Every day in the UK, £11.38m of loans on average, are written off by UK Banks and Building Societies alone; whilst in 2012, Citizens Advice Bureaux in England and Wales dealt with 8,308 new debt problems every working day.*1 As many people continue relying on credit to meet their general living costs, having an effective strategy in place to determine which customers are likely to default in the longer term, is a measure not only necessary for maintaining long term profitability; but for improving customer service and lowering attrition.
How to tell who’s at risk
There is a way to reduce risk significantly, by monitoring and spotting the warning signs of pre-delinquency and acting early enough. The longer lenders wait to take action, the less likely customers are to recover. Signs of pre-delinquency can be easily recognised, by understanding and using the right indicators.
Examples of internal data may include the sudden absence of regular income or a large lump sum being paid into a current account, suggesting redundancy. External information such as deteriorating credit scores and applications for credit elsewhere are all potential warning signs. Combining internal and external factors gives the most rounded and insightful view of what may be happening in the financial life of a customer. Using tools to identify these changes in their behaviour and credit rating, such as Experian’s Delphi and Geo-Delphi scoring systems can provide information about ongoing risk assessment, linked to factors including postcode; whilst Mosaic provides demographically segmented data, highlighting possible common risk factors.
Implementing a strategy that works
Once lenders have developed a monitoring system for pre-warning, the implementation of a new strategy can take time; with pilot tests recommended to determine the best way of targeting and dealing with customers at risk. Understanding the causes and severity of the problem is crucial to your decision making about the action required and, because payments have not yet been missed, a sensitive approach is required when communicating with the customer. Whilst an insightful level of customer service is generally appreciated, many customers may resent the idea that they are being watched too closely.
Discussing finances with customers is never easy and when approached too directly can lead to customers behaving defensively; which could shut down possible dialogue – a more effective method is to allow the customer an opportunity to openly discuss their situation. A recent case study revealed that a soft initial approach to customers worked best, offering a financial review as part of standard procedure. Around half of the customers responded, starting a constructive dialogue with the lender and addressing their individual circumstances.
Less bad debt, more loyalty
Viewing pre-delinquency as a customer management function is a common approach as it’s aimed at managing and retaining customers; however lenders will benefit from using their collections staff to deal with customers. Collections departments are adept at handling delicate financial situations and asking the right questions; which is vital to a pre-delinquency strategy being effective and maintaining long term customer relationships. They can effectively help the customer realise their options and aim to rehabilitate them prior to delinquency, still maintaining realistic although potentially lower repayments. This proactive management of pre-delinquency means that collections staff will, if successful, be managing fewer collections cases in the long term, and honing their skills in prevention measures.
Working with experienced consultants and data analysts with knowledge of implementing these systems and risk strategies, will help make the transition smooth and easy to manage. Experian can assist with the development and implementation of pre-delinquency strategies, from appending and segmenting bureau data, assessing a lender’s portfolio and identifying the accounts that show signs of pre-delinquency; to integrating the new procedures into current decision engines.
The obvious financial benefits to lenders result from more rehabilitated customers, less cases going to collections and significant reduction in impairment provisions. In addition to the financial benefits, there will be improved customer service and loyalty that will drive lifetime value; which is likely to put lenders in a more esteemed position among competitors. With so much competition in the current marketplace, that has to be a priority.
Client Consultancy Director
Mark is a qualified Banker with extensive experience in the UK Banking Industry, across the whole credit cycle at strategic and operational levels. His experience consists of direct portfolio P&L control as well as extensive consulting on the development of profitable and pragmatic solutions. Mark’s experience has been obtained from a background of 13 years within the UK banking industry, 6 years within retail credit and 11 years working internationally in a consulting role.
1 *UK Banks and Building Societies wrote-off £5.0 billion of loans to individuals over the 4 quarters to Q3 2012. In Q3 2012 itself they wrote-off £1.04 billion (of which £473 million was credit card debt) amounting to a daily write-off of £11.38m.
*Citizens Advice Bureaux in England and Wales dealt with 8,308 new debt problems every working day during the year ending September 2012.