Even in a Crisis, the Best Collections Are Avoided Collections

With a cost-of-living crisis and soaring energy costs across Europe and other countries, it’s important to re-evaluate debt collections and customer risk management strategies. Pressures points are rising at an alarming rate and in the UK, up to 60% of consumers will soon find themselves in an increased level of financial difficulty.

This will lead the credit industry to see a blurring of the organisational, policy and process lines between collections and customer management.

Either customer management functions will need to adopt some of the dynamic attributes of a best-practice early collections strategy and forbearance assist function, or collections functions will need to recognise that a growing proportion of their book will have a very different return-to-good profile.

Despite household spending being down due to savings getting plundered during the pandemic, it’s anticipated that UK consumer borrowing will reach a five-year high by the end of 2022, growing a further 8% — equating to almost £16 billion.

It’s also important to recognise that income segments are often impacted very differently. In July 2021, around one in five (21.6%) households from the lowest income quartile reported being in financial distress. This was set against one in 17 (6%) from the top quartile. More importantly, the gap between low-income and high-income groups has widened — and is increasing. Since July 2021, reported financial distress has continued to rise sharply for the first quartile, while the increase has remained consistent for the fourth income quartile.

Right now, creditors therefore need to hone their collections strategies and process skillsets because IFRS 9 will come at a cost for the inefficient. This new standard was introduced in January 2018 and designed to help lenders and banks enhance their strategy and avoid unpleasant surprises presented in the shape of loan defaults, delinquency, or early collections processes. It also represented a regulatory stepping-stone put in place following the global banking crash of 2008.

Seven Considerations for Creditors

·       Regulatory scrutiny

o   In the UK, banks and lenders are looking at effective ways to comply with the FCA’s new Consumer Duty.

·       Retaining market share is critical

o   With the wrong treatments, poor support, or late action, creditors risk losing customers. And once a customer has been lost, they’ve generally been lost for good.

·       Keep a careful eye on the cost of collections

o   It’s always worth noting that the moment a customer goes into collections their account will immediately be between 30% and 60% less profitable.

·       Plug in to quick wins at speed and scale

o   A slew of additional real-time data sources and insights are readily available, from Open Banking and public records to traditional credit bureaux and alternative data.

·       It’s a tricky balancing act

o   Pre-collections strategies are arguably the hardest place to get customer communications right. Too little, too late and its costs. Too much, too soon and the customer risks being alienated.

·       What does ‘good’ look like?

o   The right results will see customers prevented from needlessly rolling into collections.

Collectors, if they undertake to manage 20% or so of the good customers, will need highly efficient and effective capabilities to operate at scale and in an agile way. Irrespective of the implications set out by IRFS 9 in not proactively managing down the pending risk posed by inefficient collections, forecasts indicate that up to 60% of consumers are going to experience financial difficulty soon. At some point these customers will need highly effective support. While there will be multiple ways to address the challenges to be faced, it’s probably fair to say the best collections strategy will always be to avoid collections altogether – if possible.

By Bruce Curry, Senior Principal Consultant, FICO