Asia-Pacific banks play the SME tune

Banks are offering more sophisticated cash management services to cater to their increasingly savvy SME clients.

Overlooked and underserved. This is a common refrain heard from many small and medium-sized enterprises (SME) in Asia. But, as all eyes turn to the region in the aftermath of the financial crisis, local, regional and a handful of international banks with SME businesses are responding with ever more sophisticated services as they compete for business.

The SME sector is a broad church, though the precise definition varies from bank to bank. For a bank such as OCBC starts off with companies that have a turnover of about $8 million, rising to a top end with Citi handling clients who boast a turnover of $500 million. Though these businesses are small for banks used to large multinational companies (MNCs), SME bankers do not underestimate the effect these relationships can have on the bank’s bottom line. In Indonesia, for example, government figures show there were about 52 million SMEs at the end of 2010, with 60% located in Java. That’s a large pool of potential clients.

These statistics are by no means unusual. Precise numbers are hard to gauge, but the consensus is that SMEs in Asia-Pacific account for about 50% of formal employment and between 30% and 60% of GDP.

Catering for the sector, however, is not straightforward. Only around 10% of Singapore’s 200,000 or so SMEs have turnovers of more than $8 million — a far cry from banking multi-billion dollar listed MNCs. “On a portfolio basis, serving this segment is extremely complicated because of the wide range of service requirements, ambiguity around financials and non-standard operating procedures. On an individual basis, while you seldom see a structure that is more complicated than a global MNC, the basic principles of working capital management do apply to companies of all sizes,” said Tom McCabe, DBS managing director and head, global transaction services (GTS), whose bank generates about 60% of its cash and trade revenue from SMEs.

Banks that lack local roots or a continuous presence in the region, however, need not apply. SMEs typically place a great deal of value on continuity and relationships. And vice versa. “This entire spectrum of SMEs — including the emerging businesses [SMEs with turnover of less than about $8 million] — is one of the most important customer segments to OCBC,” said Raymond Chee, head of cash management, group transaction banking at OCBC. SMEs account for more than half of the bank’s current account balances and cash management fee income.

Margins from SME business may also be higher than for large corporations, as SME cash management requirements still generally need less customisation, while their growth rates can exceed those of larger MNCs by many times, albeit from a lower base. OCBC reported that growth of its SME current account balance year-on-year is at least 2% higher than growth of the non-SME portfolio. Its SME fee income is also 14% higher than the non-SME portfolio. Across the water, Bank Negara Indonesia’s (BNI) SME lending portfolio (excluding commercial lending) reached about $3.4 billion at the end of 2010, accounting for 21% of its total lending portfolio. “We managed to grow at 20% annual growth [in 2010], and expect to grow at the same percentage for 2011,” said Iwan Kamaruddin, general manager transactional banking services at BNI.

BNI reports that fashion, handicraft, furniture and tourism-related SMEs are driving cash management requirements, principally because they are so exposed to the forces of globalisation. “They have expanded from local to global buyers, which has also forced them to globalise their banking services. We have also observed that more and more of our clients require internet banking services to support their businesses,” said BNI’s Kamaruddin.

Simplicity, convenience…and recognition

Strategies to woo these clients vary but getting in early helps, as today’s SME may be tomorrow’s corporate champion. Feedback to an OCBC survey emphasized that SMEs want simplicity, convenience and, crucially, recognition as business leaders in their own right, said OCBC’s Chee. The bank’s new business card appeals to just such a sentiment.

Bankers also uniformly report that their SME clients are becoming increasingly savvy. “Liquidity management solutions, such as sweeping and concentration, used to be the sole preserve of large corporations, but now our SME customers are also looking to these sophisticated solutions to optimise the use of their funds and to increase their yields from such balances,” said DBS’s Lum Yin Fong, managing director of GTS.

This view is echoed by Som Subroto, global head of SME banking at Standard Chartered, who notes a growing trend for a combination of cash management and working capital solutions, instead of stand- alone cash management solutions. “Furthermore, the continuing global trade liberalisation has resulted in more sophisticated cash management solutions (such as cross-border financing against domestic cash deposits under the China cross-border trade settlement policy), and it is a trend that is likely to continue in 2011 and beyond,” he said.

Overseas expansion and an end to paper and fax-based systems requires banks to invest in technology and a global footprint.

“It is a natural progression for SMEs that as they grow bigger, their requirements grow more complex. A lot of the local banks have very strong capabilities in their own markets, but it is a little more complex for them to address the needs of clients across multiple markets with the same consistency. That is our bread and butter,” said Sridhar Kanthadai, managing director and head, Asia Pacific and Japan, treasury and trade solutions at Citi.

Even so, a regional footprint can be just as important. According to a UPS Asia Business Monitor report published last September, mainland Chinese SMEs now conduct most of their business in Asia Pacific. The annual survey, which covered 1,350 SMEs in 13 markets across the region, showed that 78% of mainland SMEs do business in Asia Pacific, compared to just 10% of them doing business in Europe and just 6% in the US. In addition, more than 70% listed Asia Pacific as having the best prospects for trade growth and business expansion during the next three years, according to the survey.

SMEs are fast emerging from the shadow of their larger corporate brethren, and banks are responding in kind.

 

This story was first published in the March 2011 issue of FinanceAsia magazine.

¬ Haymarket Media Limited. All rights reserved.