Now that we have turned the page on the calendar and entered the third year of the global pandemic, what are the challenges facing debt collection and resolution professionals? I’ve been in the business for over 30 years now, and while some of what I see is new, much of it is awfully familiar.
Stress on household wallets
Regardless of the billions in cash reserves that governments have invested in furlough programs, business loans, deferred repayments and debt relief programs, the cost of living continues to rise rapidly. Rising energy and fuel prices are now key catalysts that weigh on the level of disposable income of many households in financial difficulty.
At the same time, a perfect storm is approaching, combining insolvencies, job losses, interest rate hikes and vague but significant over-commitments by consumers, in part due to the rise of BNPL (buy now, pay later) programs ).
There is also likely to be a longer-term impact on the housing market, as the loan-to-value ratio is reduced and the affordability of homeownership puts homeownership out of reach for even more first-time buyers. At the same time, rising interest rates and continued uncertainty are also expected to drive up private sector rents as rental mortgages become more expensive.
Stress on creditors – situational and regulatory
Lenders face several thorny challenges in sifting through the inevitable financial fallout from the pandemic.
The ability to cost-effectively cope with persistent indebtedness while providing clients with respite is vital, particularly when income support schemes are phased out. There is also unease around BNPL as a competitive offering in traditional credit markets, its impact on consumers and its ability to successfully detect over-indebtedness.
A mass of digital solutions and fintech innovations offering real-time open banking data as well as transactional insight into customer affordability and vulnerability are being showcased to Tier 1 lenders. The puzzle is where make the big bets for the best return.
Regulations also continue to place demands on already overstretched back offices, juggling limited budgets, labor and bandwidth issues.
In the UK, for example, the FCA’s Regulatory Initiatives Matrix details pending and pending industry-focused regulatory changes. In September 2020, 111 initiatives were listed. In November 2021, 134 active initiatives were listed.
The table below gives a summary of the total number of initiatives by sector. Indicative impact is achieved through institutional feedback to FCA:
Other regions may not have the initiative grid, but they will have industry-level initiatives launched and requested by local and “pan” organizations and authoritative bodies. For a periodic refresh of the number of initiatives that different industries are grappling with, the Initiatives Grid is a decent reference.
Positive signs for debt settlement
But beyond the challenges of regulatory change, all is not bleak for lenders. Many consumers are repaying their debts; outstanding credit card debt fell 3.7% in the year to October 2021 (The Money Charity, December 2021). there is plenty of capital available and relatively small collection portfolios, with most creditors reporting collection volumes below expectations. Despite the challenges of the past three years, the overall economic outlook is positive. Lenders can take advantage of this by moving from a collection and collection mindset in a timely manner to providing more holistic customer support and debt resolution programs. It’s a win-win situation for all parties, as I explained in a recent webinar with McKinsey on digital first collections.
Changing the operating model in debt collection
The expected debt tidal wave has so far been flattened, thanks to a combination of standstill programs and careful management – but are we in danger of being complacent? How are lending appetites shaping among competitive Tier 1 banks and can they continue to be well prepared for new surprises without securing the best customer insights?
Will 2022 be the year that the long-awaited changes to the collections industry’s operating models are widely adopted? This will likely pave the way for much shorter retention of late-paying customers, faster transfer to third-party debt resolution for delinquent accounts, and a more proactive approach to helping so-called “ resolute customers” to return to the status of good customers. Lenders also appear set to offer more frequent sales of non-performing loans (NPLs) and non-performing exposures (NPEs), to help keep portfolios healthy.
Technology and data sources are rapidly fueling an ever-changing back office for collections. Real-time access to ‘traditional’, new and emerging datasets continues apace. Explainable AI, digital platforms, and automation all help reduce overhead. But these are all critical investments that can be complex and time-consuming to set up. They also need talent and manpower to deliver effectively. Success hinges on the ability to parachute in the necessary expertise when it comes to seamless installation and optimizing operations.
For many, digital transformations have also been advancing at a steady pace over the past 24 months – and are expected to continue. As a result, the value of improved analytics is proven across the enterprise Agility is now a mindset applied to all aspects of the business – not just the IT implementation process – while everything the world understands the benefits of improving customer journeys, wherever they are in the lifecycle.
Today’s top performers are focused on building agile, flexible, and scalable capabilities. They care less about the accuracy of economic and behavioral forecasts and more about ensuring they have the ability to handle whatever may come their way intelligently, quickly and appropriately.
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