Johannesburg 17 February 2023-Many lenders are at a fork in the road when it comes to devising smart, agile collections strategies that will safeguard their customers and cement long-term loyalty, simply by helping them ride out the impact of the ongoing squeeze on household incomes.
Let’s look at the two paths many lenders are taking:
Route A: Increasing capacity to address volume and sticking with the same segmentation, strategies, treatments and policies. This will take lenders down a dead-end road to mass collections and customer insolvency. It’s a costly and unyielding collections strategy based on simply increasing back-office capacity to tackle high volumes and a fast track to sizeable delinquency, losses, and write-offs.
Route B: Segmenting borrowers into those who have “classic” reasons for delinquency and would have been delinquent even in a steady-state economy, those with classic reasons but whose problems were exacerbated by the worsening economy, and economic victims who are only suffering because of the changes in the economy. This is a far more agile and holistic route that works by easing customers out of the current spending crunch. By analysing, calling out, and catering to the differing ‘return to good’ profiles of the three customer cohorts, lenders can adapt treatments to best suit each segment.
For the two cohorts that have fallen foul of the current economic headache, smart treatments include adjusting forbearance and write-off policies to ensure they get a chance to return to form. Changing the terms and objectives of debt sale and contingency placement contracts, while also reviewing and aligning collection strategies and forbearance solutions are imperative.
With the implementation of Staging under IFRS9 lenders have been placing greater emphasis places on preventing accounts from moving between stages, hence having the right treatments for the right segments will prevent unnecessary losses and write-offs.
Experience also shows that setting targets for the retention of future good customers is a useful way to safeguard portfolios and win long-term consumer loyalty. In fact, near-term results should speak for themselves, with a timely contribution to the successful mitigation of the cost of living and economic crises, suitably high ongoing balance sheet yields, and a growing market share of satisfied customers.
Intuitive And Smart Collections Strategies to Offer Customer Safeguards
None of this thinking is revolutionary. There are really four factors shaping analytic insights, strategy, policy, and execution when it comes to successful and agile collections.
Consumers hit exclusively by an economic downturn – so-called economic victims – typically are embarrassed, concerned, and averse to being in an arrears situation. In fact, they will do whatever it takes to get back to their definition of ‘normal’. Once a route to creditworthiness has been agreed they are committed to return to financial good.
Right now, it’s fair to say the vast majority of customers swelling the collections queue will also be economic victims. There’s an obligation to ask whether enough is being done to optimize collection strategies while putting in the work to support customers in a time of need. For instance, can you:
- Accurately profile and identify economic victims?
- Adjust policies, collection strategies and treatment paths to suit accordingly?
- Apply the right level of tolerance to consistently drive the right outcomes?
Don’t Let Credit Policy Become a Driver of Delinquency
There’s always been a need for policies, but they can also be used as a convenient cover for ignorance. If a lender is sufficiently well-informed about their customer, a better and more appropriate treatment should be available beyond the stringent guardrails imposed by a historic policy.
In fact, most of these policies simply fail to accurately fit the circumstances many customers find themselves in. While one customer might be able to afford half a contractual instalment, another can afford one and a half times their instalment. Another customer may only need a two-month extension, but another may need four months. One customer might be at the end of their credit term but have no future source of income while having other repayments fully up to date.
Without accurate insights to determine the right outcomes, policies simply become the default decision-maker. Policies are there to maintain structure and are necessary as a guideline however they should not be too rigid where they drive the wrong outcome.
Leveraging data and analytic insights is by far the most effective way to maximize the value of an agreed outcome for both the customer and creditor and to the satisfaction of the regulator. Through the use of hyper-personalised omnichannel communications customers can be offered the most appropriate solution for both you as a client as well as for the customer.
Bad Forbearance Costs
The global pandemic has clouded the clarity around customer risk that was expected to be provided in part through reporting under IFRS 9. In most markets, the response hinged on financial protection to both society and business. It ran for the first full period of reporting under IFRS 9, prompting many discussions about the real degree of risk.
But the widely predicted tidal wave of debt didn’t materialize, thanks to the financial protections that were granted to consumers, collections portfolios were reduced as due to payments holidays, and lockdowns limited discretionary spending, allowing a greater level of debt servicing.
Now, the emerging economic downturn is being aggravated by a combination of inflation, interest rates, and rising energy costs. The fiscal protection will not be the same as provided during the pandemic. As a result, lenders’ collections books are already growing.
Creditors that don’t have scalable and agile orchestrated digital channels will struggle to manage the high volume of activity already emerging at the pre-delinquency and early collections stages. In fact, some customers will get pushed to Stage 2 and Stage 3, simply because the volume of late payers simply cannot be effectively managed, rather than because the risk is greater for these customers.
Cost-Effective Collections Tactics
Volumes are unlikely to be well-managed at a reasonable cost if pre-delinquency and early collections are predominantly dealt with by call centers. The availability of bi-directional, omnichannel platforms and the very clear evidence of adoption by society really call into question any collections shop that still has a heavy reliance on an inbound line and outbound dialler; yes, they have their place, but they should be seen as serving a tiny minority of customers, with digital auto-resolution / self-service looking after the vast majority.
Debt collection has become about debt resolution – organisations need to assess whether they have the right understanding of their portfolios as well as the right capabilities to deal with the current debt crisis in order to determine the appropriate action across the different economic cohorts.
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