With all the new banking entrants coming into the SA market this year, it is surprising that only one of them has publicly stated that they will specifically target the SME market, writes global consulting director Nick Tuttelberg. The others seem to be more focused on poaching business from the already competitive ‘wealth to do’ market, where both profitability and loyalty are at a premium.
SMEs represent a huge opportunity for banks given the scalability of certain businesses, as well as the lack of real competition in this sector. SMEs provide the stage for entrepreneurs to develop and grow new innovative ideas, but their biggest challenge remains access to finance.
SMEs provide employment for about 60% of the labour force in SA and account for about 34 % of SA’s Gross Domestic Product (GDP). At Experian, we host performance data on about 1.2 million active SME’s within SA.
Some significant events have taken place recently to show momentum is growing within the country’s SME sector, notably the announcement by the finance minister committing to setting up an SME fund to target start-ups and IT businesses. Add to that the recent investment by the International Finance Corporation (IFC) of R740 million into a local bank and it shows just how big this opportunity is. In fact, the IFC stated that the SME Push Program would channel up to R40 billion in investment into South African SME’s during the next five to seven years.
Having spent some time recently consulting in Europe to some blue-chip banks and telcos, it is also clear that SME is regarded as an area for growth in many other tough and competitive economies, where the wealthy consumer market is saturated and unemployment numbers are growing.
Many European countries have raised bonds specifically for investment into the SME market, which in most countries still employs up to 80% of the population. This clear strategy is a result of a drive to improve access to capital and create employment opportunities. This is particularly relevant to many countries, including SA, where the corporate retirement age is getting earlier and earlier, forcing many to create a second employment as early as 60.
Having spent extensive time with most of SA’s large banks, many themes and concerns are raised especially when up to 80% of SMEs fail within the first two years. It’s easy to see why the sector should be managed carefully with the correct strategy. Two main themes in SA rise to the top of most agendas and this is consistent with some of the large European banks. First, how to better use alternate data for risk mitigation, closely followed by how to optimize current utilization within existing SME bases to increase spend.
There are many solutions that we can help with to ensure better optimization of SMEs in SA, but there are two that are proving very successful with UK and Spanish Banks – and already yielding very good results.
Alternate data (Web harvesting solution)
Many existing bureaux offer the traditional datasets to assess an SME opportunity, such as key business information like adverse data, years trading, business risk score, deeds information and financial data – if available. More recently, banks and telcos have been using the information on business principals or shareholders in their assessment process. The approach is backed up by recent statistics which show up to a 70% link between principal success and business success, when there are four or fewer principals. While on the face of it the approach looks fine, but does it offer a genuine competitive advantage – especially when the information is unstructured and not as consistent as consumer data?
At Experian, we not only provide a bespoke Business Delphi score for SMEs, incorporating payment behaviour data, but we’ve also successfully implemented a Web Harvesting Solution for two major overseas banks, which have delivered some excellent results. In both instances, significant lift in SME scorecards has been evident, while approval rates increased by 50% within the first six months.
The solution works by supplementing existing data by providing an additional score from multiple factors identified on the web that directly relate to the SME, its principals, or the sector. Examples include everything from press releases, to economic data, third-party accounts information, membership of associations, articles, white papers, the principals’ activity and behaviour. Its seamless and helps to further supplement existing data sources, especially when the SME in question is very new to market and often with limited ‘traditional’ data.
Early warning System (EWS)
The EWS solution is used in the management and collection phase of the credit life cycle and focuses on optimizing existing utilization in the SME base and identifying pre-delinquent accounts based on three key variables of – Risk versus Bank loyalty versus Profitability.
They highlight a very dynamic view of the SME business and when combined, the results can deliver a very different set of actions, depending on the high, low results. In the past risk, and to a lesser extent profitability, drove the SME strategy, and was not always dynamic. With our new EWS solution we help build, it can allow you to follow very different actions depending on the outcome of the analysis. It can also be run offline on a monthly or quarterly basis, or even automated via an existing interface with Experian.
The management phase allows you to pro-actively manage your best clients with the most optimal offering across all products to help drive higher utilization and loyalty. Some of our other clients also use the segmentation to forward ‘hot’ leads to the sales team where there may be cross and up -selling opportunities, depending on the defined actions agreed at the outset with the client
Collections. The solution is a perfect fit for the pre-delinquent analysis that so many banks are starting to look at, both overseas and within SA, given the advent of so-called ‘Open Banking’ and the black hole of business rescue / debt review. Declining trends are quickly highlighted, but we will also build actions with you to avoid this potential pitfall and design a self-help portal / strategy manger to approach risk pro-actively.
Analytics platform Sandbox has also delivered a proven track record of success during the past 18 months and is also a natural fit for the EWS solution. It’s a cloud-based data solution which enables a more ‘client centric’ view of SMEs for lenders, by hosting three main datasets for analysis and use across the full credit life cycle. The cloud hosts a mix of internal transactional records on SMEs and their principals, which is overlaid by Experian data and new sources delivered from our web harvesting techniques.
All the data sets allow the bank or telco to apply improved analytics to differing credit life cycle phases, by using all available data to get a comprehensive 360-dgree view of the SME. For example, in the origination phase, it’s now entirely possible to build very powerful scorecards using alternate data, business records and principal information. New leads could also be identified through principals’ other business links.
All the solutions outlined above allow our clients to take advantage of our analytical and data capabilities as a strategic partner. By building them together with clients, helps us to further benchmark and share insights from our network of global partners.