3 minute read 22 Sep 2020
artist painter working on painting in studio

How banks can reimagine the collections model

By Maurice Berbel

Principal, Banking and Capital Markets, Strategy and Business Transformation Consulting, Ernst & Young LLP

Over 15 years’ experience in banking. Proficient in consumer banking, default management, business process improvement, and business transformation.

3 minute read 22 Sep 2020
  • How a large consumer bank identified efficiency opportunities within its collections environment (pdf)
    Size: 1 MB Download

COVID-19 threatens a debt crisis. Banks should set up systems to help consumers find personalized solutions to their payments’ challenges.

In brief
  • Banks’ legacy outbound collections models are costly and inefficient, but an inbound approach can improve potential recovery returns in a more personalized way.
  • Banks must make better use of data and predictive and behavioral analytics, to improve the customer experience and maximize recovery returns.
  • Creating a more meaningful customer experience, will result in increased cure rates, a decrease in redefaults, strong retention rates, and long-term value.

The impact of COVID-19 has swept across the global economy. In the first months of 2020, banks’ loan books expanded, as financial institutions quickly reacted to surging unemployment numbers and customers’ need for credit. Along with offering extended credit lines, banks willingly provided forbearance on credit card, mortgage and other loan repayments in an attempt to ease the pain of customers most impacted by COVID-19.

We are now entering a period in which lockdowns are phasing out in some countries, but fresh outbreaks of COVID-19 are flaring up in others. Under this saw-toothed economic recovery, banks are experiencing a growing tension between providing ongoing support to customers, while looking ahead to the mounting cost of non-performing loans (NPL).

Global household debt levels had already reached fresh highs1 prior to the pandemic. In the US, total household debt was US$14.3t in Q1 2020, of which mortgages amounted to US$9.71t2. The average collections rate pre-COVID was below 20% – the lowest in 25 years.

In addition, small businesses that availed themselves of loan schemes during lockdowns – such as the UK’s Bounce Back Loan Scheme that issued £33b in two months3 – will face increased pressure to repay these loans over the coming months.

With widespread defaults anticipated, banks are looking for new terms of reference on how to manage businesses that are still struggling and have little way of repaying their debt. Government stimulus packages and sizable unemployment benefits, so far, have warded off widespread defaults across retail and small to medium-sized (SME) customers, but such extraordinary measures are unlikely to last.

Banks have put aside record sums for NPL losses, the cost of which could increase if economic conditions remain subdued and customers fall behind on their payments.

However, it is already clear that the economic impact of the crisis will be significant, with large swathes of customers expecting to need financial assistance to avoid collections. The inbound collections model can help banks reimagine how they think about collections, creating a better customer experience, and generating long-term value.

It is unlikely that most banks have the necessary resources or technological capabilities needed to consistently deliver fair outcomes using their existing collections processes. These areas tend to be under-invested, because of low demand for such services. However, with so many customers expected to need unique payment strategies and solutions, banks will need to devote greater attention to improving these capabilities. By reimagining their collections model, banks can meet the needs of all customers who are grappling with the new norm – and satisfy regulatory scrutiny – in the months ahead and beyond.

By transforming the collections model – from a labor-intensive outbound approach focused on finding customers who are able to pay, to a loss-preventative, inbound operation in which banks offer pre-approved treatment strategies and personalized communications – banks can incentivize consumers to proactively reach out to them, delivering more personalized, effective customer service, at scale.

Inbound collections model can help banks reimagine how they think about collections, creating a better customer experience and generating long-term value.

Customer needs in the wake of the COVID-19 crisis

To successfully build an inbound collections campaign, banks need to show a higher level of understanding of their customers’ needs, across every channel. This means approaching customers in a compassionate way, seeking to understand their personal circumstances, particularly how affected they have been by the pandemic. In turn, this will provide banks with greater insight into real-time customer behavior in the marketplace – which will enable them to create better, more relevant solutions.

Greater understanding of their customer’s circumstances and behaviors will give banks the confidence to pre-approve treatment strategies where appropriate, thereby building a successful inbound collections process. Worst thing that can be done is not to engage with these customers, as loan losses will be compounded if they don’t.

The most effective assessment identifies customers by their willingness to pay against their ability to pay. For example, a customer who is more than 60 days overdue, but has a high willingness to repay their debt, could work with their bank to agree on a treatment strategy. This could be an extended payment holiday – which would prove the right outcome for both the customer and the bank.

The worst thing banks can do is not engage with these customers because loan losses will be compounded if they don’t.

Matching customers with the right solutions

The fundamental advantage of knowing customers better lies in the fact that banks can apply this knowledge to a set of pre-approved, personalized treatment strategies. These could take the form of extending payment holidays on credit card payments or mortgages or offering to readjust the terms of a mortgage, so the repayments are lower over a longer period of time. Banks that make better use of data to understand each customer’s situation will not only create a better, more personalized customer experience, but also maximize the potential of recovery returns. Peter Neufeld, EY EMEIA Financial services Digital Customer Experience Leader, said: “The opportunity to understand customers better is now. And the need to know customers’ potential to recover from the impact of the pandemic is immediate.”

In the past, banks’ outbound collections strategies have been costly and inefficient, with the success rate of these campaigns standing at roughly 5%. Instead of using a traditional approach – such as call centers’ mail with red headings, or collection officers contacting customers to get them to agree to a new debt treatment strategy – a pre-approved treatment strategy enables lenders to push out their options in advance, much like marketing offers. For example, the offer could be no mortgage repayments for six months, or a temporary reduction in the interest rate. This would reduce the payment, making the customer reach out proactively to accept it or another treatment solution.

By providing incentives for customers to call in and explore the bank’s pre-determined solutions at an early stage, there is an opportunity to understand and treat their debt challenges more efficiently.

Early intervention solutions, combined with a compassionate approach to customers in need, should result in a significantly higher rate of inbound calls.

The opportunity to understand customers better is now. And the need to know customers’ potential to recover from the impact of the pandemic is immediate.
Peter Neufeld
EY EMEIA Financial services Digital Customer Experience Leader
  • Show article references#Hide article references

    1. Institute of International Finance, IIF Weekly Insight: COVID-19 exacerbates household debt burdens, March 2020
    2. The Federal Reserve Bank of New York, Household debt and credit report Q1 2020, May 2020
    3. Financial Times, UK Treasury and banks in talks on coming wave of bad Covid debt, July 2020
    4. Financial Times, HSBC profits plunge 96% as loan-loss provisions jump on coronavirus, August 2020

EY-Pegasystems Alliance: Compassionate Collections solution

A comprehensive solution that integrates analytics and operations to deliver a powerful value proposition, presenting a view of the customer, segmentation, treatment strategies, and optimized outcomes.

Download the report

Summary

Banks have an opportunity to offer customers personalized, pre-approved debt treatment strategies by remodeling their repayment collection operations now. This will help to minimize losses, benefiting both the bank and customer alike.

About this article

By Maurice Berbel

Principal, Banking and Capital Markets, Strategy and Business Transformation Consulting, Ernst & Young LLP

Over 15 years’ experience in banking. Proficient in consumer banking, default management, business process improvement, and business transformation.