Bruce Curry – senior principal consultant for FICO
Bruce Curry is a senior principal consultant for FICO, working with clients across EMEA on debt management. He blogs at http://www.fico.com/en/blogs/category/collections-recovery/.
As the scrutiny on the UK credit card Industry intensifies, with the FCA’s consultation out on how to manage the 3.3 million ‘persistent credit card debtors,’ a big question remains hanging: When will all parties start to manage borrowers at a customer level, not a product level?
There is a vast difference between customer-level and product-level management, and many organisations have chosen the customer level. However, in the UK a major bank is moving away from customer-level collection strategies because its experience is that they get too complicated for the amount of value they deliver. They do, however,continue to work the analytics at a customer level, which is what many top banks desire to do.
Several leading institutions are very clear about what the customers want, and are using the words “identity”, “control”, “language” and “convenience” to shape the strategy for customer treatment. But to shape the strategy at a customer level, you have to look at the customer in the round. You would not apply the same treatment and tolerance to a customer with a full suite of secured and unsecured products nearing retirement and carrying an EAD of >£350K as you would a customer with only unsecured products starting out on their career with an EAD of, say, £14K.
New Challenges in Customer-Level Management
What is making customer-level treatment difficult? Well, there remain the age-old challenges for many organisations of organising their data and creating a robust ‘Golden Record,’ and then deploying analytics based on that record. Many organisations are not there yet and whilst attempting to close this gap they are being challenged by what appear to be opposing requirements:
- Customers want to be known and understood – so they expect organisations to have a holistic view of all their liabilities and investments. That’s on any interaction, 24/7 across all digital and non-digital channels.
- The regulator wants organisations to treat the customers in line with their circumstances – TCF and CONC have been around for some time now and to do this requires accumulation and validation of a wide set of data.
- General Data Protection Regulations (GDPR) requires that you use minimum data to achieve the decision objective and only where explicit permission has been given to use such data for such a purpose (except where the use of that data is to enforce a contractual obligation).
Add to the above the accommodation of PSD2 and the balance sheet implications on treatment from IFRS9 and it becomes clear that several of the requirements imposed on institutions are in conflict. Some might say healthy conflict, but this stress has not come by design. It is here because differing bodies are progressing their differing objectives in isolation.
- The FCA is looking to ensure that lenders lend responsibly, borrowers borrow what they can afford and any changes in customer vulnerability are understood and accommodated in the treatment of those customers.
- GDPR is meant to increase the protection of customer data retention, use and portability.
- IFRS9 is aimed at ensuring a greater degree of risk assessment and financial prudence to cover changing risk.
There is evidence of Institutions needing more information to determine the right treatment for customers — but only information they have explicit consent to use, or (under GDPR) information that meets stringent use tests. Institutions must demonstrate appropriate levels of forbearance (under FCA CONC) — while holding more provision (under IFRS9) to cover the potential lifetime losses of a status 2 customer, whose deteriorated risk is evidenced by the level of forbearance they require.
How Will This Play Out?
Let’s take an example to see how these conflicts might play out. Let’s say — as has been suggested in the FCA’s consultation for credit card persistent debtors — there is an action such as the suspension of credit card use.
- Will that in itself be an indicator of deteriorating risk?
- Will that mean that both the issuer and other creditors of the card holder will need to action and provide for any other of the customer’s borrowings under IFRS9?
- Will a suspension of use of that card or an aggressive credit limit decrease exacerbate the problems for those customers who are dependent on the card as a seasonal financial ‘pressure valve’? Evidence of the past has been that pre-delinquency treatment on cards has often accelerated entry into arrears for a high proportion of customers are ‘living on the card.’
Credit card issuers could be driving a significant number of customers into status 2 under IFRS 9 — not only for themselves but for other lenders. If those other lenders can’t afford to keep these customers with a lifetime provision,where do the customers go? Will any future borrowing be at a higher cost? Does that not defeat the objective of the credit card initiative to help these borrowers?
You can see the conflicts. Not getting this right is going to be expensive to the customer, the card issuer and other lenders who have the same customer. Managing down over-indebtedness is never wrong, but what matters is how it is done. When so many requirements focus at a customer level (TCF, GDPR, IFRS9) then a product-level initiative may bring as many challenges as it solves.
Different Priorities for Different Market Segments
Many organisations seem focused on adapting what they have to make it fit the new requirements. Very few seem to have stood back and asked, “Is now the time to reshape how we do what we do?”
A small number of organisations do seem to be looking at how they turn these seismic demands on them into seismic changes, to closer meet the needs of their customers,as well as the requirements of the regulatory bodies. And of this group, not many seem focused at a product level.
The fintechs, which have the distinct advantage of no legacy systems, are setting themselves up from the outset to automate data usage and provide credit through low-cost, highly efficient technologies. However, many of them enter the market as mono-lines. They are proving good at what they do; evidence of their success is in the growth of the fintech sector, and the fact that they took the vast majority of this year’s credit awards for the quality of service provision.
But mono-line creditors increase the challenge for all to manage a customer at a customer level.
A number (but not a large number) of traditional lenders are looking at how they can consolidate the multi-dimensional view of the customer through their deep data pools and analytics, and leverage that insight to the benefit of the customer experience and profitability. They are pledging to stay focused on the customer no matter what the new regulatory and accounting landscape looks like.
Then there are the disrupters, those well-established organisations (e.g. retailer banks) that are looking to expand their products and services into the credit arena. Much of this ‘disrupter lending’ is happening outside of the UK (nano-lending in East Africa, mobile credit in the Philippines and WeBank on WeChat in China), but are expected to be quickly adopted here once they prove their worth.
Trying to Do the Right Thing
So, are we all pulling in the same direction on the same fronts?If the aim of the disparate regulation is prudent and appropriate lending, risk assessment and fair treatment of the customer, I’d have to say that many institutions are pulling in the same direction — and often despite (rather than because of) the regulations intended to enforce that treatment.
It remains to be seen whether the additional costs under IFRS9 for customers whose risk increases or the TCO of data and technology to meet the demands of GDPR will allow the diverse range of credit-issuing organisations to invest competitively in managing customers effectively, when within their organisations or in others, action is being taken at a product level that affects both the risk and the treatment at a customer level.
All of this change is consuming energy, budget and competitive focus at a time of huge competitive disruption (fintechs, digital, cybersecurity, Brexit).And the question remains: Despite their best efforts, will all of lenders’ investment in true customer-level credit management be thwarted by the implications of product-level initiatives?
One thing’s for sure: There will continue to be many an interesting day ahead for those working in credit risk management.
Bruce Curry is a senior principal consultant for FICO, working with clients across EMEA on debt management. He blogs at http://www.fico.com/en/blogs/category/collections-recovery/.
ECB launches small climate-change unit to lead Lagarde’s green push
FRANKFURT (Reuters) – The European Central Bank is setting up a small team dedicated to climate change to spearhead its efforts to help the transition to a greener economy in the euro zone, ECB President Christine Lagarde said on Monday.
Lagarde has made the environment a priority since taking the helm at the ECB, taking a number of steps to include climate considerations in the central bank’s work as the euro zone’s banking watchdog and main financial institution.
She is now creating a team of around 10 ECB employees, reporting directly to her, to set the central bank’s agenda on climate-related topics.
“The climate change centre provides the structure we need to tackle the issue with the urgency and determination that it deserves,” Lagarde said in a speech.
She said that climate change belonged in the ECB’s remit as it could affect inflation and obstruct the flow of credit to the economy.
The ECB said earlier on Monday it would invest some of its own funds, which total 20.8 billion euros ($25.3 billion) and include capital paid in by euro zone countries, reserves and provisions, in a green bond fund run by the Bank for International Settlement.
More significantly, ECB policymakers are also debating what role climate considerations should play in the institution’s multi-trillion euro bond-buying programme.
So far the ECB has bought corporate bonds based on their outstanding amounts but Lagarde has said the bank might have to consider a more active approach to correct the market’s failure to price in climate risk.
“Our strategy review enables us to consider more deeply how we can continue to protect our mandate in the face of (climate) risks and, at the same time, strengthen the resilience of monetary policy and our balance sheet,” Lagarde said.
(Reporting by Balazs Koranyi; Editing by Francesco Canepa and Emelia Sithole-Matarise)
What to expect in 2021: Top trends shaping the future of transportation
By Lee Jones, Director of Sales – Grocery, QSR and Selected Accounts for Northern Europe at Ingenico, a Worldline brand
The pandemic has reinforced the need for businesses to undergo digital transformation, which is pivotal in the digital economy. In 2020, we saw the shift to online and cashless payments accelerated as a result of increased social distancing and nationwide restrictions.
The biggest challenge on all businesses into 2021 will be how they continue to adapt and react to the ever changing new normal we are all experiencing. In this context, what should we expect this year and beyond, in terms of developments across key sectors, including transport, parking and electric vehicle (EV) charging?
Mobility as a service (MaaS) and the future of transportation
Social distancing and lockdown measures have brought about a real change in public habits when it comes to transportation. In the last three months alone, we have seen commuter journeys across the globe reduce by at least 70%, while longer-distance travel has fallen by up to 90%. With it, cash withdrawals for payment has drastically reduced by 60%.
Technological advancements, alongside open payments, have unlocked new possibilities across multiple industries and will continue to have a strong impact. Furthermore, travellers are expecting more as part of their basic service. Tap and pay is one of the biggest evolutions in consumer payments. Bringing ease and simplicity to everyday tasks, consumers have welcomed this development to the transport journey. In-app payments are also on the rise, offering customers the ability to plan ahead and remain assured that they have everything they need, in one place, for every leg of their journey. Many local transport networks now have their own apps with integrated timetables, payments, and ticket download capabilities. These capabilities are being enabled by smaller more portable terminals for transport staff, and self-scanning ticketing devices are streamlining the process even further.
Ultimately, the end goal for many transport providers is MaaS – providing an easy and frictionless all-encompassing transport system that guides consumers through the whole journey, no matter what mode of travel they choose. Additionally, payment will remain the key orchestrator that will drive further developments in the transportation and MaaS ecosystems in 2021. What remains critical is balancing the need for a fast and convenient payment with safety and data privacy in order to deliver superior customer experiences.
The EV charging market and the accelerating pace of change
The EV charging market is moving quickly and represents a large opportunity for payments in the future. EVs are gradually becoming more popular, with registrations for EVs overtaking those of their diesel counterparts for the first time in European history this year. What’s more, forecasts indicate that by 2030, there will be almost 42 million public charging points deployed worldwide, as compared with 520,000 registered in 2019.
Our experience and expertise in this industry have enabled us to better understand but also address the challenges and complexities of fuel and EV payments. The current alternating current (AC) based chargers are set to be replaced by their direct charging (DC) counterparts, but merchants must still be able to guarantee payment for the charging provider. Power always needs to be converted from AC to DC when charging an electric vehicle, the technical difference between AC charging and DC charging is whether the power gets converted outside or inside the vehicle.
By offering innovative payment solutions to this market segment, we enable service operators to incorporate payments smoothly into their omnichannel customer experience that also allows businesses to easily develop acceptance and provide a unique omnichannel strategy for EV charging payments. From proximity to online payments, it will support businesses by offering a unique hardware solution optimized for PSD2 and SCA. It will manage both near field communication (NFC) cards and payments from cards/smartphones, as well as a single interface to manage all payments, after sales support and receipt with both ePortal and eReceipts.
Cashless options for parking payments
The ‘new normal’ is now partly defined by a shift in consumer preference for cashless, contactless and mobile or embedded payments. These are now the preferred payment choices when it comes to completing the check-in and check-out process. They are a time-saver and a more seamless way to pay.
Drivers are more self-reliant and empowered than ever before, having adopted technologies that work to make their life increasingly efficient. COVID-19 has given rise to both ePayment and omnichannel solutions gaining in popularity. This has been due to ticketless access control based on license plate recognition or the tap-in/tap-out experience, as well as embedded payments or mobile solutions for street parking.
These smart solutions help consider parking services more broadly as a part of overall mobility or shopping experience. Therefore, operators must rapidly adapt and scale new operational practices; accept electronic payment, update new contactless limits, introduce additional payments means, refund the user or even to reflect changing customer expectations to keep pace.
2021: the journey ahead
This year, we expect to see an even greater shift towards a cashless society across these key sectors, making the buying experience quicker and more convenient overall.
As a result, merchants and operators must make the consumer experience their top priority as trends shift towards simplicity and convenience, ensuring online and mobile payments processes are as secure as possible.
Opportunities and challenges facing financial services firms in 2021
By Paul McCreadie, Partner at ECI Partners, the leading growth-focused mid-market private equity firm
Despite 2020 being an enormously disruptive year for businesses, our latest Growth Index research reveals that almost three quarters (74%) of mid-market financial services companies remained resilient throughout the pandemic.
This is positive news, especially when taking into account the economic disruption that financial services firms have had to go through since the crisis began. No doubt 2021 will also hold its own challenges – as well as opportunities – for firms in this sector.
Unsurprisingly, the biggest short-term concern for financial firms for the year ahead involved changing pandemic guidance, with 42% citing this as a top concern. With the UK currently experiencing a third lockdown many financial services businesses will have already had to adapt to rapidly changing guidance, even since being surveyed.
Businesses will also be considering the need to invest in working from home operations, and there may be uncertainty over re-opening offices on a permanent basis. According to the research 30% of financial services firms are planning to adopt remote working on a permanent basis, so decisions need to be made now about whether they invest more in enabling staff to do this, or in their current office premises.
Due to Brexit, UK financial services firms are no longer able to passport their services into Europe, which may cause problems, particularly in the next 12 months as the Brexit deal is ironed out and the agreement is put into practice. Despite this, Brexit was only cited by 24% of financial firms as a short-term concern. While it’s comforting to see that UK financial firms aren’t hugely concerned about Brexit at this juncture, it is going to be vital for the ongoing success of the industry that the UK is able to get straightforward access to Europe and operate there without issue, otherwise we may see these concern levels rise.
Looking ahead to longer-term concerns for financial services businesses, the top concern was global economic downturn, of which 40% of firms cited this as a worry when looking beyond 2021.
Investing and adopting tech
Traditionally, the financial services sector has been slow to adopt digital transformation. Issues with legacy systems, coupled with often large amounts of data and a reluctance to undertake potentially risky change processes, have meant many firms are behind the curve when it comes to technology adoption. It’s therefore promising to see that so much has changed over the last year, with 45% of financial services firms having invested in AI and machine learning technology – making it the top sector to have invested in this space over the last 12 months.
One business that exemplifies the benefits of investing in machine learning is Avantia, the technology-enabled insurance provider behind HomeProtect. The business has undergone a large tech transformation in the last few years, investing in an underlying machine learning platform and an in-house data science team, which provides them with capabilities to return a quote to over 98% of applicants in under one second. This tech investment has allowed them to become more scalable, provide a more stable platform, improve customer service and consequently, grow significantly.
This demonstrates how this kind of tech can help businesses to leverage tech in order to offer a better customer experience, and retain and grow market share through winning new customers. This resilience should combat some of the concerns that firms will face in the next year.
Additionally, half (51%) of financial services firms have invested in cybersecurity tech over the last year, which allows them to protect the platforms on which they operate and ensure ongoing provision of solutions to their customers.
Clearly, there is a benefit of international revenues and profits on business resilience. In practice, this meant that businesses that weren’t internationally diversified in 2020 struggled more during the pandemic. In fact, the businesses considered to be the least resilient through the 2020 crisis were three times more likely to only operate domestically.
Perhaps an attribute towards financial services firms’ resilience in 2020, therefore, was the fact that 53% already had a presence in Europe throughout 2020 and 38% had a presence in North America. This internationalisation gave them an advantage that allowed them to weather the many storms of 2020.
Looking at how to capitalise on this throughout the rest of 2021, half (51%) of are planning overseas growth in Europe over the next 12 months, and 43% in North America. Further plans to expand internationally is not only a good sign for growth, but should further increase resilience within the sector.
While there are many concerns, the fact that financial services businesses are investing in technology like AI and machine learning, as well as still planning to grow internationally, means that they are providing themselves with the best chances of dealing with any upcoming challenges effectively.
In order to maintain their growth and resilience throughout the next 12 months, it’s imperative that they continue to put their customers first, invest in technology and remain on the front foot of digital change.
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