MD Genesis Corporate Solutions
As we saw with Comair, there is a significant challenge in the profession when it comes to raising capital to fund a restructuring effort. Perhaps shareholders and lenders are becoming increasingly cautious? Perhaps they are focused on holding companies more accountable to ROI goals? What happens when it comes to funding SME businesses?
This issue was also highlighted in the 2022 Deloitte Restructuring Survey where bankers openly said that there will be increasingly stringent controls when it comes to allocating post commencement financing.
Where does this leave small and medium enterprises (SMEs)? SMEs already make up 70% of the US business rescore and PwC points out that, despite facing key challenges, African SMEs will have a key role to play in the economic growth of Africa going forward. However, we know the statistics. One in every four SME won’t see out its first year and only two out of every four SMEs will mature as a business.
How then do we structure finance so that these companies have access to financial support? I recently read an article by McKinsey which looks at some of the building blocks of the new SME-lending model that banks could turn to.
Strategy
The article points out that, as banks set out to find a strategy to meet their needs, they should consider several factors, including target segments, SME pain points, and the best ecosystem model. In many countries, SME markets have their local intricacies, but they also share commonalities that make scaling up across borders easier from a cost and go-to-market standpoint.
One key element is to lock in the target client segment and value proposition so that the bank can grow profitably. To determine the suitable design options for each dimension, banks must consider objectives, segments, customers, products, regions, processes, and channels. By asking questions and identifying targets in each dimension, they can then use the most effective design options. An understanding of the pain points that the SMEs in the target segment experience then helps the bank create a product and coverage model. These products should be explicitly targeted to the SMEs’ pain points at each phase, from launch and growth to connecting with the community.
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The article adds that a further component of the strategy is determining what role partners can play in the SME-lending model. Establishing the right ecosystem partnerships can help banks create unique forms of data access and a captive customer base through unique product offerings. The partners can help the banks develop the best and most distinctive product offerings by more effectively targeting subsegments and innovating and by thinking like an SME.
One European bank, for example, has partnered with an e-commerce marketplace to provide a flexible digital-lending solution to merchants that sell on its platform. The bank did so to target the subsegment of small businesses migrating toward the online space.
Streamline the SME lending process
The article points out that, from the end-to-end digitization of the credit process to the creation of clear segmentation rules, maximizing the efficiency of the SME-lending process can help banks generate more opportunities and to close more loans. Now, more than ever, banks must reimagine the SME customer experience. The most frequently noted pain point for SME borrowers across the globe is uncertainty and delayed time to funding. Automated lending can significantly streamline processes. By redesigning and digitizing a significant portion of the customer journey, banks can substantially enhance the SME experience.
Rethinking legacy policies and processes can also help streamline lending. Many of these policies and methods have multiplied organically over time and no longer meet the needs of today’s SME customers. By clearly segmenting rules by credit details, risk, policy, and complexity, banks can refine their swim lanes to extend automated processing and assessment where feasible and to reserve manual expert review for complex, high-value cases. The best policies and processes enable banks to increase their straight-through processing of customers and to route only a carefully sized and selected proportion of applicants through manual checks.
The article adds that redesigning the credit memo and credit-decisioning process with standardized documentation also significantly enhances the efficiency of the process. By creating a single source of truth, a bank can automate data retrieval for decision making with a digital signature and track changes for the next actor. This process vastly accelerates underwriting with decision making, enhances the experience of relationship managers, ensures a complete audit trail, and typically reduces “time to yes” by 50 percent (and significantly more in situations characterized by repeated information requests to customers, triggered by manual-review processes). For example, an emerging-market bank, keeping in mind the customer experience, recently redesigned its processes to offer preapproved loans in minutes to its small-business customers using the bank’s mobile app.
Analytics
The article points out that banks frequently still drive decisioning through a monolithic infrastructure and rarely envision developing analytical models for cross-functional use. By taking a modular approach with legacy and new data sources, they can unlock the true potential of the available data by using analytics for other cross-functions, such as sales, marketing, and pricing. Capturing real-time credit insights from transactions and sales will enable banks to enhance the performance of their credit models significantly.
Establishing a modular framework for SME credit models also enables banks to build predictive models sequentially with expanding data. This modern architecture offers many advantages over traditional methods: for example, it allows banks to leverage information for each client’s decision making and to enhance the existing decision engine with expanding data. Banks can use these credit models not only for instant decisioning but also for cross-selling opportunities.
The article adds that banks can reimagine SME credit lending through dynamic, risk-adjusted pricing and limit setting. SME lending depends on bespoke offerings catering to unique customer needs and thus requires an advanced pricing engine to help relationship managers anchor negotiations at a suitable price range. A European bank, for example, put in place a modular design for model architecture, using forward-looking real-time data on merchants’ customer feedback to review and reassess the limit and pricing on a regular basis.
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SME Operating models
The article points out that, although strategy, process, and analytics can help identify new SME-lending opportunities, banks must also identify the right operating model and supporting infrastructure to put things into practice. The target model must include service operations and new ways of working with a centralized credit authority to adjust business models, increase regulatory preparedness, enhance effectiveness, and improve efficiency.
Banks also need to base their IT architecture and technology options—from legacy to next-gen ones and from specialized to full-suite platforms—on their current loan book and scale-up aspirations. Redesigning the end-to-end process does not necessarily imply a greenfield IT approach; a new front end can be built on top of the existing core banking IT. Nonetheless, some players have opted for a greenfield cloud-native stack. Banks are also partnering with fintech players to revitalize offerings and digitize processes across the SME-lending value chain.
The article adds that digitizing the performance monitoring of not only the portfolio but also of the core models, the relationship manager’s workbench, and the overall business allows banks to gain capital efficiency, to make staff more efficient by reducing the time it spends extracting and reporting on data, and to reduce the number of defaults by ensuring timely action on, for instance, model corrections and the performance of clients.
My final thought is that banks should increasingly engage with Turnaround Professionals and get them involved in the process. They can add a lot of value to the process. They show SMEs how to structure their operations to become profitable and they can help SMEs achieve financial targets to that the interests of shareholders are always at the heart of every transaction.
Phahlani Mkhombo is the MD of Genesis Corporate Solutions and is a Senior Business Rescue Practitioner.
