By Bruce Curry, vice president for collections and recovery consulting and sales at FICO
Who would want to be a collections or recoveries manager in the current COVID-19 environment? Bruce Curry, vice president for collections and recovery consulting and sales at global analytics software provider FICO, examines the challenges those responsible for collections currently face – and some of the long-term game-changers the current crisis could potentially deliver.
Right now, there is an urgent focus in the world of debt collections in a number of areas, from digital communication and systems agility to data quality. And whilst focusing on the immediate and pressing need is inevitable, as much as possible there should be a look to the future to ensure that any data collected now will enhance long-term strategies too. While this pandemic is unique, there are lessons that can be learnt from the financial crisis of 2008 that will definitely stand the collections and recoveries business operation in good stead for the future.
Data is key … what is the key to unlock the data?
The truth is, this period will create a lot of data and organisations need to capture the right data, understand it and where it will be needed further down the line.
Across many EMEA markets – even before COVID-19 became part of our daily vocabulary – debt collection has been focussed on driving the right outcome for the customer at the outset, rather than how soon and how quickly cash can be collected. Having access to the right data and the insight it can deliver has been a key driver in influencing that strategy.
That is, undoubtedly a lesson learnt from the 2008 financial crash. But there were other things that were not done during global financial crisis of 2008 that must be addressed now to ensure that lenders and their customers can emerge with mutual loyalty still intact.
In particular, the lending sector failed to:
Identify the customers who would not have been in collections were it not for the financial crisis. Today, that would mean the customers entering collections purely because of COVID-19.
Understand how these particular customers would perform compared to those individuals perpetually in debt
Their behaviours were not profiled, nor how they differed in a collection situation
Their behaviour just before they came into the collections area was not profiled
Their likely return to financial good wasn’t profiled and their financial morality wasn’t assessed
As a consequences of not doing the above, lenders didn’t change:
Two years before the 2008 crash, the average return to financial good was 2.5 years. So, if a customer had gone into collections, gone through the whole collections and recovery process and been sold on to a debt purchaser, it was typically 2.5 years from the point of entering collections to when the debt purchaser would be able to get into a routine payment habit with the indebted customer. Two years post the crisis that period of return to financial good had reduced to nine months. This is because the customers who rolled into collections as a result of the 2008 financial crisis were actually good customers, with a short-term payment problem. They have a very different financial morality profile and are soon back in employment and earning again hence returned to a good status.
Fast forward to today, treating the customers who are now facing financial stress as a direct consequence of COVID-19 with the right outcomes will generate a lifetime of loyalty. However, there is one very important difference this time round. Unfortunately, the scale of vulnerability in both the short and long term appears greater.
Planning for the Next Stage
Currently operations are simply trying to deal with the huge increase in customer calls, driven by the respective relief and earning protection programmes across the different EMEA markets. And the volume of incoming calls isn’t the only challenge. Lenders and debt collection agencies have been trying to maintain business continuity in the face of a significant reduction in their workforce, as well as the challenges of home working for those still able to work.
But not withstanding those pressures, it is important that somewhere in the business, a team is asking:
What do I need to do today to make sure, in the not too distant future, we are well-positioned to manage what will be a far larger collections portfolio than we planned to have?
And how do we do this without haemorrhaging future good customers, or creating bad customer sentiment?
These two factors alone will determine how rapidly and how strongly an institution’s collections team comes out of crisis. It’s fair to say those that don’t carry out the right action today could still be blaming the crisis when in fact it’s long gone.
In particular there should be a focus on digital customer engagement to ensure scalability and a frictionless, secure journey for the customer, as well as releasing pressure on the classic call centre workforce. The attitude towards information capture also needs to change.
Capture important information today that you would not have chosen to capture in the past. When the initial tidal wave of customer calls starts to lessen, there will be large books that need to be worked. Collections, risk and operations executives will need to have the data that helps them:
Understand the differences between COVID-19 related debt and non-COVID related debt.
Identify the customers that classic collections risk analytics apply to and those for whom it is redundant.
Determine the likely return to financial good profile by customer cohort data, including:
Were they in a protected industry?
What circumstances drove their reduction of income? E.g. was it:
Furlough and if so with what degree of protection?
What has been the true level of impact on disposable income – can open banking support and validate the impact?
What is their likely return to good curve given their household dynamics and industry sector?
Organisations may be doing all this already. But the current situation is different — for instance, in the past governments may not have offered wage and business protection programmes.
Using the Data
When things do start to normalise, those that have captured the information so that they can prioritise who to contact, with what expectation, can take the lead. Clearly it will be impossible to call all the customers on day one, but avoiding calling a lot of the customers in the wrong order will ensure costs are not wasted and the goodwill gained when providing blanket forbearance as asked for by the customers, local politicians and regulators, is not eroded.
Good data will also help shape the creation of specialist teams that will be vital in the coming months and years. For example:
Deceased teams – Recognise that a sensitive approach will be needed when approaching those left to handle any outstanding debt. This is normal practice, but the volume will rise, so don’t let work pressure create wrong practices — resource accordingly. Recognise too that you will be dealing with many more unexpected deaths, as well as bereaved people who could not even get to their loved one’s funeral.
Insolvency teams – There will be a significant increase and these teams will need to assess what protection these SME owners may have been entitled to. A measurable proportion will have to walk away from their businesses to focus on other priorities. They’ll be more like a straight key handover than a last straw after running at significant debt for a long time.
It’s natural when facing a large wave to start swimming fast, but sometimes it’s best just to slow a little and ride with it. Customers will be expecting tolerance from the lender and the lender should ask for the same in return. It’s better to take a bit of time and ensure the right outcome for both parties. Strengthen that upfront IVR message and let them know there will be time to resolve their concerns. Those that have never been in collections will be the first to want to get out of it!