Retail Banking in CEE: Exploiting the Potential of ... - Roland Berger

RETAIL
BANKING
IN
CEE
EXPLOITING
OPPORTUNITIES
THE
AND
POTENTIAL
HURDLES
OF THE
MICRO BUSINESS SEGMENT

CONTENTS
1
CONTENTS
3
5
6
9
PREFACE
FOREWORD
SUMMARY OF KEY FINDINGS
PART I – IMPORTANCE OF MICRO BUSINESS – HIGH POTENTIAL WITH SEVERAL QUESTION MARKS
Macroeconomic overview of micro businesses in the EU
Attractiveness and growth potential of the micro segment for CEE banks
Banking definition of micros
Summary of key challenges
15
PART II – MICRO STRATEGIES – ELABORATING SEGMENTATION AND SERVICE MODEL
Maturity of micro strategies – Huge deviations among the interviewed banks
Targeted positioning – Competition via unique service level
Segmentation – The core element of the whole micro strategy
Service model – The cost-to-serve driver
Regional micro approaches in CEE
Organizational relations of the micro segment management
27
PART III – RISK MANAGEMENT – MANAGING RISK COST WITH FAST PROCESSES
Challenges of micro risk management
Solution depending on the applied segmentation
31
PART IV – CROSS-SEGMENT OFFERING – UTILIZING THE LINK OF BUSINESS AND PERSONAL NEEDS
Analysis of the status quo
Coverage models and recommendations for CEE banks
Coverage model alternatives
Life-cycle differentiations
39
PART V – SUMMARY – RECOMMENDATIONS AND FORECAST
Recommendations for "micro committed" banks
Dos and don'ts
Forecast
42
45
METHODOLOGY AND SCOPE OF THE STUDY
ABOUT US

PREFACE
3
PREFACE
EFMA AND ROLAND BERGER STRATEGY CONSULTANTS DID A STUDY ON MICRO BUSINESS
STRATEGIES IN THE CEE REGION. COMPARING CEE BANKS, THEY IDENTIFIED BEST PRACTICES
AND IMPROVEMENT POTENTIAL.
Since 2009, banks in Central and Eastern Europe have had to shift their focus from growth to the definition of a
sustainable bank size and to the handling of non-performing loans (NPLs). Stopping the growth of NPL volumes, their
collection and workout was the most frequently discussed topic for some years but in 2011 something changed: in a
stabilized market, yet still under non-favorable market conditions, banks started to look for growth potentials. Several
institutions identified the micro business segment to be an interesting potential target group and analyzed the opportunities
and threats of smallest-size enterprises.
Given the increased interest in micro business in CEE, Efma and Roland Berger Strategy Consultants, kindly supported
by KBC Bank, conducted a study on micro strategies in the CEE region. The objective was to compare regional players'
practices and to identify key success factors and improvement potentials.
The report at hand contains the study results and provides an insight into how credit institutions in CEE handle the
micro segment, covering the following topics:
> Root causes of micro business attractiveness
> Applied segmentation models and their consequences
> Risk assessment techniques and change of importance
> Sales, service and communication channels
> Applied cross-segment offering techniques
For the study, managers of regional and local banks all across CEE were interviewed. The findings were combined with
the market knowledge of Roland Berger and the insights obtained during numerous projects in the region.
We are sure that the coming years will see a revolution and the invention of micro business in CEE banking. Thus the
importance of a proper micro strategy and the capability to implement is becoming a critical issue for each bank that
strives for a footprint in the CEE micro market. We believe that this report will support you and your organization in
assessing your micro business status and practice, in identifying improvement potential and consequently better coping
with the changed business environment in CEE.
Hendrik Bremer
Partner
Roland Berger Strategy Consultants
Patrick Desmarès
Secretary General
Efma

FOREWORD
5
FOREWORD
KBC BANK
The self-employed, the liberal professions and small private businesses are often said to offer growth potential to the
banking sector, especially in Central Europe. However, this micro-business market is still largely untapped and banks
only recently started to show an increasing interest in its potential.
KBC is a recognized market leader in the SME segment on its Belgian home market and, as such, has a natural link
with this customer group. SME and micro businesses as a matter of fact may be considered to be part of KBC's DNA.
In line with this built-up and long-standing expertise, the micro-business segment in KBC's Central- and Eastern Europe
home markets equally offers many opportunities to the company. Taking into account that the CEE micro-business
market is gaining maturity, diversity and quality, I am convinced that it will become an important part of the area's
economic tissue and a future growth domain for KBC.
I trust that the report you have in front of you – which is one of the first dedicated researches into this market – will
generate further discussion and help readers assess the market potential of this business segment. Furthermore, the
insights gained will also assist us in defining and implementing successful dedicated strategies, benefiting to both the
banks and the micro enterprises and individual entrepreneurs. KBC will be glad to act as their preferred partner, putting
into practice the conclusions of this report.
Marko Voljč
CEO Central- and Eastern Europe and Russia Business Unit
KBC Group

6
SUMMARY OF KEY FINDINGS
SUMMARY OF KEY FINDINGS
From CEE banks' perspective,
micros are attractive because they
represent growth potential in a
stagnating market
OVERVIEW
The financial market crisis rearranged the priorities of CEE banks within a very short
period of time. After the stabilization of bad loan portfolios, the number-one priority of
banks is now to find break-through segments with a realistic growth perspective – even
if we do not talk about annual market growth potentials of more than 10% anymore.
Certainly the real driver is lending. Therefore banks focus on segments that have a
relatively low loan penetration and show lending potential with reasonable risk.
The micro segment meets the above described criteria. Thus it is definitely planned to
become one of most CEE banks' focus areas in the upcoming three to four years.
However, those banks still need to elaborate and detail the respective segment strategy
and especially its impact, e.g. on sales and service models or risk modeling.
CEE banks' challenges and
questions can be grouped into three
topics: strategy, risk management,
cross-segment offering
CHALLENGES
The micro segment challenges identified by CEE banks are the large number of potential
clients and their heterogeneousness. The banks' uncertainty is reasonably high to
avoid NPL rate growth or a too high cost level caused by over-servicing. Generating
more profit from this segment requires the understanding of the main micro-specific
cost and revenue drivers. As a result of the study and of Roland Berger's project experience,
three key success factors can be highlighted:
1. Detailed micro strategy aligned with all relevant internal departments to guarantee
the highest operational efficiency with focus on two major topics:
> Segmentation – grouping micros into homogeneous sub-segments, identifying
target groups and their specialties
> Service model – defining the level of service and organizational setup required
for cost-efficiently selling to micros and servicing them
2. Tailor-made risk management considering all micro specialties via elaborating a
sub-segment specific, efficient scoring model to avoid NPL growth and to speed up
"time to yes" process
3. Enhancement of cross-segment offering by increasing sales and service efficiency
of advisors and sales boost by utilizing best practices of joint private and business
need services

SUMMARY OF KEY FINDINGS
7
REGIONAL CENTERS' APPROACHES IN CEE
An essential trend is that more and more regional head offices increase the control of
local banks as regards the micro segment. When this study was being prepared, most of
the major CEE banks had at least a standardized reporting form to grant comparable,
transparent and traceable micro operations. In addition, a few banking groups showed
a strong head-office competence in micro business. They elaborated their own best
practice model and now these banks are ready to roll it out in the CEE countries.
On CEE level, standardized reporting
has become usual, while bestpractice
model elaborations and
roll-outs are still rare
The study interviews clearly showed: although the majority of banks want to grow in
the micro segment, the level of strategy elaboration together with the commitment and
ability to implement varies significantly by bank and by country. For example in Russia,
Ukraine and Belarus, the large corporate segment still generates enough business
potential with moderate risk to fulfill banks' growth demand. Therefore for them, the
fragmented, per-deal lower business volume and more risky micro businesses are too
problematic to focus on.
At the same time, there are best-practice models in CEE banks that are focused on
micros, have the necessary level detailing of their micro strategy and a proper scoring
model and apply cross-segment offerings. These strategies, however, are quite fresh,
they were implemented recently or are still in the process of implementation. Therefore
it is difficult to compare them from a proven success and result point of view.
POSITIONING STRATEGIES
All the interviewed CEE banks do not intend to start a price war and to win clients
with aggressively low prices. They prefer to differentiate themselves via high-quality
service compared to the competitors' ones, often formulated as "being close to the customers";
and the majority believes that others do not exactly understand the banking
needs of micros. Products are considered to be "easy to copy" and therefore the product
focus is not perceived to be a winning strategy.
CURRENTLY APPLIED SEGMENTATION
The targeted sub-segment focus is not spread yet. Interested banks are rather focusing
on healthcare related professions (pharmacists, medical doctors, dentists and veterinary
doctors) and lawyers. However, there is room for improvement considering the country-specific
market opportunities. For example, in Croatia it is common to focus on the
HoReCa segment which has no real micro priority in other countries.
Banks want to differentiate and
compete with their service level
assuming that others do not
sufficiently understand micros'
specialties
There are popular sub-segments
targeted by most of the banks
having micro segmentation – above
all in the healthcare sector

9
PART I
IMPORTANCE OF
MICRO BUSINESS –
HIGH POTENTIAL WITH
SEVERAL QUESTION MARKS
CONTENT
> MACROECONOMIC OVERVIEW OF MICRO BUSINESSES IN THE EU
> ATTRACTIVENESS AND GROWTH POTENTIAL IN THE MICRO SEGMENT FOR CEE BANKS
> BANKING DEFINITION OF MICROS
> SUMMARY OF KEY CHALLENGES

10 IMPORTANCE OF MICRO BUSINESS – HIGH POTENTIAL WITH SEVERAL QUESTION MARKS
19 million micro businesses represent
approximately 30% of the EU's
private-sector jobs – Strong differences
among CEE countries
MACROECONOMIC OVERVIEW OF MICRO BUSINESSES IN THE EU
Public administration defines micro enterprises in a slightly divergent way compared to
the banking sector. The public definition, however, is standardized throughout Europe
and therefore grants a comparable overview of the different countries. In most of the
observed countries, the number of relevant legal entities ranges from 300,000 to
500,000. Micros are a focus topic for politics as well: several governments assign high
importance to the local micro segment as it makes up for one third of the private-sector
jobs in the EU countries (compare fig. 1) and is target of EU project and development
funds.

IMPORTANCE OF MICRO BUSINESS – HIGH POTENTIAL WITH SEVERAL QUESTION MARKS 11
ATTRACTIVENESS AND GROWTH POTENTIAL OF THE MICRO SEGMENT FOR
CEE BANKS
In 2012, the majority of the interviewed banks regarded micros as a highly attractive
segment compared to other client segments (e.g. private clients, corporate segment).
Two thirds of the banks forecasted an even increasing importance (compare fig. 2).
The background of this attractiveness is the identified growth potential which has several
reasons:
From the CEE banks' perspective,
micros are attractive because they
represent growth potential in a
stagnating market
> As a result of the crisis, segments have become mature that used to be easier to
serve and access in the past than the micro segment.
> Micros have been neglected for not being a homogeneous set of clients and therefore
their banking penetration is low (especially in loans).
> Only a limited number of micro clients were not able to reach the critical mass
required to make banks feel comfortable.
> The micro segment currently represents a large number of non-tapped banking
potential.
> Many micro-company owners are affluent clients thus offering potential both at
the business and the private side.
21
61
21
69
Source: Roland Berger Strategy Consultants
The majority of the banks with an advanced micro-business strategy reported this segment
as being one of the most profitable within their institution. Generally these banks
particularly focus on defined micro sub-segments and use customized micro risk-assessment
scoring-models.

12
IMPORTANCE OF MICRO BUSINESS – HIGH POTENTIAL WITH SEVERAL QUESTION MARKS
85% of the interviewed banks
separate micros from SMEs
BANKING DEFINITION OF MICROS
The majority of the participating CEE banks apply a separate micro definition so that
micros are not part of the SME segment. The definitions are usually based on annual
revenues (see fig. 3) and at the same time considering the exposure. In some cases, the
gross income generated for the banks is an additional factor that serves to split either
micro and SME or premium micro and mass micro.
Limits for the micro segment show a wide range in CEE banks:
> Client's annual revenue limits: from EUR 0.17 m to 2.0 m
> Exposure limits: from EUR 20,000 to 400,000
Often the micro segment is split into two sub-segments according to the gross income:
mass micro clients generate an annual gross income amounting to maximum EUR
1,700-2,700, whereas the annual gross income generated by premium micro clients is
above EUR 1,700-2,700.
SUMMARY OF KEY CHALLENGES
During the interviews, the banks' representatives identified the major challenges they
face when seriously considering growth or optimization strategies and potentials in the
CEE micro-business segment. The following questions summarize the key issues found:
> How to understand the micro segment and the behavior of the respective clients
> How to identify really valuable micro businesses and how to focus on them
> How to make the risk predictable and how to avoid growth of the NPL rate
> How to identify the optimal service level to avoid over- and under-servicing by universal
level service
> How to boost one-stop banking for the private and the business side

IMPORTANCE OF MICRO BUSINESS – HIGH POTENTIAL WITH SEVERAL QUESTION MARKS 13
After the root cause analysis of these questions, they were grouped so that each identified
fear or concern could be classified in one of the three categories in the model
shown in figure 4.
CEE banks' challenges and questions
can be grouped into three topics
– Strategy, risk management,
cross-segment offering
In the following sections, you will find detailed analyses and recommendations for
these three major topics.

15
PART II
MICRO STRATEGIES –
ELABORATING
SEGMENTATION AND
SERVICE MODEL
CONTENT
> MATURITY OF MICRO STRATEGIES – HUGE DEVIATIONS AMONG THE INTERVIEWED BANKS
> TARGETED POSITIONING – COMPETITION VIA UNIQUE SERVICE LEVEL
> SEGMENTATION – THE CORE ELEMENT OF THE WHOLE MICRO STRATEGY
> SERVICE MODEL – THE COST-TO-SERVE DRIVER
> REGIONAL MICRO APPROACHES IN CEE
> ORGANIZATIONAL RELATIONS OF THE MICRO SEGMENT MANAGEMENT

16
MICRO STRATEGIES – ELABORATING SEGMENTATION AND SERVICE MODEL
1/3 of the participating banks have
a detailed strategy including micro
segmentation and service model
MATURITY OF MICRO STRATEGIES – HUGE DEVIATIONS AMONG THE
INTERVIEWED BANKS
If there is a micro head in a bank, this person has his resp. her own detailed view on
micros. In some of the participating banks, however, this person makes up for the
whole micro "department" and often belongs to the SME department.
Moreover, the maturity level of the existing strategies varies significantly from detailed
documents incl. sub-segmentation and service model to some vague ideas of which
sub-segment the bank should focus on (compare fig. 5). Various banks reported that
they were in a phase of micro strategy preparation.
Banks want to differentiate and
compete via service level thinking
that others are weak in understanding
micros' specialties
TARGETED POSITIONING – COMPETITION VIA UNIQUE SERVICE LEVEL
Among the elements of a successful positioning for micro businesses, most of the participating
banks ranked the service level on top. On ranks 2 to 4, there are product,
proximity and price to be found – the latter being mentioned by less than 50% of the
interview partners. Finally, promotion and physical environment are merely also-rans.
Fig. 6: Perceived factors of positioning and weaknesses in the micro segment
Perceived elements of successful positioning
[%]
Perceived weaknesses of banks in the micro segment
[%]
Service (level)
Product
Accessibility/proximity
Price
Promotion
Physical environment –
Design of branches
10
23
53
50
47
77
Long/complicated procedures
Not in focus
Lack of customization
Lack of dedicated personnel
Lack of dedicated products
Poor scoring model
High fees
High risk
Poor reach
Low willingness to lend
Lack of information
25
25
22
22
11
11
8
8
6
6
6
Most frequently mentioned elements
Source: Roland Berger interviews with bank executives

MICRO STRATEGIES – ELABORATING SEGMENTATION AND SERVICE MODEL 17
For validation purposes, the perceived success factors mentioned above were compared
with key findings of another micro survey. That one focused on micro clients' real
banking preferences and motivations to entrust their private and business finances to
only one bank. Figure 7 shows why clients have gone for one-stop banking (historically)
and why other clients (hypothetically) who split their private and business finance
to be administered by two different banks would consider to go for one-stop banking.
The main reason for bank switching
is related to the service level –
Better price does not automatically
generate business
Historical and hypothetical reasons for transferring money in one bank differ greatly.
For those respondents who already bundled their finance in one bank, convenience
and positive experience are the most important ones. For the other respondents, price
or change in market structure would be the critical decision making criteria. Price
appears to be an essential factor for many persons, but they are the ones who use to be
very "mobile" and their loyalty is limited: "easy come – easy go". More non-merged
than merged clients state price as motive.
The results of that survey mainly confirm the assumptions the interviewed banks made
on how to win clients from competitors. Those clients who really switched the bank
did not care too much of price. Their main motivation was the missing simplicity and
accessibility complemented by a low level of satisfaction. These findings correlate with
the service level ranked top as perceived key success factor by the banks' representatives.
Whereas micro clients who have not switched yet consider themselves much
more price oriented. This result is interesting for banks focused on startups: it is likely
that a newly established firm's representative has no professional banking background
and his resp. her decision making will largely depend on price.
SEGMENTATION – THE CORE ELEMENT OF THE WHOLE MICRO STRATEGY
Close to 80% of the interviewed banks have a micro sub-segmentation model so that
they can differentiate micros and prioritize them. Their main categorization aspects are
the industry where the company operates and the business volume generated for the
bank (see fig. 8). While the first method is used to define target segments, the second
one is rather a basis to split mass micros and premium micros.
The majority of the banks apply
different levels of sub-segmentation
– Usually according to industry or
generated business volume

18
MICRO STRATEGIES – ELABORATING SEGMENTATION AND SERVICE MODEL
There are popular sub-segments
targeted by most of the banks
having micro segmentation – The
medical sector is the dominant one
Micros consist of small legal entities on the one hand and self-employed persons and
independent professions on the other hand. In this study, the sectors commonly targeted
by CEE banks were identified. Concerning legal entities (typically the larger micro
business), the most attractive sector is import/export, followed by production and
construction. Among self-employed persons/independent professions (typically smaller
practices), the medical sector is top ranked by most of the banks and includes pharmacists,
medical doctors, dentists and veterinary doctors. The top-ranked micro sub-segments
comprise just two non-healthcare related professions: the lawyers/attorneys/
notaries group and agriculture.
In reality, various micro sub-segment clients generate above-average profit for banks
being categorized as private individual clients, however, in CEE, this habit is linked to
tax morals and compliance behavior. The correlation between private and business
needs and profitability will be analyzed in more detail in the cross-segment offering
section of this study.

MICRO STRATEGIES – ELABORATING SEGMENTATION AND SERVICE MODEL 19
Beyond this general ranking, micro sub-segmentation shows some country specifics.
For example in Russia and Ukraine, micro sub-segmentation is not yet applied, while
certain low-ranked segments may have a particular emphasis in selected countries,
such as tourism and HoReCa in Croatia.
Micro segmentation can result in a multitude of sub-segment specific offers.
Service level is the targeted differentiator
while today sub-segment
specific offers mainly utilize product
and price
The commonly used way of targeting are products tailored according to the perceived
sub-segment specialties. As shown in figure 10, the service level is less customized to
the targeted sub-segment although in positioning, it was by far the most important differentiator.
All interviewed bank representatives stated that they did not want to start a
price war. At the same time, their tailor-made products are often provided with highly
attractive conditions.
Segmentation of the heterogeneous micros is in use for three main reasons in most of
the observed banks: for their
1. Different profit and volume potential,
Micros are so heterogeneous that
first the real target groups have to
be selected carefully considering
the bank's specialties
2. Different risk and
3. Potential to differentiate service level (and service cost).

20
MICRO STRATEGIES – ELABORATING SEGMENTATION AND SERVICE MODEL
Therefore banks that are not experienced in the micro segment should make their own
local market evaluation, define strengths and opportunities and select two to three
target sub-segments (compare fig. 11) to gain experience in a first step. A clear classification
of sub-segments into mass and premium is the next step driving "cost to serve"
(see details in the following section), following the scheme of the private clients. The
private affluent side of the banking relationship is usually closely connected with the
business side.
Healthcare professions are the most
attractive sub-segments – All four
prioritized groups can be targeted in
a bundle
Analyzing the professions more in-depth allows further sub-segmentation (compare
fig. 12).
Based on the research, professionals may be less attractive in terms of their sheer number.
But they can quite easily be captured with dedicated offers. Healthcare-related professions
(medical doctors, dentists, pharmacists, veterinary doctors) are most attractive
segments by GI per client. Other segments are less promising mainly due to their lower
need for credit products and their possibly lower transaction traffic. At the same time,
the four prioritized segments constitute the majority of potential professional clients
with medical doctors making up almost 50%.
From the banks' perspective, all free professionals represent significant GI potential
from savings and investments in the later stages of their life cycle, e.g. medical professionals
shift from financing their business to private wealth management or other free
professionals accumulate wealth and demand investment products to maintain private
savings.
Generally retail & wholesale,
production and construction are the
most attractive sectors in terms of
both volume and value per client
In the group of small companies, the number of clients makes retail & wholesale the
largest segment by far. Production and construction lead in terms of value per client
and of annual GI per client (compare fig. 13), followed by retail & wholesale and agriculture.
Transportation, culture/sport/education and hospitality are smaller and thus
low-priority segments but may show distinctive needs (e.g. leasing in case of transportation).

MICRO STRATEGIES – ELABORATING SEGMENTATION AND SERVICE MODEL 21
Within the group of self-employed clients, retail & wholesale is by far the largest segment
and an attractive one in terms of GI due to a heavy use of transaction banking.
Production and construction also belong to the most attractive segments in terms of GI
per client with a market average of app. EUR 700-900 p.a. (compare fig. 14). The risk
profile of the individual companies and sectors needs to be considered, especially for:
Retail & wholesale, production and
construction are the most attractive
sectors especially in terms of
average GI per client
> Agriculture: huge investments with usually an annual cash inflow periodicity and
huge risk related to nature and weather
> Transportation and construction: extraordinary initial investments requiring experience
in assessing the realism of the business plan and ROI calculations as well as
professionalism in the behavior and tendencies of the market sector
Financial advisory and intermediation is the least attractive segment in terms of GI per
client. But strongly positioned banks can make profits there and in particular use the
accountants' client base to generate business.

22
MICRO STRATEGIES – ELABORATING SEGMENTATION AND SERVICE MODEL
Figure 15 shows a reference case from a CEE bank with a reasonable segmentation and
target group definition.
Banks should reduce branch
dependency for micros and
reposition their underestimated
call centers
SERVICE MODEL – THE COST-TO-SERVE DRIVER
Banks tend to focus all kind of micro-client activities to branches (compare fig. 16), yet
this is the most expensive channel.
A proper segmentation shows that several micro segments do not need personal assistance
and profitability declines with increased use of branch advisor services. Therefore
the recommendation is to transfer service to e-channels in order to stop over-servicing
and to reserve higher quality to the higher-value segments.

MICRO STRATEGIES – ELABORATING SEGMENTATION AND SERVICE MODEL 23
62
The high share of dedicated
micro advisors indicates of overservicing
and suggests a servicelevel
review
Dedicated advisors (relationship managers) are the most expensive service model granting
the same high service level to each micro-segment client with high probability of
over-servicing. In Romania, Russia, Slovenia and Ukraine, most banks use dedicated
advisors while in Czech Republic, Hungary, Poland and Slovakia, the mixed model is
more popular. Interestingly enough, banks with a detailed micro strategy combine the
two models (compare fig. 17) and reserve dedicated advisors for premium clients. Mass
clients can be served by universal advisors in branches.
Most of the participating banks still apply the traditional branch management approach:
the branch manager acts like an entrepreneur taking responsibility for a geographical
area and for all client segments. In addition, he or she decides which client should
receive a higher or lower service level.
Banks focusing on micros need a
separate reporting line to guarantee
a proper bi-directional information
flow
Banks with an advanced micro strategy use two micro sales/service channels (compare
fig. 18):
> Branches serving mass-micro clients – controlled by the branch manager
> Dedicated advisors serving premium-micro clients – reporting to region centers (or
to the central micro unit)

24
MICRO STRATEGIES – ELABORATING SEGMENTATION AND SERVICE MODEL
While dedicated websites are common,
call-centers have a significant
development potential when it
comes to serving micros
The service role of e-banking is in line with expectations, while the underutilization of
call-centers indicates cost-efficiency improvement potential for nearly all participating
banks (compare fig. 19).
Most of the interviewed banks do not have micro-specific call-center operators. The
micro segment is mainly served by SME call-centers without micro specialists.
The website analysis shows that nearly one quarter of the interviewed banks have no
micro website and therefore miss the communication to the market and their clients
through this channel.
Figure 20 shows a reference case from a CEE bank with an enhanced service model.

MICRO STRATEGIES – ELABORATING SEGMENTATION AND SERVICE MODEL 25
REGIONAL MICRO APPROACHES IN CEE
In the CEE region, banks tend to increase their central (regional) control and to invest
into best-practice elaboration and standardization. Three years ago, best practices were
not collected, local banks had their own segmentations and service models, while first
standardized reporting required standardized segment definitions and later best-practice
sharing. The centralization process is still ongoing as only 40% of the examined banks
have already collected the micro best practices (see fig. 21).
In CEE, standardized reporting
became usual, while best-practice
model elaborations and roll-outs are
still rare
Source: Roland Berger Strategy Consultants
ORGANIZATIONAL RELATIONS OF THE MICRO SEGMENT MANAGEMENT
Various banks reviewed their organizational setup of the micro segment and realized
that micro businesses belong to Corporate from a legal point of view but are completely
heterogeneous concerning business need, risk assessment and service demand. The
result of these reviews is that separated SME divisions are getting more popular, especially
in banks that are committed to focus on micros in the upcoming years (see
fig. 22).
Micros were often moved from
Corporate to Retail and SME divisions
while the number of separated
SME divisions has increased
Source: Roland Berger Strategy Consultants

27
PART III
RISK MANAGEMENT –
MANAGING RISK COST
WITH FAST PROCESSES
CONTENT
> CHALLENGES OF MICRO RISK MANAGEMENT
> SOLUTION DEPENDING ON THE APPLIED SEGMENTATION

28
RISK MANAGEMENT – MANAGING RISK COST WITH FAST PROCESSES
Micro risk management must be
enhanced as both loan volumes and
NPL ratios are higher in micros than
in PI
CHALLENGES OF MICRO RISK MANAGEMENT
In case of micros, both median and maximum values of NPL ratios are significantly
higher than PI NPL ratios (see fig. 23). The very low minimum value is caused by
those participating banks without micro segment focus because their lending activity
was moderate and their NPL ratio extremely low.
Moreover both minimum and maximum of average banking loan volumes granted for
micros approximately double the PI loan volumes (see fig. 24).

RISK MANAGEMENT – MANAGING RISK COST WITH FAST PROCESSES 29
SOLUTION DEPENDING ON THE APPLIED SEGMENTATION
The recommendations to avoid an unexpected growth of NPL rates can be grouped
into two major topics:
A. Segment-specific risk assessment and scoring
Generally banks assume: one client group with a high NPL is not a problem if it
was priced accordingly. To be able to price accordingly, however, banks need to
forecast the risks as exactly as possible before a loan becomes an NPL. Thus
elaborating a proper risk assessment (scoring) tool for micro sub-segments has a
huge added value but was not found in many participating banks. Setting up such
a tool requires the following steps:
Homogeneous risk groups of micro
sub-segments allow an efficient
scoring model and a fast lending
process
1. Having defined suitable target sub-segments, create a proper scoring database
for micros
2. Analyze the existing loan portfolio of the targeted sub-segments with their loan
volumes (min, median, max) and NPL ratio
3. Incorporate the identified risk cost into the normal pricing of lending products
for the targeted sub-segments
B. Fast and transparent processes to assess loan requests
Loan request assessments usually take time because the evaluation processes and
criteria are not properly defined. That means, standardization is not possible and
each request is evaluated on a case-by-case basis. The root cause is the non-proper
scoring system, thus each process weakness is in reality a workaround to compensate
for the weaknesses of the scoring model. Establishing a sub-segment based
micro scoring model allows a fast and automatic evaluation of loan requests in a
standardized form. This satisfies the clients in terms of processing speed and helps
the bank avoid non-planned NPL growth.

31
PART IV
CROSS-SEGMENT
OFFERING –
UTILIZING THE LINK OF
BUSINESS AND
PERSONAL NEEDS
CONTENT
> ANALYSIS OF THE STATUS QUO
> COVERAGE MODELS AND RECOMMENDATIONS FOR CEE BANKS
> COVERAGE MODEL ALTERNATIVES
> LIFE-CYCLE DIFFERENTIATIONS

32
CROSS-SEGMENT OFFERING – UTILIZING THE LINK OF BUSINESS AND PERSONAL NEEDS
There is room for improvement in
cross-segment sales resp. service
models as a lot of banks use just
ad-hoc campaigns for this purpose
ANALYSIS OF THE STATUS QUO
The majority of the institutions have at least an ad-hoc (campaign driven) cross-segment
capturing practice and 77% of the interviewed banks do apply these models. Out
of these roughly three quarters, just 15% have a complete and elaborated methodology
and the huge "rest" of 85% uses ad-hoc campaigns (see fig. 25). These actions are
usually linked to one specific product resp. service offer but do not offer a joint service
model for both private and business needs.
Fig. 25: Cross-segment offering practices in CEE banks [%]
Banks not applying
cross-segment sales/service
23
Banks with methodology for
cross-segment sales/service 1)
15
Banks applying
cross-segment offering
77
85
Banks using adhoc
campaigns 1)
1) Out of banks applying cross-segment offering
Source: Roland Berger Strategy Consultants
There is an important link between micro sub-segments and cross-segment offering
because cross-segment target groups can be easily originated from micro sub-segmentation.
For example, banks may use the link between targeted professions and the (usually)
private affluent individuals segment assuming that a lawyer PI client needs a business
account, too. And vice versa, lawyers may be targeted by the banks to gain affluent
PI clients.
Managing both the private and
professional sides of a client relationship
increases the gross income
and can even double it
COVERAGE MODELS AND RECOMMENDATIONS FOR CEE BANKS
Previous European case studies highlighted the following important facts:
> Dual relationship is worth 30% to 100% more than single relationship.
> The proportion of NBI share between the private and the professional side varies
strongly by sub-segment and develops over the life cycles of the business and of the
business owner.
> Marketing strategy and product offer require operational and tactical segmentation.
Based on these three facts, the split of business and private needs of clients shall be
examined considering local market-specific sub-segment specialties. The results can
lead to various important conclusions as to the optimal client coverage model. In the
example of figure 26, "X1" priority means that the client will generate a higher gross
income for the bank on the professional side. Therefore in case of e.g. the triumvirate
coverage model (see fig. 28), the business relationship manager shall play a more
important role. At the same time for "X2" sub-segments, it is worth focusing on the
clients' private needs and serving them rather as private, not as micro clients.

CROSS-SEGMENT OFFERING – UTILIZING THE LINK OF BUSINESS AND PERSONAL NEEDS 33
The key drivers of multiple-bank relationships require some further analysis of the
micro clients' preferences on the relevant market from each bank. Certainly not all
clients like one-stop shopping. The example in figure 27 shows that "clarity" is an
important argument for both client types: some like one-stop shopping because it grants
higher clarity for them, others prefer separation for the same reason. Moreover the
example proves that it is worth communicating the importance of time saving, convenience
and one dedicated contact person when focusing on clients who prefer one-stop
shopping.
The main reasons for – and success
factors of – one-stop shopping are
clarity for the customer and one
competent contact person

34
CROSS-SEGMENT OFFERING – UTILIZING THE LINK OF BUSINESS AND PERSONAL NEEDS
Furthermore, expectations vary among countries and it is important to understand all
the local specialties of clients. Deviations can result from different country cultures or
grey economy aspects in CEE compared to Western Europe. Thus it may be risky for
some CEE clients to make their wealth visible for tax authorities with one-stop shopping.
COVERAGE MODEL ALTERNATIVES
There are four major models that can be used when serving two identities of a client.
Our interviews showed that the majority of the CEE banks use the separated-businessand-private-banking
model. This traditional approach does not allow the full utilization
of client potential and guarantees no more than limited information sharing, even in
case of a sophisticated cross-motivation system.
The super-banker model is mainly applied in Western Europe where economies are
much more transparent and the grey zone is insignificant. There banks can afford the
most expensive relationship managers that are able to serve both private and business
needs of micro clients. This model requires high quality staff and a huge amount of
trainings. Thus it is not yet recommended for implementation in Central and Eastern
Europe. Here banks should rather strive for the lead-banker model, which is one centralization
step before the super-banker one. With lower expenditure, it nevertheless
offers fast information flow and opportunity utilization as well as a "virtual" one-stop
shopping experience for clients.
For initiators, there are two types of cross-capturing in terms of private and micro business
needs: either they motivate professionals to use the banking services for private
purposes as well or they target private clients (mainly affluents in CEE) considering
their micro business interest.

CROSS-SEGMENT OFFERING – UTILIZING THE LINK OF BUSINESS AND PERSONAL NEEDS 35
LIFE-CYCLE DIFFERENTIATIONS
Private and micro clients show similar life-cycle models with three stages each. These
cycles stand for banking needs and behaviors which do not differ much (compare fig.
30). Having recognized that, various banks started to closely cooperate with startup
incubators, especially focusing on micros in the "build-up" phase. (These different and
changing demands were visible earlier in this study, when the reasons of bank switching
and bank selection were analyzed.)
Both personal and professional life
cycles consist of three stages

36
CROSS-SEGMENT OFFERING – UTILIZING THE LINK OF BUSINESS AND PERSONAL NEEDS
There are four key moments when
integrated relationship provides
superior value – They have to be
stressed in communication
Integrated client relationships have multiple benefits not just for the clients but also for
the banks. Figure 31 shows examples of advantages parties can mutually gain from the
closed relationship.

In a third reference case stemming from a CEE bank, cross-segment based operations
are performed, though without micro segmentation or service differentiation (see
fig. 32).
CROSS-SEGMENT OFFERING – UTILIZING THE LINK OF BUSINESS AND PERSONAL NEEDS 37

39
PART V
SUMMARY –
RECOMMENDATIONS
AND FORECAST
CONTENT
> RECOMMENDATIONS FOR "MICRO COMMITTED" BANKS
> DOS AND DON'TS
> FORECAST

40
SUMMARY – RECOMMENDATIONS FOR "MICRO COMMITTED" BANKS
The ultimate goal is to establish a
sustainable and profitable micro
segment – Both cost and revenue
have optimization potentials
RECOMMENDATIONS FOR "MICRO COMMITTED" BANKS
The importance of a client segment basically depends on its profit and growth potentials
with regard to the market penetration. From all three aspects, micro businesses
have a promising positioning: for the majority of the banks, their profitability and
growth potential are above average, their market penetration is low. Thus there is a
significant advantage over competitors for banks that already implemented the key
success factors identified in this study.
Banks are not able to directly steer the market growth or bank penetration of micro
businesses. But they can definitely influence the profitability of their own micro segment.
Figure 33 gives a simplified overview of the banks' major challenges from a
profit-generation potential perspective – grouped in revenue and cost categories – and
shows the applicable tools recommended for profit maximization.
Best practices implemented in all
explored topics guarantee the
exploitation of the whole micro
potential in CEE countries
Analyzing each major cost/income factor and comparing them to the best practices
means that the bank makes a solid step to exploit the whole potential of the micro
segment in a country.
Figure 34 summarizes the key recommendations displaying best practices and the operative
focus when evaluating the maturity level of the own micro strategy. And it indicates
what to highlight when creating a micro strategy.

SUMMARY – RECOMMENDATIONS FOR "MICRO COMMITTED" BANKS 41
DOS AND DON'TS
As a result of the interviews conducted and of Roland Berger's relevant project experience,
the major dos and don'ts were summarized (see fig. 35) for banks that plan to
focus on micros.
Banks have tried different
approaches to micros but just a few
of them turned out a success for
multiple reasons
FORECAST
Based on more than 50 interviews with CEE bank representatives, the resulting forecast
for the coming two to three years can be summarized in the following six points:
1. The majority of CEE banks will strengthen their micro business focus for the
above described reasons.
2. In countries with a still high share of grey economy, the micro focus increase will
probably be delayed by some years: micro owners there are still in the capital collection
phase and are not willing to make their wealth transparent.
3. Each bank has strengths and weaknesses in terms of micro maturity. (In the study,
interesting models were introduced amidst case examples.) Soon, most of the
banks will at least assess their own strengths and weaknesses to lay the foundation
of a proper micro strategy, having recognized the correctness of this assessment to
be extremely critical for the success of the following years.
4. Banks will not attack micros immediately because both operational and risk cost
have to be predicted precisely. Currently most of these data are either not available
or not detailed on the required level. Their elaboration takes at least months
but often rather quarters (e.g. segmentation and service model).
5. As a result of the crisis, banks have generally become more conservative in lending
since 2008, although loans are essential in any segment to grow. Elaborating a
trustful micro scoring model will likewise take quarters at least.
6. The already mentioned conservative approach will motivate banks to first collect
experience in some selected sub-segments (think-big-start-small approach) and to
gradually extend the scope with further sub-segments.

42
METHODOLOGY AND SCOPE OF THE STUDY
METHODOLOGY AND SCOPE OF THE STUDY
We analyzed through structured questionnaire-based interviews how banks approach
and serve micro enterprises and identified and summarized key success factors and best
practices.

METHODOLOGY AND SCOPE OF THE STUDY 43
GEOGRAPHICAL SCOPE OF THE STUDY
CONTRIBUTING BANKS
The research underlying the present study is based on a series of more than fifty interviews
with managers from various banks and banking groups active in CEE.

ABOUT US 45
ABOUT US
Efma
Efma, a not-for-profit association formed in 1971 by bankers and insurers, specializes in
retail financial marketing and distribution. Today, more than 3,000 brands in 130 countries
are Efma members including over 80% of Europe's largest retail financial institutions.
Efma offers the retail financial service community exclusive access to a multitude of
resources, databases, studies, articles, news feeds and publications. Efma also provides
numerous networking opportunities through work groups, online communities and
international meetings.
For more information visit: www.efma.com
KBC
KBC is an integrated multi-channel bancassurance group, catering mainly for retail,
SME and local midcap customers. It concentrates on its home markets of Belgium and
certain countries in Central and Eastern Europe (Bulgaria, Czech Republic, Hungary,
Slovakia). Elsewhere around the globe, the group has established a presence in selected
countries and regions.
KBC provides banking, insurance and asset management products via its integrated
distribution channel consisting of bank branches, insurance agents/brokers and the
Internet.
KBC's headquarters are located in Brussels (Belgium), the heart of Europe. The KBC
group employs 47,500 FTEs and caters for 9 million customers. KBC is listed on NYSE
Euronext Brussels (ticker symbol "KBC").
For more information visit: www.kbc.com
Roland Berger Strategy Consultants
Roland Berger Strategy Consultants, founded in 1967, is one of the world's leading
strategy consultancies. With 49 offices in 35 countries worldwide and 2,500 employees,
the company has successful operations in all major international markets.
The strategy consultancy is an independent partnership exclusively owned by about
220 Partners.
Even beyond the standard consulting business, Roland Berger has made a name for
itself with research and development. Numerous studies on current business and
management issues bear the company's logo. The Roland Berger Strategy Consultants
Academic Network, an association established in 1998 and comprising various universities,
puts the company at the core of a continuous exchange of theoretical and
practical knowledge. In addition, Roland Berger sponsors chairs at several universities
and publishes the "Roland Berger Strategy Consultants Academic Network" and the
"Papers on European Management" series.
For more information visit: www.rolandberger.com

47
Many thanks to the following persons for collaborating in the production of this study:
The Roland Berger Financial Services team for analyzing the data and writing the study:
Hendrik Bremer, Iván Radnai
Roland Berger Partners, Principals, Project Managers and Consultants for helping
collect the data with the participating banks:
Maxim Bychkov, Elena Donderfer, Jaroslav Dvorak, Piotr Kajka, Constantin Kinsky,
Jiri Krivacek, Ioana Leaua, Wojciech Michalowski, Codrut Pascu, Vladimir Preveden,
Frigyes Schannen, Dmitry Sedyuko, Marcin Trebicki
The partners for providing their insights, industry expertise and overall guidance
From Efma: Patrick Desmarés, Lukas Dzuroska, Lubomir Olach
From KBC: Marc Dorssemont

© Roland Berger Strategy Consultants, Efma
2012, all rights reserved
www.rolandberger.com
www.efma.com