Across many EMEA markets, debt collection has been focussed on driving the right outcome for the customer at the outset, rather than how soon and how quickly cash can be collected. With the COVID-19 pandemic this approach could not come any sooner for credit customers whose ability to pay is at risk.
The past is something we should learn from. I think there are more similarities with the 2008 financial crash than we think. So, let's look at some of the learnings that will help tackle some of the challenges around debt collection and COVID-19.
There were a number of things that we did not do during the last global crisis, the global financial crisis of 2008. In particular, we failed to:
- Identify the customers who would not have been in collections were we not in the situation we are in. Today, that would mean we did not identify the customers entering collections purely because of COVID-19.
- Understand how these particular customers would perform compared to steady-state collections customers:
- We did not profile their behaviours and how they differed in a collection situation.
- We didn't look back at how they had behaved just before they came into the collections area.
- We did not assess how they might behave once the crisis that triggered their financial stress was starting to pass.
- We didn't profile their likely return to financial good and we didn't understand any differences in their financial morality.
As the consequences of not doing the above, we did not change our:
- Treatment paths
- Solution range
Two years before the crash, the average (note average) return to financial good was 2.5 years. So, if a customer had gone into collections, gone through the whole collections and recovery process and been sold on to a debt purchaser, it was typically 2.5 years from the point of entering collections to when the debt purchaser would be able to get into a routine payment habit with the indebted customer.
Two years post 2008 that period of return to financial good had reduced to nine months. This is because the customers who rolled into collections were actually good customers, with a short-term payment problem. They have a very different financial morality profile and are soon back in employment and earning again hence returned to a good status. Treating these customers with the right outcomes now will generate a lifetime of loyalty.
So just what is different with COVID-19? Unfortunately, the scale of vulnerability in both the short and long term appears greater.
Planning for the Next Stage
Operations are simply trying to deal with the huge increase of customer calls, driven by the respective relief and earning protection programs across the different markets. Lenders and DCAs have been trying to maintain business continuity in the face of a significant reduction in their workforce and the challenges of home basing those they can.
At the same time, it is important that somewhere in the business, a team is asking:
- What do I need to do today to make sure, in the not too distant future, we are well-positioned to manage what will be a far larger collections portfolio then we planned to have?
- And how do we do this without haemorrhaging future good customers, or create bad customer sentiment?
These two factors alone will determine how rapidly and how strongly an institutions collections team comes out of crisis. It's fair to say those that don't carry out the right action today will still be blaming the crisis when in fact it's long gone.
What to Do Now
Here at FICO, we’re giving our clients the following advice to deal with both the immediate and near-term challenges.
Focus on digital customer engagement to ensure scalability and a frictionless, secure journey for the customer and a release of pressure on the classic call centre workforce.
Capture important information today that you would not have chosen to capture in the past. When the initial tidal wave of customer calls starts to lessen. there will be large books that need to be worked. Collections, risk and operations executives will need to have the data that helps them:
- Understand the differences between COVID-19 related debt and non-COVID related debt
- Identify the customers that classic collections risk analytics apply to, and those for whom it is it redundant
- Determine the likely return to financial good profile by customer cohort data, including:
- Were they in a protected industry?
- What circumstances drove their reduction of income? E.g. was it:
- Furlough and if so with what degree of protection?
- What has been the true level of impact on disposable income – can open banking support and validate the impact?
- What is their likely return to good curve given their household dynamics and industry sector?
Maybe you do all this anyway, but the current situation is different — for instance, in the past the national Treasury may not have offered wage and business protection programs.
Using the Data
When things do start to normalise, those that have captured the information so they can prioritise who to contact, with what expectation, will take the lead. You won’t be able to call them all on day one but you will be able to avoid calling a lot of the customers in the wrong order, wasting cost and eroding the goodwill you gained when providing blanket forbearance as asked for by the customers, local politicians and regulators.
Whilst collections risk, strategy and operations teams are making sure they gain the best segmentation possible out of existing and COVID-19 related data, and adjusting strategies such as default policies, restructure criteria, etc., the economics team should take a view on how fast each industry will start to recover and in what order.
This information will also be extremely important in a few other parts of the collection and recovery lifecycle:
- Deceased teams – Recognise that a sensitive approach will be needed when approaching those left to handle any outstanding debt. This is normal practice, but the volume will rise, so don’t let work pressure create wrong practices — resource accordingly. Recognize too that you will be dealing with many more unexpected deaths, as well as bereaved people who could not even get to their loved one’s funeral.
- Insolvency teams – There will be a significant increase and these teams will need to assess what protection these SME owners may have been entitled to. A measurable proportion will have to walk away from their businesses to focus on other priorities. They’ll be more like a straight key handover than a last straw after running at significant debt for a long time.
- IFRS9 - Those organisations that can defend the impairment they are holding against their COVID-19 versus non-COVID cohorts will benefit tremendously. No one will accept the whole book requires no impairment!
As I finalise this post, I am already hearing of borrowers calling back to decline the payment holiday they had taken, as they start to recognise it’s not always the best solution if not needed.
It’s natural when facing a large wave to start swimming fast, but sometimes it’s best just to slow a little and ride with it. Customers will be expecting tolerance from the lender and the lender should ask for the same in return. It’s better to take a bit of time and ensure the right outcome for both parties. Strengthen that upfront IVR message and let them know there will be time to resolve their concerns. Those that have never been in collections will be the first to want to get out of it!
FICO will soon be sharing other posts and details of webinars of interest to people responsible for dealing with the impact of collections on both the customer experience and balance sheet. Additionally, if you have any specific questions please feel free to send them to email@example.com, where we will look to have the right person respond to you directly.