The Power of Knowledge A Company Bank Products and Services for SMEs Presented by: Guillermo Kopp Director, Emerging Technology Solutions World Bank –

The Power of Knowledge

A

Company

Bank Products and Services for SMEs

Presented by:

Guillermo Kopp Director, Emerging Technology Solutions

World Bank – New Technologies for Small and Medium-Size Enterprise FinanceDecember 4, 2002

AgendaAgenda:

Business drivers

Internet banking for SMEs

Relationship strategies

Questions and answers

4

Global Deregulation Result: Consolidation, Disaggregation, & Convergence

Deregulation will reduce barriers between banking, securities, and insurance products

Happened in the UK in 1987 — in the US in 1999

Convergence allowed in some European countries, more on the way

Euro deregulation underway. . . BIG TIME

Big Bang transforming Japan

Emerging markets gradually privatizing financial sector

Convergence

Disaggregation

Consolidation

5

Drivers for Change

Deregulation & convergence create competitors:From other FSI segments with established

customer relationshipsFrom other consumer-oriented industriesFrom global service providers

Outsourcing neutralizes technology barriersLow cost and incremental pricing modelsLeading-edge technology

InternetCreates vehicle for new business modelsReduces traditional cost barriers

6

Largest financial firms in the world

$105

$269

$290

$407

$426

$446

$642

$673

$715

$817

$885

$902

$992

$1,428

Allstate

Bank One

Goldman Sachs

Merrill Lynch

Morgan Stanley

AXA

Bank of America

HSBC

JPMorgan Chase

Mitsubishi Tokyo

Detusche Bank

Citigroup

Sumitomo Mitsui

Mizuho Holdings

Selected Global Financial Institution Assets ($Billions, 12/31/00)

Source: TowerGroup

7

New revenue mix: Moving from net interest income to fee-based income

The banking industry increasingly depends on transactional, fee-based income stream

Fee-based revenue (non-interest) is growing faster than net interest revenue

Sources: FDIC and TowerGroup

56.3

203.8

152.7

14.3

1980 2000

CAGR = 1

2.6%

6.6% Dependency on Dependency on TechnologyTechnology

Is Increasing Is Increasing Non-interest income

Net interest income

Fee-based Income in US BanksCompared to Net Interest Income

($Billions)

8

FSI Competitors in Emerging Markets

$0.0

$3.0

$6.0

$9.0

$12.0

Citigr

oup

HSBCIC

BC

BSCH

BBVA

Std C

harte

red

ABN AM

ROBNP

JPM

Chas

e

Deuts

che

Barcl

ays

FleetB

oston IN

G

Revenues (2001, $Billions)

Source: Citigroup

9

Margin squeeze due to market convergence

Pressure on margins

Competition based on price

New entrants

RegulationProfit

Break Even

OldBusiness

NewBusiness

Revenue Per

Customer

Market Drivers

10

Banks focus on creating shareholder value

Levers of Value Realization

Deepen the understanding of customers and their needs to create unique, tailored products that increase the value proposition

Utilize technology to migrate customers to less expensive channels and improve internal efficiencies

Optimize efficiency of branch, call center, and self-service infrastructure through cultural, logistical, and technological shifts

Lower exposure by using technology to improve credit monitoring, communication, and operational resilience

ShareholderShareholderValueValue

Revenue Revenue GrowthGrowth

Cost Cost ReductionReduction

Asset Asset ProductivityProductivity

RiskRiskMitigationMitigation

11

The changing landscape of financial services distribution

Banking Banking Distribution Distribution

StrategyStrategy

Cost efficiency

Personalized and seamless service

Accurate information

Consistent experience across touch points

Anytime, anywhere convenience

Shift from product focus to customer focus

Rapid technology developments

Geographically dispersed markets

Limited resources

Shareholder pressure for quarterly performance

12

CUSTOMER

PARTNERS

DEPOSIT

CREDIT

PAYMENT

INVESTMENT

INSURANCE

FSIs must select optimum combination of customer, business, process, & technology

Account Servicing

Customer Service

Customer Acquisition

Process

Line of BusinessLOW

COST

TECHNOLOGY

HIGH

FUNCTION

TECHNOLOGY

PARTNERS

3 Gold Mines of Opportunity

14

IntegrationIntegrationMiddleware, EAIMiddleware, EAI

AutomationAutomationItem processing, savings, checking Item processing, savings, checking

and loan account servicingand loan account servicing

CreationCreationRetirement, mutual fund Retirement, mutual fund

accounting, enhanced product accounting, enhanced product creation and servicing parameterscreation and servicing parameters

ContactContactBranch automation, ATMs, Branch automation, ATMs,

broker workstations, broker workstations, Interactive voice response, Interactive voice response,

online tradingonline trading

‘20s ‘30s ‘40s ‘50s ‘60s ‘70s ‘90s‘80s ‘00s

Mo

vin

g T

ow

ard

Cu

sto

mer

Moving toward self-directed interaction

15

SME business operations adopting the Internet

Typical SME uses:Financial services

Market research

Customer acquisition

Streamline business processes

Internet and Web Services leveling the playing field for Small Business:Altering the way SMEs interact with their banks

Reducing barriers to entry and transaction cost

16

SME Internet usage by firm size

52% 55%

62%63%

76%

57%

30%

40%

50%

60%

70%

80%

90%

100%

< $1M $1M-$2M $2M-$3M $3M-$5M $5M-$10M TOTALMARKETSource: TowerGroup

(SME Segments by Annual Sales, USD million – June 2002)(SME Segments by Annual Sales, USD million – June 2002)

Use increases with Use increases with company sizecompany size

17

SME business functions via Internet

3%

8%

14%

20%

23%

44%

57%

61%

64%

94%

74%

Customer Billing

Bill Payment

Sales

Customer Service

Access e-Commerce

Purchasing

Marketing & Promotion

Financial Research

Own Web Site

Competitive Info

Send e-mail

Source: TowerGroup

(Among active Internet users – June 2002)(Among active Internet users – June 2002)

On average, SMEs On average, SMEs have been selling have been selling online for over 2 yearsonline for over 2 years

Will grow to 18% in 2003Will grow to 18% in 2003

18

Types of purchases SMEs make via Internet

4%

14%

17%

22%

35%

39%

41%

65%

Other

Business Services

Other Business Equipment

Business Travel

Business Inventory

Computer Software

Computer Equipment

Office Supplies

Source: TowerGroup

Online Online Purchasing Purchasing has increased:has increased:

37% in 2001 37% in 2001 44% in 200244% in 2002

19

SME usage of online banking

13%

18%

28% 26%

37%

19%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

< $1M $1M-$2M $2M-$3M $3M-$5M $5M-$10M TOTALMARKETSource: TowerGroup

(SME Segments by Annual Sales, USD million – June 2002)(SME Segments by Annual Sales, USD million – June 2002)

Total market use will grow to Total market use will grow to 24% in 200324% in 2003

20

Larger institutions lead in online banking

Midsized and smaller banks are keeping up in basic functionality, but their packages are lagging behind

Many sites are geared more toward “brochureware” marketing than toward actual functionality

Few sites offer true, value-added features that are important to small businesses.

Many sites lack effective product or online banking applications demonstrations (demos)

Most sites do not offer tiered account access and control capabilities for multiple users, which small businesses continually list as one of the most important functions.

Key Findings:Key Findings:

21Business Line / ProcessBusiness Line / Process

FS

I Fir

ewal

lF

SI F

irew

all

Within Across

Inside

Outside

MOMMOMMOMMOM

EAIEAIEAIEAI

WebWebServicesServices

Web Services driving FSI connectivity

22

Stage Stage 22

Stage Stage 44

Stage Stage 33

Stage Stage 11

Business Line / ProcessBusiness Line / Process

FS

I Fir

ewal

lF

SI F

irew

all

Within Across

Inside

Outside

Extending within and across FSI boundaries

23

Networked Financial Services Institution

Ease of use

Cost savings

Convenience

Save time

Operational efficiency

Online Banking Benefits:Online Banking Benefits:

Bank branches still are Bank branches still are the primary contact pointthe primary contact point

24

Emerging Markets

Europe, Canada, &

Japan

United States

$596$596

2002 IT Spending ($ Billions)2002 IT Spending ($ Billions)

FSI – IT spending estimates for SMEFSI – IT spending estimates for SME

Source: TowerGroup

$271$271

$46$46

25

Drivers for change

Competition in credit markets will intensify Credit scoring has commoditized access to credit Commercial lending analysis capabilitiesRelationship management

Competition for SME customers will intensifyNIB income from DDA accountsFees from DDA products and servicesElectronic bill presentment and payment (EBPP)Single Sign-On for business and owner accountFinancial management software (QuickBooks)

Customer Relationship Management

27

FSIs focusing on client needs

OperationalOperational& Product& Product

Solutions that Solutions that meet themeet the

client’s needsclient’s needs

Solutions that Solutions that help the client help the client

define the goalsdefine the goalsand achieveand achieve

successsuccess

UnderlyingUnderlyingBusiness GoalsBusiness Goals

ProductProduct

Customer ServiceCustomer Service

Customer-Customer-centriccentricClientClient

SuccessSuccess

28

SME loans are complex to originate

High risk and small value per loan

Credit bureau interfaces

Automated document preparationPersonal credit and assets offered as collateral

Personal financial statements

Company income statement and tax information

Company balance sheet and cash flow statement

Workflow managementMulti-channel delivery

Real-time decisions

29

Customer KnowledgeCustomer Knowledge Product ServicesProduct Services

Multi-channel customer interaction model for Banking

A way to effectively deliver the right products and services to all customer touchpoints

StrategyStrategy

TelephoneTelephone Self-ServiceSelf-ServiceInternetInternet IndirectIndirectBranchBranch

30

FSIs must choose a strategy

Monoline Bundled Full Monoline Bundled Full SpectrumSpectrum

AdvisoryAdvisory

RelationshipRelationship

TransactionalTransactional

ProductOfferings

InteractionStyle Relationship strategyRelationship strategy

offers most banks the offers most banks the greatest greatest potentialpotential

31

Wealth Management is the ultimate customer relationship

LifeCycleGoals

AssetManagement

(Save for it)

AssetManagement

(Save for it)

Liabilities (Get it sooner)Liabilities

(Get it sooner)

Insurance(Guarantee it)Insurance

(Guarantee it)

ProductsAdvice

FinancialPlanning

Wealth Management

32

Internet technology is changing cost structure and delivery channel usage

PersonalService

MassMarket

Relationship Value

TaxPlanning

Tax-Advantaged

Accumulation

Multiple-Generation

WealthTransfer

ActivePortfolio

Mgm’t

Payments

Short-TermDebt

Long-TermDebt

SimpleMortality

SimpleP&C

Short-Term Accumulation

Long-Term

Accumulation

TransactionValue

&PersonalService

ActivePortfolio

Mgmt

Tax-Advantaged

Accumulation

Long-Term

Accumulation

33

Align people, processes, & technology

Customer data consistent, accurate, and standardized

Information systems adapted to support relationship oriented sales and service culture

Contact personnel fully empowered by enterprise relationship views

Operations, policies, and procedures reward CustomerCentricity

PeoplePeople

ProcessesProcessesTechnologyTechnology

Customer Customer Relationship Relationship ManagementManagement

34

Trusted relationship managers are essential

People with strong sales culture

Focused on client needs

Credit discipline & risk management

Consistent financial performance and service

Relationship broadening (cross-sell) and deepening (share-of-wallet)

Responsiveness and quality of service

Use technology for product integration and innovation

35

Relationship building strategies differentiate

Adopt service excellence to exploit activity created by “sticky” payment products

Utilize high tech for high touch

Leverage the customer knowledge advantage Appropriate sales & service strategies

Customer profitability

Offer innovative products Packaged offerings

Loyalty pricing

Create relationship building products

36

SweepChoice

Products to strengthen the SME relationship

InsuranceInsuranceInsuranceInsurance

Mutual fundsMutual fundsMutual fundsMutual funds

OTHEROTHERFSI branding FSI branding

and SME client and SME client segmentation segmentation

MortgagesMortgagesMortgagesMortgages

Personal loansPersonal loansPersonal loansPersonal loans

Credit cardsCredit cardsCredit cardsCredit cards

OverdraftsOverdraftsOverdraftsOverdrafts

Commercial loansCommercial loansCommercial loansCommercial loans

LIABILITIESLIABILITIES

Online bankingOnline bankingOnline bankingOnline banking

PayrollPayrollPayrollPayroll

Cash managementCash managementCash managementCash management

SERVICESSERVICES

SavingsSavingsSavingsSavings

Checking Checking Checking Checking

Commercial DDACommercial DDACommercial DDACommercial DDA

ASSETSASSETS

[email protected]

Questions…