It has been a year and a half since the first case of the coronavirus (COVID-19) was reported from Wuhan, China. As we move into the third wave of the virus, there is an apparent dilution in both collection and recovery yields in the financial services sector, primarily because relief schemes and packages come to an end.
In this two-part blog, we will explore the changing dynamics of the debt market, delve into the industry’s current state, and walk through some best practices that can be followed to ensure that this “dilution” doesn’t become a new virus on its own.
The industry is facing significant change. The behaviour of credit consumers has shifted as many have lost or may still lose their jobs, and many more have had their income reduced. Add to this the fact that credit providers have to deal with a new spate of regulatory changes. These changes make it increasingly challenging to optimise delinquent account management, particularly where the debt is unsecured, and the client has multiple exposures to various credit providers.
As with any cure, there is no silver bullet! Credit providers need to ensure they maintain a synergy between several distinct collection and recovery disciplines that extend across strategy, people, process, and technology to achieve superior yields. In the end, the best approach is to ensure you continue to do the “basics brilliantly”.
Doing Basics Brilliantly
This article will discuss three of the five basic principles—namely, prevention, prediction, and policy. Watch out for part two, where we will deep dive into prioritisation, and pathology.
STEP 1: Prevention
As the saying goes, an ounce of prevention is better than a pound of cure. It is always better to focus on limiting the propensity of current clients who are rolling into a delinquent state. The key to doing this successfully is by segmenting debtors by how likely they are to pay or roll into a delinquent state in the next month. And then treating each segment accordingly. Generally, these are clients that have not yet defaulted on a payment. You want to prevent this eventuality by reaching them with the relevant “treatment” before they do.
The most straightforward approach is to develop a propensity-to-roll scorecard. This is derived from a combination of internal (payment, account maturity, etc.) data and external (bureau) data which divides your current portfolio into distinct high, medium and low propensity to roll categories.
Next, prioritise your high-propensity-to-roll client segment using a suitable treatment framework (call, SMS, Email or other) and remind them of the importance of maintaining their current credit standing. The primary function of this communication would be educational.
STEP 2: Prediction
‘Knowledge’ as they say, ‘is power’. Superior credit providers and debt collectors should segment delinquent account holders into clear categories that relate to their ability to pay their debts. This ability to understand and predict who is most likely to fail to meet their financial obligations in the short term is underwritten by analytically derived propensity-to-roll scorecards.
As per the preventative steps above, understanding where a person sits on the spectrum is sourced from internal and external data. External data is primarily derived from credit bureau information. While other data sources that might point to a propensity to roll (or cure), such as social media or mobile data, the effectiveness and accuracy of this data has yet to be proven.
Segmenting a portfolio into discrete risk segments allows you to optimise workforce management, perform campaign prioritisation, and create suitable treatment frameworks to address real and perceived risks and then align your efforts, whether by implication or costs, to an acceptable collection or recovery outcome.
STEP 3: Policy
An effective way of improving collection rates is by creating a holistic policy framework that gives both the credit provider and debtor sensible, workable opportunities to either regularise and/or exit delinquent debt on a ‘win-win’ basis.
There is an adage in credit that states: “your first loss is often your best loss”. Forward roll-rate statistics seem to confirm that unless an exposure is contained within 60 days of becoming delinquent, there is a high probability that the account will eventually roll into a state of write-off.
Opportunity is lost when credit providers are slow to realise when to rehabilitate, seek repayment, and institute recovery proceedings in a logical, sequentially driven policy framework. Doing the same thing and expecting different results is a well-known definition of insanity, yet how many debtors receive different tilted collection and recovery treatments as they progress along the delinquent credit lifecycle? By tilted, we mean the (1) type of collection action, (2) the tone of collection action, and ultimately (3) the timing of the collection or recovery action.
Therefore, the key to an optimal policy framework is articulating the following three treatment frameworks:
- Defining when to rehabilitate a debtor and what to offer them as part of the rehabilitation process
- When to seek a mutually beneficial and commercially astute exit by way of compromise or a settlement
- When to consider commercially sound debt recovery proceedings
Underpinning all of this is the brand values of the credit provider, the regulatory environment, and the defined reputation risk framework within which a credit provider wishes to operate.
But these are only three of the five basics you need to consider. Watch out for our next instalment of this blog where we give you some practical tips on prioritisation and pathology.
In the meantime – if your business needs help with post-pandemic recovery, contact us.