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Volume 25, No. 5

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June / July 1999




New Strategic Partnerships Between Large International Banks with Small- and Medium-Sized Enterprises

by Irene Farkas-Conn

Extraordinary changes are taking place in the relationship between large and small companies. These were brought about by the combination of an open economic environment, global competition, extended information technologies (IT) and, more recently, the World Wide Web. International banks have taken the initiative to establish new kinds of partnerships with small- and medium-sized enterprises (SMEs), changing business practices, management, communication and access to information.

The health and well-being of SMEs, 90-95% of the companies in every country, are important to national economies. Governments and intergovernmental organizations have been striving to create an environment that would be supportive to these enterprises. In recent years, however, institutions in the private sector have also moved quietly into the arena. Without fanfare, private institutions have also become participants in this effort. In the United States, trade associations first started to provide critical information to their members, large and small. Now banks are also moving from a traditional arm's-length lender-borrower role to a broader based partnership with SMEs.

To show the changed relationships, I will use the experience of Harris/Bank of Montreal (BMO), a leading player in the initiation of these changes. I will take a quick view at the way these changes were instituted in the bank. Then I will show the extended services being offered and consider challenges of the SMEs and the bank. This includes changes in the interaction and communication with SMEs, the strategic help the banks can provide, and PC banking and its future. I will not discuss banking laws; the effect of disappearing boundaries between the various financial and non-financial institutions in the United States; the substantive security and IT challenges; nor related policy issues.

Harris/Bank of Montreal

Harris Bank is one of Chicago's major community banks with long-standing concern for giving personalized service to small investors and SMEs. It is a solely owned subsidiary of the Bank of Montreal (BMO), Canada's oldest bank, that has also acquired 20% voting interest in the Grupo Financiero Bancomer of Mexico. Combining the strength of BMO and its IT capabilities, Harris' community banking experience and the Latin American connections of Bancomer in Latin America, the BMO Group is becoming a seamlessly integrated NAFTA bank. Harris/BMO is further strengthened by strategic partnerships with other large U.S. banks; and through its branches in Asia, Latin America and Europe and an international network of correspondent banks it can serve the international needs of its customers.

Shifting SME-Banking Relationships

In recent years, the constricted boundaries between financial and non-financial institutions in the United States have become fuzzy. Car companies, Sears, Wal-Mart and credit card companies have replaced traditional lenders. Stockbrokers are offering insurance. Banks are selling stocks and bonds. Stimulated by competition, enabled by IT, today banks offer small businesses guidance, information and personalized business services that would have been too costly for them to consider a decade ago.

BMO's management decided to expand its SME business, build strategic partnerships with SMEs, resolutely increase the number of small accounts maintained, follow through with its vision of becoming a NAFTA bank and provide services around the world to its clients. Once the decision was made, it was necessary to consider:

  • how to carry out the vision of senior management to move resolutely into the SME market;
  • what kinds of services would be most useful for SMEs;
  • what kind of information support would be most useful for SMEs based on the bank's experience and information resources; and
  • how SMEs could be strengthened, including how to make best use of the bank's cumulated experience.

Management Changes.  How did this international bank shift its course? The reorganization of Harris/BMO started at the top and changes were institutionalized throughout the bank. The board of directors was reshaped to represent the communities they serve. Personnel were hired who understood the global market and also the needs of the local economies. Multinational companies, such as Anderson Consulting, have been advocating the need to "think globally, act locally." Others came to believe that the reverse was true: "think locally, act globally." With rising customer expectations, both are needed to succeed in the global market.

Maintaining financial responsibility to BMO shareholders while moving aggressively into a wider SME market demanded managerial retooling, considerable IT planning and a shift in marketing. To support this customer group, the bank had to explore what financial services would be most useful for SMEs and also consider what other kinds of support would stabilize them and make them more competitive. Like other banks, Harris/BMO carried out internal benchmarking, as well as benchmarking against competitors. It also developed measures to assess progress, productivity, IT and delivery of service. Focusing on customer needs became paramount.

Support and Services for SMEs . Partnering with small customers has become trendy and has become part of the rhetoric of advertisements of banks in a number of countries. But change comes slowly in many institutions. The shape of the playing field has changed; the rules of the game are evolving.

Harris/BMO has widened its portfolio of services to SMEs. It provides investment advice; initial public offerings (IPOs); cross-border payment collection; access to cash status from customer PCs; and special lines of credit for foreign exchange transactions. Other banks offer to deliver daily by 8 a.m. faxed cash transaction reports and are developing other products. Harris/BMO can now custom design services to satisfy a client's needs as the client perceives them.

Bank as Strategic Partner

How does a bank become a strategic partner of a small company? Harris' long standing commitment to community banking provided the foundation. Even small clients were assigned a personal banker, today's "relationship manager." Other banks are also broadening the relationship with SMEs. The Dresdener Bank, for instance, advertises itself as Beratspartner, a consulting, advising partner of small enterprises.

Personal bankers still approve SME loan applications. Concerned with the survival and long term success of their clients' business, they also become knowledge providers. If they perceive an area of the client's business needs strengthening, they will offer suggestions to remedy the situation, such as bringing in a financial advisor, a project management or marketing consultant or a networking expert. They would not, however, give specific advice, like telling a client what projects to prioritize. Bankers can also help SMEs avoid crushing crises because they are in a position to recognize economic and commercial trends early.

Information for SMEs. The information SMEs need is similar to large companies, but they do not have their specialized staff or the time to filter through large masses of information of questionable value. Some entrepreneurs are adept at capturing the needed information through contacts and various services. Yet many successful entrepreneurs, especially in developing or industrializing countries, cannot see why information is of value to their businesses. Marketing departments of banks are now exploring what kinds of support strengthen SMEs, making use of insights gained through the bank's experience and of its extensive information resources.

Besides discussions with clients, private sector banks are now providing information to SMEs in numerous ways. Among them is Harris' Monthly Economic Outlook and a newsletter that distills information from a variety of sources and offers useful practical advice for SME owners. Another is The Problem Solver series of booklets written in simple language. They are "designed to go right to the key points," and deal with financial issues, like cash flow planning or advice on how to prepare a business plan, measure performance or market the business - areas in which owners of SMEs often are weak. They can also listen to the bank's Sound of Business audiotapes. Its Web page even offers help on how to deal better with the world or avoid burnout.

Personal bankers are making use of the experts' knowledge and drawing on the databases of the BMO Group. The cumulated data in the banks' databases are the depositories of experiences over time, a resource ready to be mined. Based on Harris/BMO policies, the client's personal record and aggregated information in its databases, loan decisions that took days and weeks in the past are now made speedily. Remarkably, more than 80% of SME loan applications are approved.

Cumulated data not only can identify strengths but also can pinpoint potential weaknesses of businesses. One finding of strategic importance to new entrepreneurs was that small companies in the retail business often suffer because they do not have the marketing skills to deal with retail customers while those in a wholesale relationship are doing better.

PC Banking and mbanx . In 1997, BMO launched its 24-hour "virtual bank," mbanx. Operations were carefully planned and thoroughly tested. Technical service was separated from customer service. There was no tolerance for error. The developers understood that customers would also want to have a real person on line. Bankers were assigned to support mbanx, and were given special training in providing personalized service to virtual bank users. Intensive pilot operations were carried out with customers who agreed to be first users.

The mbanx service was well received in Canada, is now functioning at Harris Bank in Chicago and will be introduced shortly at Bancomer in Mexico. Other banks, such as the ING Bank in the Netherlands and Wells Fargo in the United States, are also providing or are about to provide banking through the Internet.

The Internet brought major changes for SMEs. PC banking offers a welcome alternative delivery method for small customers. Instead of personally visiting each institution to get the best deal on a loan, entrepreneurs can now visit the Web sites of banks to find out the necessary information, compare rates and open accounts online. Transactions between the bank and individuals speeded up with computers delivering and updating information. As in other areas of business, PC-based communication also increased interactions.

Entrepreneurs and bankers can now keep in contact through many channels by way of personal meeting, telephone, fax or computer. Bankers can get information about a query from the Web site, respond or follow up on it. IT also made the client's record more valuable for bankers. Comments and other information in the record expedite decision-making and allow them to give more focused advice. If the personal banker is unavailable when the client calls, a substitute can take over and follow through. Comments in the client's file also enhance building a personal relationship between the banker and client.

Other online applications assist and also give freedom to the employees of SMEs. Employees of an SME, for instance, can arrange to have access to their retirement or 401(k) account - funds deposited by the employer, consisting of salary deductions determined by the employee and employer contributions - through the "Fidelity Online Retirement Center." In the United States or other countries where employees can determine how their future pensions should be invested, they can check their status and build their retirement portfolios, buying and selling mutual funds or other investments through its brokerage services.

With further evolution of the Web, the banks will move away from back-office computing, according to Edward Horowitz of Citibank, changing traditional business methods. Through the Web they will attract and retain more customers at a considerable cost reduction. Though more and more banks are offering Internet access they have yet to develop the personalized easy interaction Amazon.com offers to its customers.

Challenges for the Bank and the Entrepreneur

Integrating financial markets and continuing to provide a fair return to shareholders are and will remain major challenges for banks. Like other large corporations, they must maintain sound fiscal management as borders become more transparent and dividing lines between markets disappear. In addition, Jeffrey S. Chisholm, senior vice president of BMO, states that banks must also help adapt sound banking principles to the realities and hazards of new business environments.

To move resolutely into an expanded SME business, BMO had to change its corporate culture. First, changes were made at the board level, as mentioned earlier. But carrying out senior management's vision in any organization also requires changing the attitude of the staff. The corporation must develop a road map. Because it is difficult to adapt to change, they must ensure that the staff understands the road map and that needed skills are being developed alongside changing attitudes. Training is essential for all of the staff. Personal bankers must be further trained in providing low-key advice to clients in a way they will accept.

Bankers recognize that entrepreneurs may know their own business very well and know the direction they want to take. They may be innovative; some are well versed in the use of IT and understand the marketplace. But SMEs have their special challenges and are also more vulnerable than large companies. Though business publications report the surge of more and more SMEs, in the United States the rate of failure for new businesses is 50%.

Bankers can help. Beyond their own knowledge and experience personal bankers can also draw on a team of experts within the organization and on cumulated data collected on SMEs, evaluating risks. Among the challenges that BMO found are the following:

  • lack of management experience without the resources to hire personnel to make up for their weaknesses;
  • failure to bring in advisors where they may be weak or to outsource some operations;
  • failure of the communications infrastructure to grow with the business; that is, an information communications pattern continues, and key information is not always transmitted to the right person in a timely way;
  • failure to appreciate the value of information - a problem even with successful entrepreneurs;
  • lack of knowledge of what business information would be useful to improve operations;
  • lack of financial planning (Even if clients have installed accounting software and do not need a full time accountant, they need a financial planner to set up the right pension plans and to advise them regarding tax and investment matters);
  • tunnel vision;
  • lack of experience in international financial transactions.

To illustrate some of these points, unless SME management knows what business information would be useful, calling in an IT specialist will not be enough. Such was the case when a consultant was commissioned to "computerize" a Midwest mental health clinic with about 30 professionals. Routine operations, such as scheduling and billing, were well done. But neither the systems expert nor the professional staff had considered what information the clinic's manager might need to supervise and give direction to the staff. For this reason, the manager was unable to pull out the information from the data collected by the computer system to help her determine the pattern of practice of the staff members: how do the professionals vary regarding the length of treatment or the prescription of drugs? Are there differences in their personal styles or are some professionals reluctant to call for additional counseling? Are others dismissing patients too soon?

Tunnel vision can be a compounded hazard of successful entrepreneurs who can dominate a small organization where no one is strong enough to raise compelling counter arguments. Banks have also found that it is difficult for entrepreneurs to accept shifts in the market or competition from unexpected quarters. After many retailers were ruined when large discount stores moved into a community, Harris recognized the trend. Owners of retail stores, despite counseling, refused to acknowledge the threat and made business plans for expansion in the area.

As electronic commerce in North America escalates as expected to $2.9 billion in 2002, many SMEs will find themselves suddenly in the international market. A local bank helped a small Minnesota company manage cross-border finances after a Venezuelan firm that found its name among rebuilders of large motors in the electronic version of the Thomas Registry contacted them. The local bank also provided assistance on revising its business strategy. 

In another instance, a small company in Iowa drew on the help of Harris to place an order with a Norwegian manufacturer. The company then relied for information and banking services on Harris during its acquisition of several Scandinavian subsidiaries.

The personal relationship fostered by personal bankers benefits both partners. When an entrepreneur has taken the advice of the bankers and made use of the supplied information, the small company will be more robust and the owner will be better prepared when applying for loan or credit and would understand the intricacies of international trade and finance. The bank, on the other hand, has a stronger and more committed client.


Some international banks have deliberately changed their relationships with small- and medium-sized enterprises. Though the direction is clear, roads to the strategic partnerships between very large and small enterprises must still be developed. The partnership between banks and SMEs will continue to expand. Large companies will provide more personalized services to SMEs at a much lower cost; and SMEs will receive substantial management and information support from the private sector as part of their business interaction.

Both large and small companies must explore the kind of information that is most useful for each partner and in what form it should be made accessible and how to make best use of people and of resources. Over time, the large company-SME experiences in the private sector should help guide national and international government efforts supporting the information needs of SMEs.

Information technologies are essential tools in the budding development of new partnerships across borders, the dynamic exchange of information and ideas. Some fear that the spread of IT and easy communication around the world might erase distinct cultural and national characteristics. Each major technological development has changed society in unpredictable ways; we can only speculate what further changes IT will bring. Information technologies made possible the globalization of banking operations that contribute to global economic integration. As Jeffrey Chisholm asserted, "the Web is spun first with capital, and only then with goods." The strategic partnerships evolving between international banks and smaller organizations can only strengthen SMEs and thus will contribute to national economies.

The author wishes to acknowledge the assistance of Daryl Newell, vice president of the Private Bank, and David A. Cuzman, vice president, Corporate Electronic Financial Services, Harris Trust and Savings Bank, Chicago.

Irene Farkas-Conn is president of Arthur L. Conn & Associates, where she can be reached by mail at 1469 E. Park Place, Chicago, IL 60637-1825, by telephone at 773/667-1521 or by e-mail at
farkas-conn@cwixmail.com. The opinions expressed in this article are those of the author and not necessarily those of the Harris/Bank of Montreal.


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@ 1999, American Society for Information Science