In a previous military life, the phrase 'Absence Of Normal, Presence Of Abnormal' was a mantra for staying one-step ahead of nasty surprises. If the presence of the abnormal, or absence of the normal are observed, it normally means something is very different. The difference needs serious analysis and without appropriate action may cause harm. Personally, I’ve replayed this mantra many times through my commercial career. As with most walks of life it also applies to effective debt collection.
Here at FICO and across numerous decision science teams, analytics talent mines data looking for both the normal and abnormal. Taking the insights and converting them into meaningful, appropriate actions means adjusting effective debt collections strategies, recovery treatments, policies, processes and the all-important key performance indicators (KPIs).
Why should the presence of the abnormal, absence of the normal be at the top of effective recovery objectives and debt collection strategies? We’re all likely to come through the next couple of years of significant challenge again having been more disappointed by what was not done by many versus what was done by a small few. The practices agencies use to respond to these challenges will not only impact the ability to effectively collect debt but also influence customers perceptions and future engagement.
Effective Debt Collection, Recovery and the Return to Financial Good
Anyone who has been to a FICO event focussed on collections within the past 14 years may well have heard me talk about the great unknown that gets little visibility in the debt collection world - the Return to Financial Good (RtFG). It directly relates to research undertaken in 2010 when empirical evidence showed that economic victims have very different risk profiles and often respond very differently when they’re struggling to service personal debt. Prior to the 2008 global financial crisis, the average RtFG of consumer credit customers having reached charge-off was 2.5 years. In the two to four years that followed the financial crisis, the average RtFG fell to nine months.
While it may seem counter-intuitive, the research was sound. When unpacked, it highlighted the extent to which economic victims differ in their ability to pay back debt – a distinction between those whose indebtedness is brought about due to market-level economic change rather than by situations of their own making. Variables include a host of multiple factors including available assets, financial morality, debt servicing obligation and resourcefulness. But they may also suffer so-called debt shock, process confusion and significant irritation – especially when creditors show a lack of knowledge or relative indifference to the customer they’re dealing with. Erosion of loyalty from near-term RtFG is very common.
Given the backdrop of RtFG customers, it would be expected that in previous ‘abnormal’ periods creditors had:
- Profiled economic victims.
- Adjusted charge-off policies to prevent the future loss of good customers.
- Implemented specific segmentation and treatment strategies for debtors.
- Enabled appropriate forbearance solutions that cater for differing RtFG.
Unfortunately, far too many creditors didn’t. As a result:
- Creditors lost good future customers at scale.
- Poor customer experience and debt-related stress were needlessly aggravated.
- Brand reputations were damaged.
- Balance sheet credit losses were far higher than necessary.
Key Differences in Recovery and Debt Collections from 2008 to 2022
As we again head into a period of significant financial strain for large proportions of credit-dependent populations, what are the key differences?
- Omnichannel two-way digital dialogue was largely unproven in collections’ operations.
- Regulation was not always focussed on driving the right customer outcomes.
- Open Banking and other sources of alternative, transactional and behavioural data were simply not available.
- Widescale scrutiny of liability in the shape of IFRS9 (International Financial Reporting Standard 9) and current expected credit loss (CECL) models were not yet mandated by policymakers. As a result, inefficient and ineffective collections processes were far more prevalent.
- Mathematical optimisation was also unproven across collections and recovery disciplines.
- Highly agile analytic and decisioning tools were also not as prevalent as they are today, while software-as-a-service (SaaS) systems were not in common use.
- The expected debt tsunami predicted in many markets simply didn’t materialise thanks to government-backed income protection initiatives and payment holiday tolerance by creditors.
- Creditors were also busy enabling payment relief schemes amid relentless waves of new and emerging regulation.
- Collections books for many lenders reduced.
- Many lenders focussed on what they were actually experiencing and what they could accurately forecast.
The Perfect Collections Storm of 2022
Right now, many global markets are experiencing the impact of a perfect storm combining the global energy crisis, post Covid-19 consumption demands, supply chain challenges and war in Ukraine. Increasing inflation, interest rates and income tax are also at 40-year highs. These challenges will have a significant impact on debtor's ability to pay back what they owe.
But the ability for debt collectors to learn from the lessons of 2008 has never been more viable. We’re no longer in need of driving innovation. It’s an era of needing to adopt the capabilities that have developed during the past 14 years.
In order to face the presence of the abnormal or absence of the normal with confidence, anyone managing collections portfolios and effective debt recovery strategies should be running through the following self-assessment. Do you have the right tools and capabilities to do these six things well?
1. Understand the differing profile of collections customers given abnormal economic situation - Leverage diverse data sources, using customer analytics to drive deep insights, tailoring treatment strategies and engagement approaches to debtors based on emerging insights.
2. Have confidence in profile refinement - Dynamically update profiles as new information is received, including streaming customer interaction and transactional data, enriching with external sources -including credit bureaux and Open Banking data - to provide rich 360-degree view.
3. Pre-determine outcomes ahead of executing the treatments – Understand how to develop, deploy and monitor action effect models, driving from predictive to prescriptive analytics and mathematical optimization.
4. Encourage round-the-clock customer collaboration – Enabling two-way customer dialogue at any time via the channels of their choice.
5. Secure confident assurance of a right outcome – Through auditable, transparent and ethical AI at each and every point of decision and execution.
6. Constantly monitor triggers and indicators of changing circumstances – Instigating appropriate customer treatment and action weighted towards something that has happened instead of by something that hasn’t happened, or simply the passage of time.
During times of acute uncertainty, the word ‘unprecedented’ becomes over-used. It’s a clear marker for the absence of normal. While circumstances may be unprecedented, what happens to the changing profiles of collections portfolios is not. Unfortunately, only a few organisations assess how truly capable they are to manage effectively and competitively when ‘normal’ is clearly going to be absent.
How FICO Collections Solutions Can Improve Your Performance
All the key requirements outlined above, and the capabilities required to deliver these are proven components of the FICO Platform. It enables our customers to manage complex data flows, drive deep customer insight, understanding, and make real-time decisions on appropriate treatments and engagement approaches for customers. It improves customer interactions through digital and ‘traditional’ channels, with optimized approaches that consistently deliver the most appropriate business and customer outcomes.
- Learn more about the FICO Platform.
- Watch the webinar with Bruce Curry and Matt Higginson of McKinsey on digital-first collections.
- Explore our solutions for collections and recovery.
- See our solution for customer communications with borrowers.