank Marketing.
Mary Beth Sullivan to present “The Future of Community Banking” at the Pennsylvania Bankers Association’s Annual Convention in Boca Raton, FL on May 14th.