As the Government’s financial support packages come to an end, alongside industry forbearance measures including payment holidays on mortgages, personal loans and credit cards, collections are preparing themselves for a surge in cases. Better understanding of pre-delinquency to identify and protect those customers most likely to be affected has never been more important. Prevention and preparation are key.
This guide navigates some of the challenges that businesses are facing along with suggestions for developing a proactive and effective collections strategy.
- Personalised treatment and customer experience in collections
- Top tips for creating a proactive collections response plan
- How can Experian help?
The ‘new normal’ for collections – how are lenders responding?
According to research by Virgin Money, around eight million people have already sought help with their debts during the coronavirus crisis, with UK consumer loans standing at around £220 billion. The picture is similar for businesses, with 42% of business owners asking their bank for support.
Alongside the end of short-term financial support provided by the Government and lenders, spending is expected to increase as the economy continues to unlock, which means many people will have less to spend on paying off their debts.
As lenders explore how to best support their customers in the longer-term, beyond short-term forbearance measures such as payment holidays, our research across the UK lending market reveals that early, proactive intervention remedies are being formulated in different ways. For example, lenders are:
- Running regular scenarios to understand different outcomes resulting from identified actual and potential portfolio changes
- Monitoring bureau activity to understand and respond quickly to changes in customer behaviours
- Looking at ways to assess economic exposure
To ease pressure on collections teams as cases surge, lenders are also:
- Relaxing strategies on business as usual and lower-risk portfolios to delay action and control collection volumes
- Increasing automation within collection operations to reduce reliance on manual intervention
- Adjusting operational priorities to focus on customer groups needing the most help.
“To help you respond to today’s unprecedented challenges, we’ve enhanced our suite of capabilities. Our unique suite of capabilities can give you deeper, more relevant insights than ever.”
The three key challenges facing collections teams
The collections process includes prioritising debt to collect, developing strategies to collect the most, and identifying fraud in your collections book, through to debt sale and late stage debt collections with debt collection agencies. So what will this process look like as lenders adapt to new and escalating challenges?
Being more proactive in identifying pre-delinquency and likelihood of non-payment to support at-risk customers poses three key challenges for lenders.
1. The need for real-time customer data
Lenders are seeking more real-time data, to better understand affordability and individual circumstances in a time of rapid changes. The time is now to get your models right, have a view of the whole market and a detailed picture of your portfolio as it changes.
2. The importance of identifying financially vulnerable customers and the scale of need
How do you tell the difference between customers who miss payment/s due to the short-term effects of the coronavirus crisis but are likely to remain financially secure, and those who are at risk of being genuinely financially distressed and need special attention in the long term? It’s becoming an ever more complex question in a volatile, uncertain economic environment.
3. An increase in cases versus limited operational and IT resource
Operational demands are growing while resources are reducing because of COVID-19 restrictions, causing significant internal challenges for lenders. From handling inbound calls, capturing income and expenditure details and identifying vulnerability, to navigating new data protection challenges, socially distanced workplaces and homeworking. In addition, APIs can take time to integrate and restrictive IT resources could mean new integrations are delayed or cancelled.
The collections process – identifying vulnerable customers
By identifying vulnerable customers, you won’t just be supporting them, you’ll be creating better debt collections strategies. Financial vulnerability has been a significant focus for lenders well before the COVID-19 pandemic began. The response from lenders shows, this is expected to continue, with even more emphasis placed on proactively identifying and helping consumers, not only through short-term economic shocks, but during the longer-term economic recovery. So how do you identify customers who are financially vulnerable, while enhancing your operational efficiency and accuracy?
1. Affordability assessments will require extra vigilance
Against this challenging backdrop, there’s even more of a need to make a sound assessment of vulnerability and affordability, by getting a full understanding of a customer’s current circumstances and financial exposure, including their indebtedness across all credit commitments. This should include combining affordability and credit data. To achieve this, and comply with the FCA’s Treating Customers Fairly requirements, lenders need to ask three questions:
- Is the customer up-to-date with their priority bills?
- Are they paying their other creditors?
- Are they maintaining payments on their account(s)?
To answer these questions, it’s essential to have a comprehensive view of a customer’s entire product holding. In addition, the quality of the customer data underpins all decisions to allow a consistent, accurate and holistic view.
Being able to model behaviours which indicate financial strain, and track them as they change, is integral in a crisis scenario. While pre-COVID-19 indicators of financial vulnerability included spending without funds, faster spending, excessive overdraft use, increased ATM withdrawals and a high appetite for short-term borrowing, things have markedly changed.
Right now, the warning signs for financial vulnerability include loss or drop in income, a shift in spending to high priority items, new or unauthorised overdraft use, greater reliance on savings and an appetite for high-cost loans.
Now more than ever, it’s important to be able to assess whether a product is affordable for individuals, both at on-boarding and throughout the lending cycle, including credit collections.
Watch our webinar where we discuss the impact brought by COVID-19 and how you can respond effectively to the challenges in the collections process.
2. Education and empowerment are crucial
More proactive intervention and signposting of financial support is crucial to support customers. For example, promoting the services of StepChange, the Money Advice Trust and others. Similarly, empowering consumers to regularly check and manage their credit report will be vital in helping them access the right services and understand how their credit score is changing.
3. Automation will bring much needed speed, at scale
To be effective, many of these actions need to be carried out quickly, while placing as little demand on you, or your customers, as possible. This is where effective use of advanced data, insight, analytics and technology become key.
Tapping into resources that help you automate previously manual processes, such as the capture of income and expenditure, or being alerted to relevant changes in consumer trends and behaviour, ensures you’re better prepared to manage both the scale of demand, and the speedy response it requires.
The lenders we surveyed identified three key requirements:
- Extra full-time collections staff to create the capacity to cope with increased demand. Accurately forecasting demand is therefore key.
- Dynamically updated affordability data, along with mid-month/mid-transaction cycling.
- More data, and a sympathetic approach to customer management.
Identifying fraud in the collections process
The fraud and collections functions have a natural affinity, one that is often not recognised in organisations that frequently have these as two distinct and separate operations. Given the current economic environment, it’s important that businesses manage delinquent customer accounts thoughtfully, efficiently and effectively.
But what if some of these delinquent accounts are fraudulent? Fraudsters, whether committing first or third party, have no intention or no ability to pay, so these accounts will quickly track through to collections. Collections cases can contain a significant proportion of frauds, which would be managed through various stages, incurring costs and time attempting to contact customers who are fraudsters, or who are not responsible for the debt due to identity theft.
Taking these fraudulent cases out of the collections process allows resources to be concentrated on accounts that will deliver a return – this is increasingly important at this time given the pressures on collections teams. This should also be part of a closed feedback loop where the fraud team uses this intelligence to enhance protection to prevent similar accounts being undetected in the future.
The key objective is to identify accounts with a high probability of fraud in the first 30 days after default. However, within some organisations, internal politics may cause conflicting interests between functions. If the collections team can pass cases to fraud teams it removes them from its bad debt provision; equally, fraud teams are under pressure to not increase their fraud levels and will not, therefore, encourage cases to be assigned to fraud.
How much of the collections problem is fraud?
In an ideal world, all fraudsters would be identified and stopped at the point of application and therefore fraudulent accounts would not be seen in the collections operation. However in the real world as the sophistication of fraudsters increases, the application and transaction fraud protection systems cannot provide 100% protection against fraudulent activities.
Fraudsters will use false or stolen identities to open new accounts and access goods and services. This ‘hard’ fraud is more serious than first party fraud, where applicants will falsify information on the application form to enhance their likelihood of acceptance and a better offer.
In addition to fraudsters coming through the application fraud process, there is the growing issue of open account fraud, where fraudsters using stolen or false identities takeover accounts and extract the maximum value. Another form of this is ‘bust-out’ or ‘sleeper fraud’ where an account will be opened or taken over and run over a period of time to maximise the value of the ‘bust-out’ that will inevitably come.
Nearly every organisation will have application and transaction fraud systems in place; however, the sophistication of some fraud will enable it to go undetected through the application process, especially if the fraudster is using a genuine, credit-worthy identity. Step up authentication is used to gain further authentication as mechanism to detect a potential fraudster.
Transaction fraud monitoring focuses on patterns of behaviour and sets limits, mechanisms which are designed to spot unusual transactions and will highlight both undetected application fraud and account take over. However fraudsters are quick to exploit the ‘rules’ of these systems and evade detection.
As a result, for a significant proportion of accounts, the first sign that there is any problem is when the first or subsequent payments are missed and the account goes into collections.
Managing fraud in collections
A key challenge for organisations who tackle fraud in collections is how to manage these cases.
Prioritise fraud risk
Using a scoring model, organisations can prioritise the risk of a case being fraudulent and choose to send the lower-risk cases through an automated activity path with appropriate activities. The remaining cases can be prioritised according to their fraud risk and potential loss value and passed to a referral team for action.
Manage high-risk cases
A referral team is required to process the resulting cases. The best option is to have a specialist fraud/collections referral team. This does not need to be incremental resource as existing resources can be developed into specialists.
Having specialist team reduces time and cost by ensuring the best use of the fraud and collections resources, by enabling them to focus on their core functions.
Incorporating staff with collections and fraud experience, the team would handle referrals passed from collections and determine whether the cases are fraudulent while still being sensitive to the possibility this is a genuine delinquent customer. If the case is not fraudulent the result is passed back to the collections team and would continue through the normal collections process.
Fraudulent cases would then pass through the standard process, potentially leading to more investigation, collation of evidence and loading of data to both internal and national databases.
A major part of an organisation’s effectiveness is collaborative working between all the teams, whether they are front office or back office functions. Organisations should ensure that fraud and collections departments work together in order to ensure they each have the necessary systems and processes and the means, and will, to interact. Organisations should ensure that internal targets and team objectives do not hamper the effectiveness of the close working relationships between the two functions.
Identifying fraud rings
Organised criminals will frequently use common elements to applications and personal information in order to receive the funds (e.g. bank accounts) and communications (e.g. mobile phones).
Using a fraud networks tool will highlight links between seemingly unrelated accounts based on this data and the links can be illustrated graphically as a fraud ring. Often, one known fraud, when used as part of a fraud ring will lead to three or more associated accounts which are likely to be fraudulent or highlight where impersonation has been used.
Once these accounts have been identified they can all be dealt with through the fraud process as well as investigated further as there may be links with these accounts which will, in turn, lead to further fraud.
Creating a feedback loop
When fraudulent accounts enter collections, any delay in the collections department passing that information to the fraud team can allow the fraudster to continue accessing funds or services and incurring further losses to the business.
Creating an effective structure to deal promptly with the early identification of fraudulent activity using information contained in the collections system can make a significant difference to reducing subsequent bad debt losses arising from fraudulent accounts.
Analysing known frauds is essential to understand the patterns and trends that are occurring, so there should be a feedback mechanism to ensure that the fraud systems are updated with the characteristics of accounts that are fraudulent.
Patterns and trends can be discerned from analysis of commonalities between fraudulent accounts in collections that can help provide understanding of how different frauds have been perpetrated and to thus improve the controls and make defences more robust. This can also highlight any common elements in the frauds, such as a member of staff which could indicate insider fraud or a staff training issue.
This will ensure that similar accounts do not enter collections the next time, but are picked up at application or during transactions, saving time and money.
Personalised treatment and customer experience in collections
The way a credit provider handles missed payments or financial difficulty is key to customers and their likelihood to stay with and recommend your brand. Every interaction with a customer is an opportunity to strengthen the relationship. Collections isn’t just about recovering money. It’s about increased customer retention. Therefore, delivering higher quality interactions through proactive identification of data quality issues, enhanced customer insight and analytically-driven collections actions can help retain the right customers.
How is coronavirus shaping customers’ priorities for brands?
Research by the Institute of Customer Service shows that in the context of the COVID-19 crisis, customers believe that protecting employees and vulnerable customers should be top priorities for organisations. Despite the challenges, collections is an opportunity for lenders to show their customers how they’re responding at a time when ‘treating customers fairly’ has become a high-profile priority in terms of customer experience and brand perception.
This approach has been demonstrated by the Credit Services Association (CSA). Peter Wallwork, CSA Chief Executive says:
“We want all of our members to do everything possible to support customers through the financial and cultural shock which our society is experiencing. They are on the front line, already dealing with millions of households across the UK that are in debt, and so are ideally placed to support people through this evolving situation.”
Top tips for creating a proactive collections response plan
The coronavirus crisis will see many credit collections teams dealing with escalating volumes alongside changing regulatory guidelines, high customer expectations and overstretched resources. We’ve identified four key strategies to help enhance effectiveness, improve support for your customers and manage any emerging credit risk across your portfolios.
1. Proactively identify customers who may be at risk
With a large proportion of the population seeing a decrease in incomes since March this year and the ongoing economic uncertainty, it makes sense to identify customers who are potentially at risk of non-payment and financial difficulty and initiate early intervention and support now, rather than waiting for them to ask for help.
Be proactive. Really focus on those signs of potential non-payment and offer support to the people you believe are at risk – without waiting for them to ask. Be armed with knowledge of income shock, and extent of hardship. Access triggers and alerts, and build a more comprehensive view of each customer’s financial exposure.
When customers do request payment holidays, track the prevalence and type of forbearance they need. It’s likely you’ll have a high volume of requests, with many needing longer-term help; and due to the scale of demand, being able to determine who is genuinely in need will require careful monitoring and a deep customer understanding.
2. Use open banking data to help build an up-to-date view of income and expenditure
New data assets, such as transaction data enabled by Open Banking, mean you can build an up-to-date, accurate view of your customers’ disposable income, financial health and resilience. Advanced insights from categorised bank transaction data can be used to understand a person’s income and expenditure in real-time, helping to identify stress and pre-delinquency.
3. Update risk models and recalibrate KPIs in line with changes
Pre-COVID-19 KPIs and indicators for identifying risk have changed. Recalibrate your KPIs to identify new signs of risk, highlight warning signs and track data such as roll rates and pre-delinquency levels. This ability to draw on the right data will also help you weather the storm of any further regulatory changes. Extra variables, and access to frequent alerts of change, can help you understand actual risk and exposure, and model these for the future.
4. Automate your processes
Using automated processes wherever appropriate and possible will ease pressure on overstretched collections teams, while automating manual case handling and customer communications will help you capture details and identify vulnerability more quickly.
The challenges are clear but there are also opportunities. With the COVID-19-crisis escalating consumer’s desire for digital channels, automation is key to customer experience as well as easing pressure on collections teams as cases grow. Similarly, the consumer desire to see vulnerable customers treated fairly as a key priority for brands puts collections teams at the heart of brand engagement and loyalty.
As the focus of collections moves further towards preventing financial hardship and providing bespoke support to customers, the sector could find itself leading the way for customer experience and help brands to build social value.
How can Experian help?
However stretched your team, there’s a whole range of effective steps you can take to respond to these difficult circumstances. If you’d like some expert help, we’re right by your side – not just to help you define robust plans for the current crisis, but also to help you mitigate the risks ahead and future-proof your collections teams.
We can help you understand the impact across your customer base, through scenario analysis and access to enhanced data insights, including the granular details behind a profile and how they’re likely to play out over the short and long term.
Through improvements to the quality of your data, we can help you to reduce the reliance on valuable technical resources and over time, drive improvements in your underlying foundational data to drive better decisions in your business.
We’re in an unrivalled position to provide that, due to the breadth of data we can share across many areas, and the credit and economic insights we continually compile. These enable us to make an immediate and lasting difference to the success of your business.
In fact, it’s our ongoing commitment to help you – and your customers – weather this storm, and minimise its impact. We believe data makes this possible and we’re continually adapting our capabilities to meet today’s challenges, while also investing in innovative tools and capabilities that will create clarity, certainty and confidence, whatever the future brings.
If you’d like to find out more about how we can work with you, our expert consulting team are on hand and happy to help.