EY - Delivering sustainable returns - Redesigning the front office

Business banking: Redesigning the front office

Delivering sustainable returns series

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In banking, small and medium-sized enterprises (SMEs) are a potentially profitable, yet often underserved customer segment. Redesigning the front office can help banks tap into the potential that this segment presents.

But banks need to act swiftly or risk losing the opportunity to both traditional competitors and newly emerged non-banks, such as technology and telecommunications providers.

We have identified four elements for a successful front-office redesign, and stress the need to implement these reforms with proper governance and incentives that encourage their adoption.

Understanding SMEs

In this whitepaper, we define the SME segment as companies with annual revenues of US$1 million to US$50 million. This segment accounts for more than half of all private sector jobs and GDP worldwide.

The complexity of SME-customer needs varies, but most tend to use few providers and want banks to act as a holistic advisor rather than a traditional “product pusher.” This makes service quality critical for retention.

The number of providers vying for a chance to serve SME customers is increasing. They include innovative technology firms, telecommunications providers, alternative asset managers, insurance companies and other banks.

If banks are to capture the profitable income streams that the SME segment presents, they need to act quickly to maximize efficiency and address these threats. In addition, banks need to manage increasing compliance costs and bottom-line pressures, without losing sight of customer satisfaction.

1. Redefine segmentation

Segmentation must go beyond the traditional (and often sole) focus on revenue, which is a metric that fails to put market and customer characteristics into context.

Data and portfolio analytics are crucial tools in this phase. Advanced analytic techniques, such as propensity modeling, help predict future customer needs by leveraging data from all contact channels.

Our analysis shows that approximately 35% of customers generate a net loss for their bank. Given that costs are typically spread evenly across the total customer base, new segmentation strategies can add significant value.

2. Revamp service models

This new segmentation strategy and better understanding of customer tranches will help banks develop more appropriate service models. Our experience suggests banks should consider the following three models:

Retail plus

This model targets the lower-value customer tranche identified in the new segmentation model. It includes branch, digital and self-service channels but excludes access to a relationship manager.

The model shifts day-to-day interactions to self-service and other lower-cost channels such as kiosks, call centers and chat rooms. The model stresses a simple, seamless experience across channels, allowing customers to begin a transaction in one channel and easily finish it in another.

SME core

This model focuses on the middle tranche of customers, who have more sophisticated needs, use more bank products and have higher cross-sell potential. It adds access to a pool of relationship managers, in addition to the branch as well as digital and self-service channels.

For this segment, we recommend using junior relationship managers aligned with a credit manager and risk officer. This approach institutes the concept of a “deal team,” which allows junior staff to handle non-advisory products and learn from senior managers.

SME premium

The upper end of the SME segment is relationship-driven, and these high-value customers should have a named relationship manager. These customers want more than a transactional relationship: they want a banker who can advise them and act as a sounding board on major strategic decisions.

Dedicated senior relationship managers will align with senior credit and risk officers along with the full array of digital and self-service channels to help these customers develop and assess complex transactions.

3. Implement change across functions

Existing front-office models involve much overlap and duplication between support-function roles. Along with outdated and legacy platforms, this creates a lack of standardization and less-efficient global processes.

Process redesign and IT investments will improve outdated workflows, deliver faster and more intuitive solutions, strengthen controls and increase efficiency.

To ensure new processes are embedded effectively into the front office, banks must evolve the relationship-manager role to one of a true advisor. Banks should also implement a new compensation model to reinforce new behaviors throughout the transformation process.

4. Initiate customer incentives

Communications programs can help customers understand the changes, educate them on the benefits and build trust. This process should also allow the customers to choose or pay for the model that best fits their specific needs.

We believe that incentives are essential to ensuring customers choose correctly, such as lowering costs for customers who choose the retail-plus approach or offering a variable-cost approach for customers who are unsure about the level of front-office interaction they require.

To learn more about the opportunities in redesigning the front office for small to medium-sized businesses, download our full report.