FICO expert explores applicable learnings from 2008 financial crash

 Bruce Curry, vice president for collections and recovery consulting and sales in EMEA at global analytics software provider FICO, urges the collections community to ensure it gets its data strategies right to handle the challenges resulting from COVID-19.

 “Clearly the current situation is like nothing experienced before – but there are certainly lessons that can be learnt from the financial crisis of 2008 that will stand the collections and recoveries business operation in good stead for the future. And we believe data is at the heart of finding the right solutions for the future,” Curry said.

“The current COVID-19 environment and the debt and financial stress it is creating will deliver a lot of data. Organisations need to capture the right data, understand it and where it will be needed further down the line. The financial community should also take heed from the lessons of the 2008 financial crisis. There were a number of things not done then that must be addressed now to ensure that lenders and their customers can emerge with mutual loyalty still intact.”

FICO believes that the lending sector must take immediate action to ensure it can identify the customers who would not have been in collections were it not for COVID-19 and understand how these particular customers would perform compared to those individuals frequently in debt. Collecting and analysing this data will help 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?
    • Redundancy?
    • Sickness?
  • 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?

By taking this forensic approach to understanding the new cohort of debtors, lenders will be able to create more effective segmentations to create the right collections strategies and treatment paths for the long-term. As Bruce Curry continues, this approach delivered positive results after the 2008 financial crisis.

“Two years before the 2008 crash, the average return to financial good was two and a half years. 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 had a very different financial morality profile and were soon back in employment and earning again hence returned to a good status. This depth of understanding – and going further – must underpin collections strategies for 2020 and beyond.

“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.

“How we come out of the current crisis is not about having 2020 vision. It’s about having the right analytics in place to understand the data and create the right strategies.”