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 sums4 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.