Master Debt Collection Now – Before It’s Too Late

The time to invest in collections technology and improve your processes is now, not when the pandemic-driven debt tsunami hits

by Bruce Curry

July 27, 2021

I’ve often said that if you need to get really good at collections now, it may already be too late. The time to invest and improve is before you’re facing a debt tsunami. And there are signs that one is coming now.

Despite so-called Freedom Day coming and going, financial uncertainty in the UK is set to continue shaping the economic outlook.

According to the Financial Conduct Authority's (FCA) latest analysis, it’s estimated that 52% of adults (27 million) in the UK could now be considered as financially vulnerable.

At the same time, repayments for commercial support initiatives, in the shape of Coronavirus Business Interruption Loan Schemes and Business Interruption Loan Schemes - BIBLs and CIBLs - are yet to get underway in earnest.

But analysts are forecasting up to £27 billion in defaults. Elsewhere, it’s estimated that more than 600,000 sole traders and small businesses (SMEs) are also at risk.

While the analysis and predictions make for grim reading and may reflect a needlessly conservative standpoint, it's worth noting the Financial Equality Index, which highlights the gap between the haves and have-nots, is now at its highest level since the heady days of the 1970s with their rampant inflation and global oil crisis.

On the jobs front, the picture is even less clear. Furloughs are yet to be fully withdrawn, although the Treasury has indicated they are now winding down to a hard stop in October.

But it's a mixed picture right now with around 2.4 million on furlough - down from a peak of 5.1m in January. Nearly a third (30%) of employers have been obliged to furlough staff, again down from 35% at the end of April.

The choppy impact of the latest variant is also confusing matters. There are now more men on furlough than women — approximately 1.2 million men versus 1.13 million women — and that is expected to significantly adjust the true impact of unemployment and accurate analysis of household incomes.

Can We Trust the Good Signs?

Lenders face another challenging period given the evident contradictions in the pace of economic recovery, accurate real-time analysis of household incomes and anecdotal evidence suggesting higher than expected paydowns of household borrowing.

There are also reports saying the UK is bouncing back as payrolls continue to soar. Elsewhere, banks are said to be ‘swimming in capital’ and with dividend restrictions lifted it could represent a bonanza for shareholders.

Many consumers are also already making the most of restrictions easing. But there are financial implications as lenders wrestle to maintain a genuinely accurate picture of their customers’ financial position and fully understand the pandemic’s true picture on household finances.

During this period of uncertainty, the smart money is on caution. Fast, smart and seamless treatment analytics and customer communications propositions are critical to success. Being obliged to try to get to grips with cost-effective and timely collections may be too late if significant defaults start to loom large.

Improving Customer Outcomes

This is an excellent time for banks, lenders and card issuers to ensure they continually interact with customers to better understand their genuine financial position — especially if household incomes are likely to take a hit later in the year.

FICO already has a proven track record in helping our strategic clients offer tailored treatments that safeguard their customers and shore up cash flow to ensure commercial viability. In Europe, we're helping clients achieve double-digit improvements in their collections performance. Enhanced strategy and treatment insights have enabled one bank to achieve a reduction in outbound calls by a fifth, a notable uptick in cash collections, alongside similar reductions in account roll rates.

Many lenders and debt collection agencies use our FICO Customer Communication Services for Collections and FICO Collections Optimization, as well as related FICO Advisors’ strategic consulting services for collections. In fact, Hoist Finance and FICO just won an award for Best Use of Technology related to debt resolution. Don’t wait until you’re swimming in debt to put these kinds of technologies to use.

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FICO® Score High Achievers: Is Age the Only Factor?

FICO’s latest research on <a href="http://www.fico.com/en/blogs/risk-compliance/us-credit-quality-rising-the-beat-goes-on/" target="_blank">national FICO® Score distribution</a> shows that US credit quality continues to trend upwards, with an increasing number of consumers scoring in the highest scores ranges. Given that, we decided it was time to refresh our study on “<a href="http://www.fico.com/en/blogs/risk-compliance/infographic-what-does-a-high-credit-scorer-look-like/" target="_blank">FICO® Score high achievers</a>,” where we examine the credit behavioural profiles of consumers with higher credit scores. As expected, our latest study showed that older people generally have higher scores, as has been the case in our <a href="http://www.fico.com/en/blogs/risk-compliance/age-before-beauty-credit-worthiness-before-youth/" target="_blank">past research</a>. This is largely because they have trade lines that have been open longer, which leads to higher scores (assuming the trade lines are in good standing and all other things equal). The most credit savvy among you will remember that length of credit history accounts for roughly 15% of the overall <a href="http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx" target="_blank">FICO® Score calculation</a>. But for younger consumers, it isn’t too helpful to say, “just wait until you are 50 years old, and that will fix things!” Thus, I decided to dive deeper with our analysis, including looking at the credit behavioural characteristics of younger consumers with high FICO® Scores. In this analysis, I looked at credit characteristics for the two highest score bands, 750-799 and 800-850, which have about 16% and 23% of the population, respectively. I further broke this down by looking at the characteristics of the youngest 15% in each group, which occurs at age 29 for the 750-799 group and 43 for the 800-850. We used FICO® Score 9 for our analysis, and examined typical variables of the categories that go into the make-up of the score. <a href="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png"><img class="alignnone size-full wp-image-29367" src="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png" alt="fico-score-high-achiever-table" width="715" height="747" /></a> Since there’s a lot to dissect in this chart, I’ll highlight a few findings that struck me: <ul> <li>Credit history. Higher scores are undoubtedly associated with a longer time on file. What’s striking is the higher average time on file for the 800+ group, both overall and for revolving accounts (the most common trade line). Clearly, it helps to start credit use early in life – but that’s not the sole determining factor for high scoring. The younger cohorts in both the 800+ and 750-799 groups have time on file medians significantly less than their older counterparts.</li> <li>New credit. High credit scorers do, in fact, pursue new credit. We see little variation in months since last trade line opening and last inquiry among all groups observed.</li> <li>Pay on time. As you might expect, the further in the past the delinquency, the higher the score – and that’s if a delinquency ever happened. 95% of the 800+ people and 72% of the 750-799 group have never been delinquent, which is a striking contrast to the 57% for the total population. The percentages for the younger groups are even higher, especially so for the 750-799ers. Collection items are also scarce for these high scorers. While 23% of the national population have collection items greater than $99, the figures are only 0.5% for the 800+ group and 3% for the 750-799 group. It is clear that, in conjunction with starting a credit file early, paying on time is a key trait of the FICO® Score high achiever.</li> <li>Balance and utilization. Finally, we look at how credit is being used, focusing on revolving product use. (Since most people only have one mortgage or one auto loan, variation in instalment product figures is minimal and driven by payment history, which is near perfect for high scorers, as we’ve seen.) FICO® Score high achievers tend to have more open revolving accounts. While the % active trades and utilization are generally lower, by no means do high scorers avoid the use of credit products. What drives the difference here is the amount of available revolving credit utilized. The 800+ group is roughly 1/4 of the national median, both in total and on their highest utilized card; they also have lower balances and more cards. The 750-799 group is more active and higher utilized, but still only at 2/3 of the national figures. The young 750-799 group compensate with lower revolving balances and, as a result, lower utilization, which is in line with what we see for the 800+ group.</li> <li>Benchmarks. I’d like to point out that while this study provides good benchmarks of the typical credit traits of the FICO® Score high achiever, individual credit profiles will vary widely. And keep in mind that when we sort groups of consumers as a whole by different behaviours, some results may look superficially odd. For example, the 800+ band has a longer median average open account time (128 months) than average revolving months on file (140 months).</li> </ul> So, what do we conclude? A huge takeaway is that high scorers don’t have too much in the way of serious delinquencies and negative public record data. In most respects, the young 800+ people are like their peer group. They really only differ markedly in their shorter credit history and higher non-mortgage balance, both of which are a function of life stage. Our results show that you don’t have to be a credit product hermit; these high scorers have more credit cards. The takeaway is to start credit activity early and maintain well-managed and moderate usage. In many ways, the young 750-799 people are more interesting because their age profile is much younger. Their credit characteristics differ more from their peer group, particularly in terms of length of credit history. They compensate by having almost pristine credit records and lower balances. Ultimately, 39% of US consumers are FICO® Score high achievers, which they accomplish by following common-sense credit practices. It ain’t rocket science!

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