Stacey West, Senior Consultant, Fair Isaac Advisors
Credit delinquency is an increasingly prevalent problem in the UK, with credit card debt growing at its fastest rate in 12 years. Both the persistent debt initiatives announced by the FCA in response to the credit crisis and the implementation of IFRS 9 this year have put card issuers under mounting pressure to help consumers claw their way out of debt.
To combat the twin challenges of rising debt and IFRS 9, UK card issuers are likely to increase the promotion of Direct Debits and offer greater flexibility to those using them. Lenders that are making payments more convenient for their customers will be the ones that successfully stave off further debt and hefty IFRS 9 loss provisions.
Under IFRS 9, issuers must provision for a 12-month expected loss for low-risk stage 1 accounts, and provision for lifetime losses on more risky accounts in stage 2. Should an account go 30 days past due or the level of risk increase since the account was opened, it will move from stage 1 to 2.
When a customer moves across stages, all their accounts moves well, so impairment would need to be taken at the lifetime level for all of them. Additionally, curing a stage 2 account does not mean its status automatically reverts back to stage 1, unless an issuer can successfully make a case for why the actual risk status of the account has changed.
A European Banking Authority impact assessment report has anticipated impairment costs could rise by up to 18% under IFRS 9, largely as a result of stage 2 provisions. To avoid a substantial increase in the funds needed for impairments, card issuers need to prioritise collection techniques that help keep accounts in stage 1.
In addition, a month after IFRS 9 came into force, the FCA introduced new rules and guidance to help customers in persistent credit card debt. Issuers will be required to monitor accounts over a 12-36-month period to determine if cardholders are paying more in fees and interest than the principal balance, and if so take action – for example, prompt customers to make faster repayments and reduce interest and other charges for delinquent accounts.
Direct Debits – a promising solution
FICO looked in detail at four clients’ data, and accounts without a Direct Debit had a bad rate (bankrupt, charge-off or 3+ cycles in the following 6 months) of between 1.5 to 3 times higher than those with a Direct Debit.
While this does not mean that all accounts that set up a Direct Debit will demonstrate improved payment behaviour, it could help those with payment problems – for example, people who consistently make late payments out of forgetfulness. This would also be in the cardholders’ interest, as they would avoid fees and poor credit information being logged at the credit bureau.
Who’s using Direct Debits already – and who isn’t?
According to the December 2017 FICO Risk Benchmarking results(see Figure 1), 37% of UK card accounts have a Direct Debit in place. For those under 5 years on book, the rate is over 45%, a figure that drops to 30% for accounts more than 5 years old. This same pattern is repeated for Classic and Premium card averages, with a higher percentage of Premium cards having a Direct Debit set up to pay their credit card balance.
Student cards have the highest overall percentage of Direct Debit users at 56%, with over 80% of accounts less than 12 months on book with one; this suggests that issuers are strongly promoting this payment method among this group.
FICO’s study also showed that consumers under 30 years of age were less likely to have a Direct Debit in place, as they might be more likely to use mobile or internet banking options instead.
Card issuers: Best practices to increase uptake of Direct Debits
The convergence of IFRS 9 and persistent debt initiatives is forcing issuers to consider how they can make payments as convenient and frictionless as possible for customers.
Although timely payments may result in a loss of revenue for issuers, such short-term losses will be far outweighed by the cost of provisioning for stage 2 accounts or the actions required in a persistent debt situation. This trade-off will help issuers build a business case for incentivising Direct Debit usage.
Ultimately, moving to a more flexible payment structure will be the most effective method to encourage more people to opt to pay by Direct Debit. Given the rise of the ‘gig economy’ and the number of people being paid weekly, offering cardholders the option to choose a date which suits them best – perhaps to coincide with payday– or even to make multiple Direct Debit payments per month, can only help those with unpredictable cash flow.
Issuers should also address the common misconception that only minimum or full payments can be taken through Direct Debit when in fact, any proportion or amount is available. They can also consider:
- General Direct Debit education programmes
- Promoting options for payments outside of just minimum or full balance
- Incentivising Direct Debit adoption with preferential offers -reduced interest rates or longer balance transfer periods, for example
- More visible promotion of Direct Debit payment options during origination stages
- Ensuring statements, and hence payment due dates, are aligned to customers’ salary dates
- Campaigns targeted at more mature accounts, those with a Classic credit card and based on consumer age
Direct Debit looks to be a win-win situation for both card issuers and borrowers – issuers will avoid the heavy costs associated with stage 1 accounts slipping to stage 2, and borrowers can avoid fees and bad credit scores. It’s down to the issuers, however, to ensure that consumers are aware of the benefits, and are offered the flexibility they need to make the right size payments, at any time.
Stacey West is a principal consultant at analytics software firm FICO. She blogs at www.fico.com/blogs.
Beyond Transactions: The Payment Revolution
By Marwan Forzley, CEO of Veem
The uninterrupted disruption brought on by the pandemic accelerated the need for robust, digital-first tools created to support remote teams and accelerate online commerce.
As offices across the US moved to work from home for indefinite periods, specialized back office departments handling sensitive information have had to go a layer deeper to find tailored solutions that support the transition of their in-person workflow. For finance teams, payment approvals, issuance, and general management became a challenge overnight. Particularly for those who — even in 2020 — continued to send and receive paper checks through the mail.
For years and even to this day, millions of small business owners around the world have relied on slow and confusing bank processes to manage their business finances. Every day, they spend valuable time using old, complex and expensive platforms to transact with domestic and international vendors — never knowing where their payment is or even when it arrives at its destination.
With ongoing economic and logistical uncertainty looming as we move into 2021, this old norm should not be expected for much longer. This year has seen small business owners wear more hats than ever before, and has influenced a mass adoption of online financial applications that offer heightened security, save more time, and provide more value as budgets tightened.
A study conducted by Mastercard earlier this year saw online business-to-business payments skyrocket in popularity with more than half (57%) of small business owners across North America turning to digital services since the start of the pandemic to improve cash flow and modernize their payment processes.
If this study is of any indication, the days of making an appointment with a banker or sending a wire transfer through an outdated web portal have passed. And the time for the payment revolution is here.
Putting the user in the driver’s seat
Major world events have always acted as a catalyst for innovation and change. As of a result of the growing pains we experienced this year, in 2021 businesses can finally say goodbye to huge transaction fees and bank-imposed gatekeeping when it comes to managing their financial processes.
The financial technology firms, in partnership card and local bank networks and sometimes even each other, have been building and iterating on products over the past decade that were created to work flawlessly from a desktop or smartphone.
For the first time, small businesses have access to needed, user-friendly financial tools packaged to make their lives easier. No longer reserved for major enterprises, those previously underserved by traditional banks can sign up for applications that consolidate billing, payments, working capital and more to one central dashboard.
With the owner in the driver’s seat, they can better communicate with vendors and customers and reallocate their time previously spent manually sending, receiving and reconciling payments toward growing their business — without ever stepping foot out of their home.
Genuinely seamless and automatic integrations with complimentary functions aligned to core financial activities mark a fundamental change in how businesses will choose to operate moving forward. Not only should experiences be integrated, but the entire lifecycle of the transaction should be digital.
Consider a freelance contractor that uses a time tracking and invoicing software to invoice a client. Through an integration between the time tracking tool and Veem (a complete online business payment tool) the client receives and captures the invoice within their Veem payment dashboard. Because Veem and Quickbooks are integrated partners, as soon as the invoice is received, a bill is automatically created, marked as paid, and reconciled on the client’s accounting software as soon as the funds are issued.
In this flow, the contractor only needs to send an invoice, and the client only has to approve the payment for everything else to move. Thoughtful integrations like these empower businesses to log-in to one application, but benefit from several, ultimately eliminating inefficiencies.
Understanding that old habits die hard, it’s expected that businesses of any size have questions when it comes to moving payments from a bank to an online provider.
Answering these questions with unprecedented product value and relentless transparency is the best way forward to bring more businesses onboard in 2021.
This means providing up front pricing, tracking, choice and flexibility to users. Before, during and after the pandemic, cash flow management remains the most critical part of running a small business. Digital payment providers enable the entrepreneur to have unparalleled insight, visibility, and control over their cash flow.
Through non-bank payment options, businesses can secure their information over a secure data network, watch their money move from origin to destination, and choose the speed at which they would like funds to move. By these tools working in harmony, the user can remove friction and spend more time focused on their business.
Separating the signal from the noise
2020 is a year that changed everything for the global small business community. In a report by Veem issued at the start of the pandemic, an overwhelming 80% of businesses shared that they anticipated COVID-19 to impact their business over the next 12-16 months. Problems surfaced that many didn’t even realize they had. And in finding those problems, businesses turned to technology to support them.
As enabling technology, it’s our job to listen and bring clarity and solutions to those contributing to and growing our local and global economies despite the hurdles and challenges they’ve faced.
Right now, small businesses deserve more. More access, more choice and more credit. In the road ahead we expect online payments and bundled user friendly financial services to play a pivotal role in the recovery of small businesses. The payment revolution will see the continuation of important and meaningful products that value the users time and enable businesses to launch, grow, and scale regardless of what’s to come in 2021.
The UK’s hidden payments crisis: why businesses should rethink their payments strategy
By Edwin Abl, Chief Marketing Officer at Modulr.
As the economic conditions imposed by the Coronavirus endure, businesses are facing a dilemma about how to reduce operational costs while meeting customer needs in as economical a way as possible. And all without compromising on their quality of service.
A recent survey of 200 payments decision makers across the UK, revealed there are hidden costs of payment processing which will have an exponentially greater impact on wider businesses if left untreated. It found, UK businesses are spending an average of £1.5m a year in costs attached to payments – money they simply cannot afford to lose to inefficient processes in these uncertain times.
Businesses need to plug any holes in their boat to avoid sinking. And for many this includes the examination and recalibration of their payments strategy.
The research reveals that the payments process now represents a huge 12% of a business’s total operational expenditure. With two-thirds (64%) of all businesses expecting the cost of payment processing to increase over the next two years.
Two thirds (67%) of payments decision makers surveyed believe the way they process, and service payments has had a direct impact on their customer experience. In fact, 62% of respondents believe the hidden costs of poor payments outweigh the hard costs. This indicates that a poor payments strategy is no longer something business leaders can ignore, as it now has a far greater and unseen impact on wider business mechanics.
The top three hidden costs attached to inefficient payment processes were ‘impact on customer experience/satisfaction’ (38%), ‘influence on relationships with other teams and departments (35%) and ‘impact on competitor differentiation’ (31%).
These findings suggest there is widespread consensus that getting payment operations right, directly creates performance boosts elsewhere in the business. When asked to estimate, as a percentage, the business performance boost received if hidden payment inefficiencies were resolved, the average margin for improvement was +14%, with traditional banking the sector most likely (31%) to predict a performance gain greater than +15%.
The 5 key steps UK businesses can take to drive payment efficiencies
There are five key areas payments decision makers and tech leaders should be looking to change, so that they can drive end-to-end payment process efficiencies:
1 – Locate hidden payment process inefficiencies
Visibility is a key issue. Respondents across large (46%) and small businesses (47%) say they have very clear metrics directly related to payment process costs. Only 8% say that they don’t understand the costs involved. Yet, businesses know they could do better with improved visibility of costs. Both large and smaller companies cite ‘lack of visibility for operational costs’ as the top challenge when it comes to achieving strategic goals around payment process and money services provision.
Digital banking companies, including lenders and FinTechs, identified ‘lack of visibility for operational cost’ as a challenge when it comes to increasing payment services revenue (37%). This is in comparison with all respondents mentioning other issues such as lack of skills (25%) and constrained resources (25%) as secondary and tertiary challenges respectively.
For many businesses, developing a cost model for current and projected payment process costs, both hard and hidden, is a top priority.
2 – Make payments key to stakeholder experience management
Customer, departmental and even supply chain partner experiences are increasingly intertwined. There is no doubt that customer experience is a top priority for payment services strategy. But enhancing the broader stakeholder experience is a close second, and certainly complements the former.
Employee experience affects customer experience. So, payment services innovation must extend beyond customer touchpoints. Happy employees who feel they are working with effective and efficient payments systems will be best placed to enhance the customer experience. And, employees in commercial roles who have bought into the benefits of efficient payments will naturally want to extoll those benefits to customers.
Companies with a sophisticated and integrated supply chain are likely to be the frontrunners in implementing the integrated payment services that benefit all stakeholders, due to their historic experience. As customer experience management evolves into a broader discipline of stakeholder experience management, including employees and supply chain partners, it will become more crucial than ever to include payment services experience
3 – Integrate and automate to support payment innovation
Payment innovation is driving a culture change, connecting previously siloed functions such as IT and finance. There is increasing integration of systems from customer relationship management (CRM) and enterprise resource planning (ERP), into accounts and payments. The research tells us that payment processes are impacting nearly every department, affecting areas including customer experience, brand, leadership, business agility and ultimately, revenue. Integration enables new business models for paying suppliers and customers.
Automation is key to driving efficiency, replacing manual error-prone and time-consuming processes with real-time and responsive, digital ones. This is particularly the case when it comes to operational and payment processes.
Indeed, 52% of large companies say that team hours spent on payment processes was their biggest hard cost attached to payments, compared with 26% of smaller companies who share that view. This suggests that automation could contribute more to cutting the cost of payment processes in large companies.
A host of payments-as-a-service providers (including Modulr) are supporting customers to do just this by enabling them to stream a whole unified product ecosystem of payments functionality directly into their own software.
4 – Bring business leaders together
Payments innovation is driving systems integration and creating a more collaborative stakeholder ecosystem. As all the C-level roles become increasingly focused on the customer experience, the finance remit now includes overall business operations and its associated risks and opportunities. The role is evolving beyond just accounting, tax liability and funding. Therefore, closer collaboration between senior leaders is key to driving efficiencies and enhancing customer experience.
5 – Innovate by adding finance and payments to vertical services
Companies with a vertical focus are well placed to innovate by offering new payment services. In many vertical sectors, especially employment services, software vendors are increasingly embedding financial services facilities, such as payments, into their technology platforms. Employment services SaaS providers, across payroll, accounting, bookkeeping and more are offering financial services to existing and new customers within their specific ecosystem.
This means they can develop hyper relevant, convenient and delightful financial products and services for their end users through highly flexible, ‘plumbed in’ payments. This creates an ecosystem of stickier products while boosting the lifetime value of each end user.
Moving forward – engaging technology to drive efficiencies
If the onset of the Coronavirus crisis has taught us anything, it is that there are many advantages to investing in technology and having a digital infrastructure as responsive as your customer-facing experience.
However, whilst digital technologies enable companies to provide customer service in new ways during lockdown. These same businesses are failing to transform their digital strategies, with the biggest priority still being cost reduction (41%).
By not shedding legacy technology and shoring up operational efficiency, UK businesses are following an increasingly risky strategy. And one which will have an exponentially greater impact on the wider business if left untreated. Particularly when this widespread failure to act concerns the customer experiences that sit at the very heart of a proposition – the payments.
To find out how you can drive payment efficiencies into 2021 and beyond, download the full report here for all the insight you need.
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