Craig Wilson, Head of Private Sector, Sopra Steria

The Chancellor’s Spring Budget is a stark warning of how over 2.2 billion low-income households struggle with the rising cost of living every day. In the wake of the well-documented economic hardship caused by the pandemic, many have lost jobs, businesses, and their livelihoods.

This situation has been compounded by a rising energy and food bills, meaning for many vulnerable people, their wages can no longer cover basic necessities for daily living. As a result, some have had to dip into hard-earned savings just to get by, jeopardising future goals such as homeowning and financial security. Others have turned to loans, credit and other short-term solutions which can often leave people in unmanageable debt in the long-term.

For many, debt is a cause for significant worry, and the debt collection process is often a source of stress. With this in mind, how can financial services better understand debtors, and improve the debt collection processes so that it eases some of this anxiety?

Understanding debtors

Ultimately, there are a multitude of reasons why people may end up in debt. For some, it could be an unfortunate financial situation following a job loss, for others, they could be victims of financial fraud. There are also many ways that people choose to deal with debt. Burying your head in the sand and avoiding it may be an easier approach for some, while others might over-work themselves in multiple jobs to keep up with repayments. The debtors themselves are almost always worst off.

Debt management in the UK is largely unregulated, meaning there aren’t the necessary procedures in place to identify vulnerable customers and ensure ethical processes are fully integrated into the debt collection process. This is negatively impacting both debtors, and the financial service organisations trying to recoup debts, and it’s time for change.

Understanding financial services organisations

While understanding debtors is key, this goes hand in hand with better education and openness when it comes to financial services organisations. Many people possess negative perceptions of the financial sector; in 2021, for example, the Edelman Trust Barometer reported that the UK public overwhelmingly distrusted financial services.

While integrating an ethical approach to debt management will be key, there are many reasons which contribute to how financial services organisations deal with debtors, many of which are not visible to the public. For example, legacy IT systems and an inability to keep up with evolving technology, like AI, may leave traditional banks falling behind their modern competitors. In fact, we’ve seen challenger banks make staggering gains in recent years, and their access to streamlined data has certainly given them an advantage when it comes to monitoring debt.

Even for these challenger banks though, the debt collection process is complex, and change will require industry-wide action to improve debt management, ensuring at the same time the public is better aware of how financial services operate.

Bridging the gap and improving the debt collection process

A lack of knowledge and understanding has created a reoccurring disconnect between debtors and financial services organisations. To bridge this gap, regulation is going to be key in transforming the debt collection process so that it is more ethical.

For example, transparency has become a key concern in a world of short-term loans and buy now, pay later schemes. Many may not realise that these are an easy way to end up in significant debt, and it is up to financial services to be wholly open with their practices and ensure customers know what they’re getting in to.

Fairness is also going to be key, and will help to improve perceptions amongst the public, smoothing the relationship between debtors and creditors so that each party can be better represented.

Alongside regulation however, financial services organisations need to start doing more to hold themselves accountable to ethical practices. Having access to a centralised hub of financial data, for example, would mean collectors can alter the way they approach debtors, adequately dealing with the public in an empathetic way. Alongside this, these organisations must take the time to understand the complex reasons why people might acquire debt and alter their approach to dealing with it accordingly in order to set an industry standard for debt management.

Final thoughts

As debt becomes an increasing worry amongst the British public, it is vital the debt management and collection process is made as open, easy, and ethical as possible. Vulnerable customers must be identified so that approaches to collection can be altered, working to break the vicious cycle of debt that many are experiencing in a post-pandemic economy.