E-Sight: Achieving Successful SME Online Integration

By Charles B. Wendel and Darren Parslow

Outside the US and a few other countries, most banks have yet to develop a focused approach for the SME market. Worldwide, progress in this segment remains in its infancy. As SME visibility is growing, so too are issues related to the Internet. Whether in the US, Spain, or Japan, executives are asking, “What is our Internet strategy? How does that impact the SME markets?”

Getting to an answer consumes a disproportionate degree of mindshare relative to the current bottom-line contribution. Business line leaders are positioning to win a future pot of gold that may or may not be real.

Global progress report

Over the past two years, financial services providers worldwide gained significant momentum in the SME online arena. Whereas past focus has been on consumer segments, current emphasis is shifting towards SMEs. With over 18 million SME’s in Europe alone, SMEs are a vital thread in the global economic fabric.

Online banking, wireless access, e-procurement, and B2B communities comprise a significant portion of current worldwide strategic initiatives. Australian banks attract attention by their impressive commitment to SME online banking. Commonwealth Bank, for example, forecasts usage growth of nearly 100 percent or 100,000 SMEs by the end of 2001. Most Australian providers also support data downloads into software packages like Quicken or Microsoft Money. Barclays Bank’s B2B.com, continuing to grow its online presence, provides online banking and secure purchase-to-payment procurement targeting SME’s with sales between £5m and £250m.

As for wireless access, the Nordic region of Europe dominates. Sweden’s largest bank, Skandinaviska Enskilda Banken (SEB) reports 29,000 online banking SME customers. It and other Scandinavian banks are moving to mobile. The biggest concern in regard to wireless adoption centers on neither the customer nor the technology but instead, the basic mobile phone. Today, even the most high tech mobile device delivers painfully slow web access.

Opportunities to address SME e-procurement needs drive a current focus on bank-branded portals. In June of this year, Westpac, a major Australian bank, announced plans to partner with Intelisys to develop both a B2B e-marketplace and a portal for SMEs. The portal aims to provide SME’s with greater purchasing power. In Italy, while online sales are very slow to move, a recent study suggested that within the next two years, 70 percent of Italian SMEs will sell products online, mandating an online strategy.

While international online advances vis-à-vis SME markets suggest a global commitment to a new delivery approach, the U.S. continues to play a leadership role. Some in the U.S. are working to integrate online delivery into a holistic SME strategy creating new business models. Such models enable financial services providers to draw on the Internet to enhance and strengthen the customer relationship and reduce attrition rates. Providers worldwide, growing comfortable with their technological advances, look to the U.S. market for the keys to integration success.

Current SME online activity

Based upon a 1999 FIC survey, business research dominates as a key focus for online use while purchasing of office supplies and equipment appears to be on the increase. At the same time, only eight percent of the businesses interviewed say that online sales generate more than five percent of their total business. This suggests that while SMEs use the web regularly, most have not fully incorporated it into how they manage their companies.

For some US SMEs the Internet has become an established tool in running their day-to-day operations. However, Internet users seem most comfortable in going online to conduct relatively “passive” transactions. 67 percent of users will obtain account balances from the web while less than 20 percent say they will apply for credit or buy/sell investments online.

Roadblocks to success

Globally, banks face some significant challenges in getting non-technology enthusiasts to use the Internet for “active “ transactions. Addressing these issues creates opportunities both to increase revenues and decrease delivery costs. The primary contributors to the low rate of current use include: impractical segmentation, unclear value propositions, and continued branch dependence for product sales.

Impractical segmentation schemes. Even though many US banks have begun to “push” Internet banking to their SME customers, questions exist concerning the effectiveness of their execution. Ideally, customer segmentation schemes drive a sales person’s ability to execute against them and drive revenues. Schemes built on profit parameters alone often lack common customer behavioral traits. This dramatically decreases the likelihood of sales success.

Unclear value propositions. Most bank providers have failed to provide SMEs with strong reasons to use the Internet, except for the simplest transactions. One company interviewed for the FIC survey commented: “Internet banking would mean just one more thing I have to learn how to do.” Banks need to focus on providing an economic or information-related benefit for the company.

Branch dependence. Ironically, getting customers to use the Internet appears to require a high touch effort from bricks and mortar personnel. When SME Internet users are asked how they were introduced to e-banking, 66% responded that branch sales staff had played a critical role in their Internet use training.

Relying on the branch to sell/service Internet capabilities raises several issues. First, at least in the near-term, a branch-base sales effort requires high personnel expense. Second, the number of products about which they need to be knowledgeable already stretches branch sales staffs. Third, some branch personnel may view the Internet as a threat to their own job safety and, therefore, are unwilling to sell those capabilities.

Characteristics of SME online users

Evaluating the economics of online customers helps to create an imperative for banks to better integrate online and offline delivery channels. Effective integration allows banks to expand their customer share of wallet by higher product penetrations; and, they create higher customer satisfaction, resulting in lower attrition rates.

An FIC client study analyzing the differences between online and offline US SME customers demonstrates that companies using online banking are more profitable and offer greater potential. For example, average demand deposit balances for an online banking customer versus an offline customer were 2.7 times higher.

The average credit balance for an online customer was more than $85 thousand US versus less than $42 thousand US for other customers. Offline customers use an average of 1.7 products while online customers use an average of three. With an average online attrition rate of 10 percent versus an offline rate of 14 percent, online seems to create the “stickiness” promised.

While the picture could change as the online user shifts from the techno-savvy to mass market, nonetheless, online SMEs appear attractive and a group worth focusing on.

Keys to online success

Based upon analysis of the worldwide SME market as well as proprietary client work, three key elements comprise a successful online banking strategy: actionable segmentation scheme; distinct value propositions for different segments; and multiple delivery channels.

Actionable segmentation scheme. Too many segmentation schemes create confusion not action. No more than three or four segments with distinctly different characteristics are more practical and drive action. For example, segmenting the SME customer base into three categories, early adapters, mass market, and branch junkies delineates motivating behaviors such as timesavings, fear, and established routines.

Each of the segments will respond to different benefits for the same delivery channel. For example, a mass market-type company in Poland may be intrigued by the Internet but wary of security-related risks.

For this SME, an appropriate action involves training to overcome concerns and continuing the existing channel configuration while slowly introducing the Internet. A branch junkie in Australia, a customer consuming a disproportionate amount of branch time vis-à-vis profit potential, requires an approach centered on cost reduction. Persuasive actions include incenting reduced reliance on the branch and other more cost intensive channels.

Distinct value propositions for different segments. The basis on which to sell Internet banking depends upon the customer segment. Banks focusing on branch dependent SMEs should do so for the apparent cost advantages of Internet transactions over the branch. Industry research in the US has estimated that branch based banking transactions cost $1.07, while Internet transactions only cost $0.01. And, while others may disagree with these precise numbers, all agree that Internet transactions are substantially cheaper.

With early adopters, banks should focus on selling new products and retaining these important customers. A bank’s message to them has to emphasize that Internet provides a new method to manage a business where and when needed. Addressing high impact needs protects a bank’s position with this critical customer segment.

To encourage SME delivery channel migration, branch personnel, among others, need to be incented to give priority to the sale of Internet banking services. Incentives that various banks are offering include: cash for each sale made, referral credits for a banker in one part of the bank referring a customer to the Internet banking group, and payouts based upon a customer’s profitability to the bank. Different approaches will be appropriate based upon a company’s culture and available systems, among other criteria. What is most important is that bank management highlight the customer and organizational benefits of the Internet and encourage active selling/training to customers.

Multiple delivery channels. Going forward, most customers will continue to require more than one channel for product delivery and servicing. In fact, many internet-only providers recently modified their customer strategy to include traditional brick and mortar access.

While SMEs may prefer to perform some basic transactions online, many favor obtaining a loan or certificate of deposit through more traditional channels, giving traditional banks an edge over their Internet-only competitors.

Beyond Internet access, other primary channels remain a critical but expensive component of an effective delivery strategy. Global analysis revealed that SME customers worldwide remain loyal to face-to-face interaction with their banker. The bankers’ challenge is to accurately predict which products and services are better suited for online versus offline distribution. A combination of both customers needs and business line economics provides the foundation for an effective delivery strategy.

The future pot of gold

Internet banking remains in its infancy. Even in the most developed markets, businesses are using the Internet for “passive” transactions. In the majority of cases, so far the Internet is not part of the essential fabric of a SMEs operation.

In the more developed western banking countries, the Internet is accepted as a fundamental business tool. In many of the other nations surveyed, however, neither the state of technology nor the mindsets are where they need to be to encourage mass adoption of the Internet for financial service-related activities. Over the next three-five years, however, rapid change can be expected in many countries, as telecommunications costs drop and technology improves. As that occurs, the outlook for adoption of Internet banking by SMEs will change significantly.

As SME mindset movement occurs, financial services providers worldwide are moving quickly towards building an Internet delivery strategy. While a level of immediate recognition and financial success will come to providers who create a compelling online message, holistic delivery channel integration will determine the long-term winners.