© 2002 GartnerG2

Usage of New Technologies for SMB Financing

Ken Kerr, Gartner Financial Services

© 2002 GartnerG2

Viewpoint

• Distances are shrinking due to technology; much of the world’s underserved SMB market will be digitally connected within a decade.

• New electronic technologies are extending financial services to SMBs and reducing costs for financial providers. But competition will keep margins from growing.

• New technology will enable developing countries to leapfrog over infrastructure limitations in the delivery of financial services.

• International providers will, directly and through partnerships, expand their reach to underserved and unbanked markets.

© 2002 GartnerG2

Technology Adoption: Hype Cycle to Maturity

Trough ofDisillusionment

Slope ofEnlightenment

Plateau ofProductivity

Maturity

TechnologyTrigger

Peak of Inflated

Expectations

Visibility

Major press coverage

creates hype

Adoption Stalls

Drawbacks Exposed

General Market Adoption grows

PossibilitiesEnvisioned

“Killer” Application

Mature applications,payoffs received

Technical Issues resolved

ATMs

Account Aggregation

© 2002 GartnerG2

Strategic Importance of SMBs Grows for Banks

SMB Profitability Compared to Other Segments

0%

10%

20%

30%

40%

50%

60%

70%

Much less

Less The same

More Much more

To consumer

To corporate

Relative Profitability of Deposits and Loans to Banks

0 20 40 60 80 100

$3B+

$1-3B

Deposits LoansAssets

LoansDeposits

More Important than 3 years ago: 80% of banks (among largest banks: 91%)

Default rates in LDCs no greater than in developed world

© 2002 GartnerG2

E-finance drives down costs, but also margins

Relative Bank Processing Costs

0

20

40

60

80

100

120

E-trans-actions

Call Center

Branch Teller

E-finance Lowers Operation Costs

• automates processes

• speed credit decisions

• lowers profitable loan size

Lower Margins Also Likely

• lower cost of entry

• expands financing reach

• servicing becomes more transparent

© 2002 GartnerG2

New Technology Applied for End Users and StaffE-Finance in developing world: requires technology for both customers and agents

Bank

Field AgentSMB

Agents: “Portable office”--cell phones, PDAs, wireless laptops, etc.

• As supply increases, larger customers will demand rapid decisioning on loans

•FSPs will need automated tools to reduce costs of decisioning and servicing accounts

Customers: “Self Service”--kiosks, cell phones, Internet cafes, Chip cards•Access to information, anytime, anywhere

© 2002 GartnerG2

Live dialog between customerand RFSP. Information and functions maybe shared.

Person toPerson

Customer accesses information and functions, submits information,executes transactions onhis or her own.

Self-ServiceCustomer’s computer accesses information and functions,submits information, executes transactions.

Computer to Computer

Interaction StyleInteraction Style

Advice Advice

InteractionIntent

Sales Sales

Service Service

Interaction Style: More Important Than Devices

Face-to-face, “manned” telephone, instant messaging.

Brochure, mail, IVR, ATM, Web, PC dial-up, wireless device, kiosk.

File transfer, EDI or FEDI wireless device, Web services.

MethodMethod

© 2002 GartnerG2

0%

10%

20%

30%

40%

50%

3Q2002 YE2003 YE2005

U.S. SMBs Use of Online BankingAt Banks With Dedicated Small Business Sites

SMEs Will Use Online Channel To Transact

SMB Internet Banking

Extends reach through self-service •reduces transaction costs•Makes some corporate services economically feasible for SMEs•Anytime access to accounts, loan info

51%33%

16%Traditional

Banking

ElectronicBanking

Equal mix of both

SMBs’ Primary Banking Channel, 2004Among SMBs Active w/Online Financial Activity

© 2002 GartnerG2

Near Real-time Access to Accounts and Cash Flow:

Critical to Your SMB Success?

53%

15%

33%

SomewhatCritical

Not CriticalVery

Critical

Source: GartnerG2

Access to Cash Flow is Critical

30%

24%

18%

26%

Reduce costs(credit, transfers,

payments)

Faster cash flow info

Save time

General business

help

FSPs View: Primary Factor Driving

SMB Online Channel Adoption

© 2002 GartnerG2

0% 20% 40% 60% 80% 100%

Planned by YE03

3Q2002

Check account balances

Send invoices

Stop payments

Acquire credit cards

Buy insurance

Positive pay

Invest funds

Pay bills

Transfer funds

Small Business Internet Transactional Activity (US)

Source: GartnerG2

Activities Most in Demand Online

© 2002 GartnerG2

Wireless devices to drive SMB e-finance in LDCs

0

5

10

15

20

25

30

35

40

45

1999 2001 2003 2005

All mobile units

Basic units

Data Enhanced

Mobile Device Sales in Latin Mobile Device Sales in Latin America, by type, 1998-2005America, by type, 1998-2005

First Internet device dictates e-finance usage

•Wired Internet world--limited mobile e-finance demand•Developing world--multiple use with mobile devices creates comfort with mobile e-finance

Millions

© 2002 GartnerG2

Immigrant remittances opens opportunities

• International remittances is a very profitable business: Nearly $50 billion (US) annually--fees account for 10% of total

• Cards, ATMs now being used

• Local bank brands convey trust

• Accounts can build other services

• Remittance services build knowledge of new customers

© 2002 GartnerG2

Usage of New Technologies for SMB Financing

Ken Kerr, Gartner Financial Services