The Credit Lifecycle consists of several stages, including Collections and Recoveries. To understand the collections and recoveries landscape, it is necessary to also understand what happens during the Credit Lifecycle before an account enters Collections.
In Part 1 of this Blog, we focused on the first two stages of the lifecycle which are Leads and Originations.
In this Part 2, we continue to explore the various stages, focussing specifically on the Account Management and Pre-Delinquency Collections Stages, before we delve into our main feature: Pure Collections and Recoveries.
We previously mentioned (Part 1) that during the origination process a credit application is either declined or approved. Upon approval of the application, an account is opened and the credit or credit facility is allocated to the customer.
During the account management phase, all account-related transactions are managed and, based on a customer’s behaviour, cross selling opportunities may be identified and offered to the customer.
Interaction with a customer during the account management stage is done according to a customer service approach and is usually performed by customer service consultants or agents. Preferably these consultants or agents should be and usually are different to those involved with the following stage, which is delinquent accounts.
With the advancements in big data and analytics and especially predictive analytics during recent years, a new focus area within the account management stage has emerged, which is high risk pre-delinquency.
Historically, when a customer defaulted, companies could only respond reactively, in other words after customer had already defaulted. Nowadays however, with the assistance of accurate predictive analytics, companies can predict which non-default active accounts or customers are likely to default in the near future. This new capability opens up the option of proactive (before the customer defaults) interventions and the application of appropriate pre-delinquency strategies.
When deciding upon pre-delinquency strategies, the following steps are followed:
- Identification of accounts which will likely default;
- Ranking the accounts in terms of the risk of default; and
- Allocating the appropriate actions to the identified accounts.
The main objective of a pre-delinquency strategy is to reduce the amount of accounts entering a delinquent state.
The question that must always be asked and answered is what actions do we need to allocate to these accounts in order to reduce the risk of default?
Pre-delinquency actions will depend on the risk ranking of the accounts, for example:
- Low risk accounts: No action
- Medium risk accounts: Actions intended to educate the customer on the consequences of defaulting on an account
- High risk accounts: Actions intended to assist customers by way of account rescheduling or instalment reduction
South African legislation closely follows that of the UK FCA (Financial Conduct Authority) in terms of consumer credit and we have recently noted the huge emphasis placed on treating customers fairly (TCF). We anticipate that in future even more emphasis will be placed on regulating the proactive identification and remedial actions of customers in distress. Companies are therefore advised to make TCF an integral part of their business culture, sooner rather than later.
In Part 3 of this Blog, we will start exploring our main feature which is Collections and Recoveries, starting with Collections (Early and Late Stage). Stay tuned!
Contact us, to find out how Principa can help you better manage your Collections and Recoveries.
Perry de Jager: Head of Collections and Recoveries Solutions
Perry has been with Principa Decisions since 2015 dealing with Collections and Recoveries solutions for clients within South Africa, Africa and the Middle East.