Vanda Gomolčáková (KB): Will the client have a mortgage at the end of the month or is he at credit risk? The Trench application will help predict the movement of money in the account
26. 05. 2022
Reading time: 10 minuts
Apply for a loan online and have the money in your account within minutes. This is what sole traders and smaller businesses would appreciate, but so far, they have been more or less out of luck despite their large number. Neither Czech nor European banks offer the SME segment what it needs. How to do it? "The important thing is to be able to mine the data properly and start digitizing," Mirek Kolář, who runs Adastra Business Consulting (ABC), advises banks in the Adastra podcast.
Ivana Karhanová: 99 percent of all companies are sole traders, micro, small and medium-sized enterprises. It is a very diverse group that breaks down into several segments, whether in terms of the number of employees or turnover. And as a result, their needs are very different. Yet, so far, neither Czech nor European banks have been able to give this group what it needs. While they are treated as enterprise customers, they are closer to retail in their behavior. So how should traditional banks approach the SME segment? That's what I will talk about today with Mirek Kolar, CEO of Adastra Business Consulting. Hi, welcome to the studio.
Mirek Kolář: Hi, thank you for having me.
Ivana Karhanová: What are the real needs of the segment in terms of using banking services?
Mirek Kolář: I would like to start by saying that I have been in consulting for 15 years and our clients are a lot of banks. There has been some shift in that time, but we said all those years ago that banks are trying to serve retail and corporates, but SMEs are somehow neglected, but it is a huge group. I think there is a huge space there. Seventy-five percent of SME clients are mostly one-man show companies. These are small companies with few employees that one person controls. They are more or less retail customers who want quick service, quick credit, and quick pay.
And most importantly, I would say they don't want to go to the bank. They don't have a finance department behind them. They don't have a CFO, an accountant, or somebody to take care of it in some way. They have to understand everything themselves.
Ivana Karhanová: Why do banks treat them like this? What is the reason?
Mirek Kolář: I would say that the banks don't have the data available to them, allowing them to make decisions faster. The second thing is the processes and some digitalization that will allow them to serve them properly.
Ivana Karhanová: If we go back to the fact that the banking segment is now serving SME clients basically the same or very similar to enterprise clients, doesn't that mean that these clients also mean lower profitability? They're just as hardworking as that bank, but they are useless.
Mirek Kolář: Absolutely. There's a lot of manual work and long processes, and it costs money. So the banks cannot offer proper products for reasonable money, for reasonable profitability.
Ivana Karhanová: Does that mean the whole segment is worse and more expensive to service from the clients' point of view?
Mirek Kolář: Exactly. I would add one more thing: these clients often have specific needs compared to retail. For example, a freelancer who works in construction has a different need, a dentist has a different need, and a farmer has a different need.
Ivana Karhanová: When you mentioned that banks lack data, does that mean they really lack data or just don't know how to work with it?
Mirek Kolář: It's a combination. As I mentioned, in the bank, we have existing, and new clients, and the data intensity is a little different. For an existing client, the bank often has a lot of internal data. Some banks are better at handling it. Others are a little bit worse. So you need to create some data repositories, connect that data properly, and make the most of it for that existing client. This data can be enriched by various external sources, such as car registers. But we don't know much about the new clients, and that's where we need the data. And there, it would be possible to set up more retailing. For example, you can get good external data like geolocation of some satellite imagery of that farmer, telco data, client's web behavior, or mobile phone usage. Of course, we also have standard external registries.
Ivana Karhanová: How hard is it for banks to get this data?
Mirek Kolář: Probably as much as which ones, and at what price. I don't know how much satellite imagery costs - every day in the media, now we see imagery of Ukraine being done by one company. There are a lot of these companies, and it's probably not cheap. Then it becomes a business case. As for telco data, the biggest banks in the country work directly with phone operators.
Ivana Karhanová: Before the filming, we talked about e-shops and e-marketplaces, for example. How can banks use this data, for example?
Mirek Kolář: This is a very interesting segment. Let me give you an example. There are marketplaces like Mall.cz or Shoptet, which are companies that allow small entrepreneurs to create their e-shops and bring together many e-shops in one place. For example, Shoptet has over 30,000 e-shops in its portfolio and knows a lot of information about them - what types of products they sell there, how much they sell, how they're doing, and so on. That's a lot of data that, if a bank got it, it would be able to serve a lot of clients much better.
Ivana Karhanová: Does that mean that the bank at that point would have access to data such as sales, turnover, demand, and customer behavior of those B2B (SME) clients?
Mirek Kolář: Exactly. And basically, it would be a new client that we suddenly know about, how they have that business, how much they are turning, and so on.
Ivana Karhanová: Another example that we talked about, which is interesting, is, for example, public procurement listings. Let's put this into a concrete example.
Mirek Kolář: We did a project a few years ago with a big Czech Republic bank with a large corporate portfolio and a lot of data. Imagine you have a big company that builds motorways, for example. European subsidies quite often pay for such a highway. This company, which is part of our banking group, wins the contract, which is public information. Before that motorway is paid for from European subsidies, it must be built and driven on, and only then does that company get the money for it. So it needs a loan until then, and at the same time, it has a lot of contractors who also need some credit to cover the initial costs. There are a lot of subcontractors for concrete, iron, and so on. If I can find these things out from an external registry, which is free, and in my client database that I have in the bank, I can respond immediately and arrange for, say, a bank advisor to meet me at a branch or if the client is a small business, I can reach out to that client directly through some call center and offer them a specific loan for a specific need.
Ivana Karhanová: That means it's event-driven segmentation and product offering, then?
Mirek Kolář: You could say that. I'll give you another example of a completely small businessman, which is, for example, a dentist. Once every five years, for example, he needs to buy a dentist's chair that costs two million crowns. He has enough money and doesn't need any loans, but I know that once every five years, you need to buy a chair, so I just call him once every five years and ask him about his needs.
Ivana Karhanová: So what would be most helpful to those SME clients at the moment from the banks?
Mirek Kolář: A quick process would help.
Ivana Karhanová: Perhaps including digital onboarding?
Mirek Kolář: Sure. It's one thing to get that client through some digital environment; they don't have to go to a branch, and they can open an account and apply for a loan digitally. It's quick, he's able to do it himself, or he can call somewhere and fine-tune it with a bank advisor, for example. But everything can be done very quickly without going to a branch. The second thing is the speed of the whole process, not in a matter of weeks, but ideally in minutes to have the money in the account.
Ivana Karhanová: That means that I am not going through the classic process of delivering X years of tax returns back, then having someone at the branch review them in a matter of days, and then calling me back to say that they are still missing this statement and another statement.
Mirek Kolář: Exactly. I'll give you an example again. We were working with a client in Germany who serves online SMEs in Spain, the UK, Holland, and other countries, and there everything is done automatically. I download the financial statements and the financial data of that company. I have the information there through the accounts of those clients. In this day and age of PSDT, I can pull that data, and I have a risk model in there that instantly calculates for me if the turnover in the accounts matches what he declares in the tax return. I can instantly assess it online, and no manual work is required. The problem with a lot of our banks is that quite often, there are PDF and Excel documents forwarded in emails and manually transcribed.
Ivana Karhanová: Should the credit rating of SMEs, for example, be based on a different model than that of large companies, because whether we openly admit it or not, these businesses logically optimize taxes?
Mirek Kolář: Absolutely. These companies are quite often about one person. Quite often, they put up their family house as collateral. So we can treat them more like retail.
Ivana Karhanová: One survey found that all 68 SMEs surveyed prefer digital over going to the bank. And 76 percent of those small business owners are willing to share other business data with the bank to more easily access credit facilities. What does this imply for large traditional banks?
Mirek Kolář: It's about data processing. I have X sources, and those banks don't use them often enough. So if that client wants me to do some lending and I tell them that here are some data requirements, if they can give it only, they'll give it because they want the loan. We then need to be able to process them quickly so that we can respond immediately with an appropriate offer.
Ivana Karhanová: Where should the banks start? Apart from calling you and saying: Mirek, do we need to move this SME?
Mirek Kolář: The important thing is to trust the data and learn to think about how to mine it. What data do I need, what data do I already have and haven't mined yet, what data could I have, and maybe I'm not collecting it yet. So think about what I'm able to get about that client and ideally digitally, as much online as possible so that the client has as little to do with it as possible. That's one area. The other is digitizing processes: digital onboarding, all the back-office processes I mentioned, so PDF documents, email forwarding, etc. - all of that should be digital. And it doesn't have to be some top model. Of course, for some document reading, artificial intelligence may be behind it (we have a daughter who does this). But it can be a simple RPA robot that scrapes data or moves it from one front to another. Big corporate banks have lots of these systems, and it's not exactly easy for them to connect them.
Ivana Karhanová: How much detailed segmentation should it go into then?
Mirek Kolář: Now you mean the risk scoring of those clients?
Ivana Karhanová: Not only risk scoring, but basically, they offer other products or services. I mean, is it the whole SME segment, or do we want to segment the clients not by turnover and employees, but by behavior, for example?
Mirek Kolář: The offeror segmentation should be as simple as possible. I should offer the client the simplest possible product they can understand and get quickly, which may vary depending on their industry. But as an entrepreneur, I just want to get the money immediately, and I don't want to think too much about it.
Ivana Karhanová: Will that then lead to cheaper products as a result?
Mirek Kolář: It should. I should also make the product cheaper if I save some manual work. Then, I would focus on the business streams that bring the greatest benefit and profit to the bank. And I would start with digitalization.
Ivana Karhanová: Says Mirek Kolář, CEO of Adastra Business Consulting. Thank you for visiting us in the studio.
Mirek Kolář: Thank you very much for having me.