The UK is on the gradual road to recovery as it moves steadily out of recession. FICO recently conducted research on UK credit card trends, which demonstrated a reduction in the growth of delinquent balances relative to the growth of current balances, due to cardholders making more timely payments. The results of the research showed a decrease in the ratio for all delinquent cycles, which suggests an upturn in performance, writes Daniel Melo, senior director, Fair Isaac Advisors, FICO
Although these are promising signs, banks should not be complacent. Today, borrowers have a vast array of credit options at their disposal, from peer lending to payday loans and even crowd-funding. An increase in sources of credit means that there are also more opportunities for first-time delinquency, with 65 per cent[1] of surveyed UK executives having experienced an increase in first-time debtors, according to a Marketforce UK debt recovery survey commissioned by FICO. These first-time delinquents can pose a challenge for collectors as they may display different behavioural characteristics from more seasoned debtors.
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The New Breed of Debtor
Many first-time debtors find themselves in financial distress following a sudden period of un- or under-employment. They may suddenly have to rely on credit cards and payday loans to see them through the month, when previously they may have had a higher than average credit score and good payment history.
Before 2008, it might have taken around six years for a seriously overdue consumer to get back into good payment behaviour. However, for the first-time debtor of 2014, this period may be as little as eight or nine months. These are often people who have been good credit users all their lives, but have suffered a setback; as such, they are highly motivated to pay off any debts, and will not accept financial hardship as their predetermined fate. They do not wish to be seen as financially irresponsible and may be particularly sensitive to any communication from a collections agent that implies this is how they are perceived. Remember that many people still blame the financial services industry for the economic crisis and their own financial woes. But, of course, this is not a reason to just pardon all debts.
So, many traditional debt collection practices are now no longer fit for purpose. Today, lenders need to determine what kind of debtor they’re dealing with, and get to the high-risk customers faster to recover debts and rebuild profit more quickly. The further a customer falls behind, the less likely the lender is to eventually collect on the debt.
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By GlobalDataAs most customers have multiple obligations, it is vital to move to the front of the queue in order to be paid at all. However, while direct and proactive discussion may work best with those customers that are used to being in debt, those for whom it is a new and unsettling experience may require a softer approach. An effective strategy can be to adopt a proactive range of pre-delinquency treatments to assist responsible consumers beset by economic problems in continuing payments, while reducing exposure to high-risk customers likely to fall into bad debt.
A New Approach
Collections and recoveries teams are finding that the traditional "call and collect" strategy may no longer be the most effective. It may, in fact, be counter-productive to the bank’s aims, creating a negative, adversarial relationship with the debtor. Instead, these new debtors may react more positively to an engagement that reflects their previous payment history or is sensitive to their current predicament, which may be unusual for them. If the contact matches their preferences, they then may be more open and willing to participate in the rehabilitation of their account.
Financial institutions will need to harness a greater understanding of these debtors, who no longer fit the typical risk profiles. Big Data and predictive analytics will play a critical part in formulating collections and recovery strategies that yield higher success rates and also optimise the cost per pound recovered, while retaining customer loyalty on their return to financial health.
Most organisations do not yet understand the full potential of predictive analytics, but many are optimistic that analytics will help them improve business performance in the coming years.
An analytics-driven methodology helps collectors to match the client to the right action, reducing harassment and improving the customer experience. Collections contacts represent one of the main touchpoints for many customers, and a better customer experience will provide the best result: better payment and higher retention. Encouragingly, 58 per cent of UK collections and recovery professionals surveyed by Marketforce recognize the potential of analytics and have either made investments in analytics or plan to make them within the next 12 months, putting them ahead of the pack and giving them a competitive advantage.
Broadening the Data Sets
Social media and payday lender contacts are good sources for data that could be used to improve collections, but are currently going underutilised. Payday lender contacts are an early and strong indicator of financial distress. Even those who have invested in analytics are only using limited data sets to populate their models, restricting the potential and benefits.
Even sources of demographic data, like age and postcode lending data, are going ignored. The reasons why are clear: Lenders know they could face damage to their reputation if they use data unwisely, or if new regulations prohibit the use of additional data sources. This could dampen the value lenders see from predictive analytics.
Instead, C&R teams are often more comfortable with their own internal data sources. Our research found that 68 per cent favour using internal sources of unstructured data, versus only 18 per cent using data from social media and only 19 per cent using data from payday lenders.
Mobile interactions will also be another important strategic avenue as C&R teams compete for repayment. Using interactive SMS and mobile services in collections has been shown to greatly increase contact rates and speed of repayment. However, the benefits of mobile best practices go beyond just higher response rates. They can reduce customer calls to live staff, meaning lower call centre staffing, since customers can use "auto resolution" to take the next steps themselves, including setting up payment plans or making payments. They can also improve the overall customer experience, and decrease the customer "embarrassment" factor involved with having to talk to someone directly regarding their debt.
Unfortunately, investment in online and mobile payment systems still lags. Ten per cent of collections professionals in the Marketforce survey work at firms that don’t enable repayment online and have no plans to do so, and more than half (57 per cent) don’t have systems that enable mobile payments. Of these, 26 per cent plan to invest in mobile over the next 12 months, leaving 31 percent with no plans to enable mobile payments.
Collections and Recovery Strategies for the Digital Era
Too many UK organisations have a collections and recovery strategy that is stuck in the pre-digital age. This could prove costly, as a better customer experience can lead to higher recoveries and, as personal circumstances improve, win repeat business. An effective collections and recovery strategy is fundamental to not only limiting losses but also retaining indebted customers, and to be truly effective that strategy must be personalised, real-time and mobile.
Carefully implemented pre-delinquency treatments can positively impact the customer experience. Banks that take a proactive interest in helping and educating their customers will be seen as valuable partners, and customers will then be less likely to churn – providing a strong competitive advantage and increasing profitability.
Daniel Melo is a Senior Director in FICO’s consulting arm, Fair Isaac Advisors.
