Our team in the UK has just run some reports indicating that, at least among the UK high-street banks, static delinquency levels are running high. Static delinquency occurs when a consumer who is, say, 1 cycle delinquent makes the minimum payment, thus rolling over the delinquent balance to the next month but staying at 1 cycle delinquent.
In our latest reporting from the FICO Benchmark Reporting Service in the UK, we found the following in a review of several high-street banks’ card portfolios:
There are large percentages sticking at these levels of delinquency, with high average balances. The accounts are demonstrating some ability to pay, as they are meeting the minimum payment each month. (Some of the banks studied have payment plan accounts, which can inflate the results, but these banks’ accounts are not always at the top end of the static delinquency report.)
FICO reports this information to encourage clients to segment these accounts and apply special treatment. Targeting these accounts can have a noticeable positive impact on delinquency results. For clients stuck at 1 cycle, we recommend trying to take the full payment to prevent them rolling back into delinquency. When customers are already at 2 levels or higher, work with them to establish plans to bring the accounts back to current basis.
Static delinquency consumes not only operational resources but also capital. In fact, when I managed collections in Latin American banks during a period of hyperinflation and hyper-unemployment, static delinquency was caused as much by the banks, which didn’t know how to deal with the problem, than by the customers.
A proper collections strategy that offers reduction on monthly payments with tools such as renegotiation or payment rescheduling requires a good segmentation. Some of the customers will have lost their income and need help adapting to the new reality. Some customers have inherited a heavy burden of balances. A proper “pre collections” strategy can easily identify those clients, proactively offering a solution rather than waiting them to become delinquent, at which point you may lose both the client relationship and finally the revenue. More than just a collections problem, this is a matter of good customer management.