Remember the ice bucket challenge craze? Get ready for the IFRS 9 bucket challenge — it’s even more startling, and nobody’s standing by to give you a warm towel.
Like GDPR, IFRS 9 poses major challenges for collectors, just as it does for accountants, IT, risk managers and anyone else in the credit business. So now let’s talk about what you can do.
Note: While I’m just talking about IFRS 9 here, you do have to approach it and GDPR in concert, because in some areas they seem to be in conflict. You don’t want to gear up for IFRS 9 and then realize you have to undo some of your strategies or processes to avoid GDPR fines.
Build your 30-day planIFRS 9 says if a customer’s risk deteriorates — including becoming 31 days overdue — they go into Stage 2, and you have to start holding lifetime impairment. Don’t be surprised if your CFO, who you may not know personally now, walks down to your office to say, “I can’t afford for any accounts to get to Stage 2. How are you going to stop that happening?” It would be good to have an answer, preferably one that doesn’t involve a rude gesture.
Your CFO is right to be worried. Under IFRS 9, he or she has to carry provisions on an up-to-date book, to levels they never had to carry before. The last thing you want is for those provisions to go up because of unnecessary 31+ day past due delinquencies.
Even worse, if a product or portfolio would have a higher impact during an economic downturn, a Stage 2 status could be applied and the provision go up even on customers that aren’t delinquent.
So your first challenge is to stop the flood to bucket 2, 31 days past due. Questions to ask:
- What are my communication channels, and am I using them in a truly coordinated way?
- How do I keep my collection costs down while boosting the attention to bucket 1?
- Do I have analytics to predict who’s likely to roll to bucket 2? (I say that knowing that few organizations have analytics that predict bucket-to-bucket roll. Most organizations only predict write-off, because that’s where loss would come from — not anymore.)
- How do I up the ante to work heavy workloads in bucket 1 adequately, while maintaining a good customer experience?
- If I’m not working self-cure accounts, how do I make sure they won’t roll to bucket 2 before they cure?
Optimize your restructuringRestructuring is a big part of meeting the bucket 2 and beyond challenges. If you can get them to a low default rate, you can get lifetime provisions down when they get back up to date. You can’t dismiss the provisions, but you can lower the amount you have to provide on them.
Optimization is key here, and the adopters are using it to really understand the differences between accounts and take targeted actions.
Say you’ve got a customer on maternity leave, whose disposable income dropped by 30%, but they’ll be back to work in 6 months, they’ve been on books 5 years, and they only have a year to run on loan. Now say you’ve got someone who’s 64, was just made redundant, has had a drop in income of 70%, was only on book 3 years, and has another 5 years to go on their loan. NPV and profitability on those two customers, when you restructure them and take them back onto your books, is vastly different.
People are using optimization to get these decisions right. If you’re relying on Draconian policies, you will find it hard to show the regulator you’re using the data in the best way, and that you’ve got the risk right and therefore the provision right.
Create your strategy for losing customersSubject to what’s going on in your good portfolio, you may be able to extend good tolerance and payment forbearance to customers who are financially vulnerable. With IFRS 9, though, the business might not want those customers back on the portfolio, because they consume more capital because of the higher provisions on them.
If that’s the case, you have to make different decisions about what to do with those accounts. There will be organizations that will have to sell or offload future good customers because they can’t afford to hold them for the period during which they will be incurring higher provisions.
If you’re running a 30% or 20% post-restructure default rate, when you restructure customers they are still going to incur high provisions. Not only are you wasting operational time doing that, but you can’t even qualify that your restructuring is fixing the problem, because of the high default rate. You need to get to below 10% post-restructure default rate to lower the amount of provisions you’re going to have to carry on your restructure portfolio.
Do a status check on your analytics, contact channels and case management systemYou’re going to need all three to be top-notch as you try to stop customers getting to bucket 2. For accounts that do get to weeks 5-8, bucket 2 and 3, you’re going to need them to make smarter decisions about what to do with customers and how. Your success requires good analytics, excellent case management systems which can serve very dynamic solutions and dynamic repayment schemes.
If you only have a small range of repayment schemes now, you’re not going to be able to be dynamic enough to show regulators, “This is the solution we have for these customers, this is the reason why, this is the low level of default, so even if we take them back onto book, we only need a low provision.”
Review the whole bank’s operating modelUgh. That sounds hairy, but given the size of the changes, it’s important.
One bank told me that when they set up their team to review this, they identified 21 areas of critical impact in treatment strategies, in technology that supported their operating model, and in their channels. These required massive changes to meet the bucket challenge.
Move omni-channel from your Wish List to your Shopping CartWhile omni-channel has been seen as a way to meet customers’ needs of going digital, they’re now needed to cope with the bucket 1 challenge. Sure, omni-channel lowers costs and improves the customer experience, but collectors now are saying, “Blimey, if I have to stop 15% of accounts going to bucket 2, I need to move to digital, because it’s going to be too expensive to do it with people alone.”
Omni-channel is how you can take the load off your human resources center, and meet the bucket 1 challenge by using automated channels, offering your customers self-serve, and scale with greater demand and peaks. You can also put your staff on the harder accounts you know have a higher likelihood of rolling.
Finally, prepare for a massive provision upliftIn the first panel results of parallel runs with IFRS 9, unsecured revolving issuers are saying they have to uplift provisions by 40-43%. That’s not a surprise. None of the four big accounting firms predicted less than 30%.
Unless your institution has made a major provision uplift over previous years — because your balance sheet enabled you to do so, and you had very conservative risk management — you will have to make significant adjustments. Your good book will already have an uplift in provisions, which is why the CFO will not want accounts returning to the good book and incurring lifetime provisions because of weak strategy execution in bucket 1.
At FICO, we’re helping customers get ready for IFRS 9 and GDPR. In my next post, I’ll share some advice for the latter. In the meantime, you can listen to my on-demand webinar on IFRS and collections. And just like all those folks who took the ice bucket challenge, try to smile!