By Katie Pender, Head of Client Solutions, Target Group
Why lenders need to fundamentally change their arrears and collection strategies when payment holidays end
Banking has undergone a wholesale shift during the pandemic. It’s forced one of the world’s oldest and most influential sectors to work in new ways – digitisation and automation have come to the fore, we’re seeing drastically reduced high street traffic, and online has become king. Whilst the sector has managed to navigate the turbulence relatively well, it’s also benefitted from emergency government schemes to help keep the country liquid (such as reducing the amount of capital required to set against lending). The increase in lending power has no doubt helped operations, and allowed lenders to execute roll outs of schemes such as the Bounce Back Loan Scheme and mortgage payment holidays.
However, whilst lenders have adapted relatively well, the same can’t be said for all their customers. It’s fair to say that the pandemic has put many businesses and consumers into financial positions that would have seemed incomprehensible just 12 months ago. Government schemes have looked to support people across the spectrum, from job losses to freeing up extra monthly cash. But it’s now getting close to the point that some of this emergency funding will need to be repaid. For those reliant on the State to help them through month-to-month, this cliff-edge will have a severe consequence on their income and ability to pay off debt.
Living costs, utilities, food – I could go on – are becoming more expensive, so interest added repayments will be another worry for millions.
This position that many customers find themselves in will present the financial sector with a new set of unique challenges. Whether it’s a mortgage payment holiday or a business loan, lenders will now need to cope with the operational demand of a spike in arrears whilst balancing the needs of customers – many of whom will not be able to instantly recover and return to the previous status quo. Lenders themselves will also need to dedicate more time and resources to managing these collections, whilst battling legacy IT systems and a hybrid workforce who may require specialist training. Whilst the sector may be revelling in the benefits of automation, collections and arrears is not something that can be solved by a chatbot. It requires specialist teams, negotiations and dealing with very human emotions, including guilt, embarrassment and hopelessness.
So, what can financial institutions do to manage this spike?
First, they need to appreciate then re-evaluate their customer base, the demographics of which will have shifted significantly over the past 12 months. We expect to see the following segments in the customer base:
- Uncertain: Whilst this will be a feeling for many, for the self-employed or those on furlough, the next 6-12 months could see significant changes. All of these people are facing uncertainty and will have needs beyond payment holidays. They will need further support to understand what additional help is available to them both in the short and longer term until they can be sure of more stability.
- Troubled: These customers may have experienced an unexpected redundancy, perhaps after a period of furlough. They may well have found new employment, but at lower pay. They will have suffered a significant financial impact and will be at risk of not being able to meet payments in the short as well as the longer-term. They are likely to seek urgent support to manage existing debt, or to avoid falling into future debt.
- Curtailed: Some people will have faced lower levels of income due to furlough or pay cuts, leading them to request payment holidays. They may want, or be able to make over-payments to rebalance their increased instalments over time, or conversely extend their terms to avoid higher payments over the same term.
- Fortuitous: Whilst affected by the wider economic uncertainty, this section of customers may have seen surplus income during the pandemic due to reduced spending. They may wish to plan to avoid future risks, perhaps by saving more or to repay any money owed more quickly than planned.
Whatever the financial impact of the pandemic, there is also the mental health impact of over 12 months of disruption, meaning now more than ever it’s vital to focus on good outcomes. Here are three tactics which can facilitate not only preparing for the spike in collections and arrears, but also good outcomes.
- Forbearance, affordability and empathy are key
Data is vital across every part of financial services, and this is no different when it comes to collections. In fact, open banking will change how lenders are able to structure repayment plans, as it provides a more holistic and accurate view of people’s financial situations – something the customers themselves are too embarrassed to provide. Sadly, financial matters are still a taboo topic, and resultantly, many customers are not truthful about how much they are able to afford, which can then make collections difficult.
Open Banking and analytics provide insight into previous spending and behavioural patterns, allowing lenders to evaluate the current situation and a customer’s genuine affordability. It can also be used to predict how this may change in the future. This now allows for flexible decision-making – adapting support for the customer as their financial position evolves. There is no one-size-fits-all for arrears, and as a customer’s situation changes – be this for better or for worse – lenders should be able to be flexible in their approach to enable fair treatment of the customer and quickly adjust their payments. Lenders should also ensure that specialist trained agents are available to support vulnerable customers, those who have complex needs or those in uncertain situations; those who are able to readily display empathy and understanding and work towards achieving the best outcome for all.
- Leverage different channels and encourage self-service where appropriate
Financial Services was one of the first verticals to adopt online, and today’s customers are used to accessing and providing financial information that way. With lenders now dealing with multiple generations as customers – all with different preferences, offering different platforms is a way to engage multiple stakeholders simultaneously. Many will still prefer face to face or over the phone, but some will prefer online, and using self-service provisions – at a time and place that suits them.
Self-service is a cost-effective way of arranging and collecting payments, and allows for a 24/7 provision. This digital offering also goes some way to overcoming the embarrassment factor. Online expenditure assessments and the setting up of payments helps to remove some of those barriers. It not only provides a simple route for customers who may have otherwise ignored the problem, but it also delivers positive outcomes for
- Forbearance drives proactivity
When consumers miss, or know they are going to miss a payment, early engagement is vital to prevent debt spiralling. It’s a situation lenders are familiar with, as according to Money Facts, 40% of customers have missed a payment for a credit card or loan. Proactivity is therefore key. Communicating clearly, and the use of education so consumers understand there are multiple ways lenders can support them is a must. Lenders need to remove the stigma associated with debt and encourage customers to communicate with them in an open and honest manner. Lenders should consider existing forbearance measures to ensure they are appropriate to meet consumer requirements during this unique time. These measures should be easily understandable and flexible, and their appropriateness carefully considered based on each set of circumstances and an affordability assessment.
Whilst we’re starting to see more positive news about moving back towards a semblance of normality, sadly the true economic toll of the pandemic is not yet known. What we do know, however, is that treating customers fairly and understanding their needs and circumstances is vital, to help them and you navigate these uncertain times. Not only is adapting debt collection a pragmatic approach, it’s also the right thing to do ethically. But by leveraging Open Banking, lenders now can take a proactive approach to helping to implement payment plans which are achievable for all parties, leading to better outcomes.