Unpacking the long overdue disruption of the collection and recovery framework to make a real difference to debtor recovery
Opinion by Tej Desai, CEO of Alefbet Collections & Recoveries and Bruce Curry, Independent Collections and Recovery consultant
In our previous blog, we unpacked a myriad local and global challenges that indicate that the financial hardship of the South African consumer is likely to get worse before it improves, and that the tail on this economic downturn will be long. As consumers become more susceptible to any additional financial strain, it means that the time to repair is significantly extended. However, we also know from previous research that certain segments of ‘economic victims’ have a much shorter return to ‘financial good’ period than might be expected. The challenge for the collections and debt resolution industry is how to discern the difference and how best to cater for each.
With this backdrop, we believe that the disruption of the well-embedded collection and recovery framework is overdue. The ‘first mover’ will gain a distinct advantage in terms of the cost to resolve early arrears and bad debt, the ability to retain good customers who find themselves in bad circumstances (much like the early pandemic months), market share growth through better customer retention, strengthening of brand reputation and confidence by doing something meaningful for customers, the economy, staff and shareholders.
There are some very clear ways to make a difference by being different! The question is the HOW and WHY. Credit providers simply cannot assume a business-as-usual approach in the current circumstances. It is imperative that the collections and debt resolution sector comprehensively understand and collaboratively approach the business and consumer landscape that we find ourselves in, and unpack the following critical questions:
- Who is the distressed customer (debtor) now and how are they different to traditional credit risks? The reality for banks and credit providers is that current bureau data on their consumers is entirely moot because people who are coming into the debt collections space are not your traditional bad risks. They have a risk-factor that is based on a single black swan event, rather than their consistent credit behaviour, which means that entirely new datasets need to be built, and credit vetting and risk assessment processes need to evolve with the changed circumstances.
- How to combine a collections and customer service engagement in the current economy and understanding the ‘new normal’ in your future customer base. The big question is, what is the impact on the recovery phase for the millions of consumers who continue to find themselves under significant financial duress? How can new primary datasets be used to determine whether consumers who found themselves in distress in the current climate be reassessed as credit worthy in future, given that traditionally a credit blight stays on your record for six years or more? How do the credit risk assessment practices need to evolve given that we are dealing with entirely different circumstances that relate to an event rather than an individual’s consistently poor credit behaviour? And through all of this, how do you maintain positive relationships with a defaulting debtor who needs a far more empathetic response to their circumstances?
- The importance of putting your brand first in constrained economic times – We can expect to see an unprecedented rise in unemployment and business closures, putting even greater strain on the solvency of customers and companies who were just barely recovering after three years of pandemic. It’s an incredibly delicate balance to strike. For companies, unpaid invoices and accounts hurt already distressed cash flow, which in turn will limit the ability of the business to recover, invest and grow. On the other end, we are dealing with customers who were previously in good standing and, through no fault of their own, may now find themselves defaulting on their financial commitments. Collections are more challenging than ever, and are likely to take longer due to the circumstances consumers find themselves in. By using collection strategies driven by in-depth analytics of high-volume debt recovery, and starting much earlier in the collections process, we can use this primary data to determine the best time and channel for debt recovery, but at the same time maintain the bond of the customer relationship.
- Closing the loop between customer acquisition and customer debt – With interest rates at an all-time high, many credit providers have been reluctant to open the taps on new business because we simply cannot predict where things are going to go from one month to the next. New primary data is needed to inform the risk ratings going forward, and also help to understand the changed consumer demand and appetite for credit and for what purposes it is being used. How do credit providers open up for new business, and to the right customers given that the credit datasets of the last few years have very little, if any relevance in guiding this analysis and risk assessment? Credit Bureau information is entirely retrospective thus it cannot be relied on to provide insights for banks or credit providers in these radically altered circumstances that customers find themselves in. Credit history is no longer indicative of what can be expected from consumers going forward. To gauge the future and navigate the way forward with a customer-centric approach will demand that financial services providers engage with each of their impacted customers to obtain current, primary data on their financial position and how they are impacted.
The value of having a direct line of sight of the primary transactional account to clarify the position of the customer will be crucial in terms of when they expect to return to financial good, and whether there are any extenuating circumstances that could impact the customers’ ability to financially recover. There is a significant opportunity to arbitrage for efficiencies in the collection and analysis of such primary data by working with your collections partner in a collaborative approach.
The landscape has changed dramatically for traditional collection practices. Banks can no longer contract with collections service providers who work solely on a ‘success basis’, and success cannot solely be measured in Rand Collections alone. There are numerous factors to consider, both from a legislative perspective as well as an ethical one. There is a fine balance to be struck – credit providers and their collections providers need to act in the best interests of the customer given the ongoing economic uncertainty and upheaval. However, debts remain exactly that, and must be collected to ensure that financial services providers avoid blanket debt write-offs or any other actions that might place depositors’ funds at risk or otherwise undermine the integrity of the financial sector.
Traditional statistics and approaches cannot be amplified to the present situation. Our financial services sector will require a new approach and readiness to restructure, with a more customer-centric, empathetic approach driven by current, forward looking customer data and analytics based on people’s changed realities, rather than retrospective analysis of their credit history. The time for the debt collection and resolution sector to be different to make a difference, is long overdue.