In this interview Olena Prokopovych, IFC Non-Financial Services Lead in the Eastern Europe, the Middle East and North Africa region, shares IFC’S EXPERIENCE on Why banks are seeking to EXPAND their NON-FINANCIAL SERVICES.


Olena Gryniuk: There is growing interest from banks in non-financial services. Why are non-financial services becoming so popular? What do they bring to banks?

Olena Prokopovych: The rationale is very simple—if your client does well, you do well. Experience proves that banks get tangible advantages through helping their clients grow. This holds particularly true for small and medium enterprises (SMEs) because the SME market provides significant untapped potential.

Let me explain why the SME market is so attractive for banks. There are about 400 million small businesses operating in the developing world. About 280 million of them (70 percent) do not use external financing, though many are in dire need of it. About 340 million (85 percent) suffer from credit constraints. Among the key reasons for this is a lack of information or poor business skills/financial literacy, meaning they’re unable to speak the same language as financial institutions.

Recent studies underscore that the SME sector can be extremely profitable: Many banks report higher returns on assets with SME clients than with traditional clients. And as SME banking becomes more and more popular, the competition in this segment is increasing and intensifying, so much so that price competition is no longer sustainable. From the other side, the transaction costs for serving SMEs are high, as many of them lack business skills and require individual relationship services. At the same time, there still isn’t enough information about SME needs. This makes the situation worse—services offered to SMEs do not match their expectations and needs. As a result, the number of clients does not increase significantly and profits remain low. This is a lost opportunity because the sector has huge potential. And here NFS can be a solution.

OG: So, which non-financial services (NFS) do banks usually offer to their clients and what NFS products are the most popular?

OP: Non-financial services (NFS) are also called business support services. Usually these are non-commercial services, designed by the banks to help their SME clients improve their business value-add to services. And it is important that these services complement the financial offerings of a bank. There is a wide range of examples, from information support (web platforms, call centers, publications and media) to trainings (to improve business skills, financial management, marketing, operations) and even consultancy advisory (by in-house and/or outsourced experts). Networking, like trade fairs, expos, discounted buying, and business clubs, is also a good example.

There are four popular types of NFS, including web platforms, training programs, SME clubs and consulting support.

  • SME Web Platform with educational content (articles, videos, sample agreements and forms, calculators).
  • SME Academy – training programs for SMEs, conducted by bank staff or outsourced vendors, to strengthen business skills.
  • SME Clubthe design and content may vary to provide products/services/provider or partnership offerings of privileged services for target groups (networks, pooled services, discounted buying, premium services, gender-specific or youth targeted formats, etc.).
  • Small business advisor, a customized program for a bank’s relations managers to enable them to advise client SMEs on business issues.

OG: What are the key challenges in implementing NFS?

OP: Our experience in many countries shows that there are some typical mistakes, which later might lead to not getting payback or not meeting a client’s expectations and requiring costly changes.

First, successful NFS requires a systematic approach, starting from a needs assessment to adjusting the selected NFS product and integrating it into a bank’s strategy. The bank’s management should be involved in the strategy design and NFS product selection. This is key to success; often banks ignore this, which is the main reason for most failures.

Not doing a proper assessment and relying only on the information available is the second pitfall. The bank should strategically asses its needs and internal capacity, as well as research the SME market and identify gaps to understand the external and internal environment for NFS.

Third, there is no solution that suits all. Often banks select a standard product without adjusting it.  NFS is a tailor-made product, which should be relevant to a bank’s SME strategy and resources.

The fourth pitfall for banks is understanding the importance of staff coaching, building new skills, and closely collaborating with outsourced vendors, as well as structuring internal and external communications on NFS.

The last, but not least, challenge is for banks not to treat NFS as a fancy promo tool, but instead to integrate it into its strategy, with KPIs to monitor, adjust and measure the return on investment.

So, designing their own NFS requires diligent and extensive homework, where is where banks require additional support from IFC. IFC has a team of highly experienced experts who have been working on NFS for many years, consulting with management and working teams, and helping with initial feasibility studies to identify client needs and adjust the NFS products accordingly.

OG: What are the key advantages of NFS?

OP: Well implemented NFS rewards banks with strong market differentiation, client loyalty and better portfolios: By helping to grow their SME clients, banks gain strategic market advantages.

OG: Three key benefits to banks from providing NFS to their SME clients

OP: First, there is strategic differentiation from competitors. NFS allow a bank to position itself as an SME partner and offer focused products and services.

Source: “Why Banks in Emerging Markets are Increasingly Providing Non-financial Services to Small and Medium Enterprises”, IFC, 2012

Second, it’s about better client retention. NFS allows banks to learn more about their SME clients to better tailor services, and increase SME customers’ loyalty by strengthening their performance and profitability.

Third, banks implementing NFS often get better portfolios because of targeted marketing, higher cross selling, and a wider range of products for stronger SME clients.

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