Bob Welsh has over 40 years’ experience in collections, working for RBS, Bank of Scotland and Lloyds and consulted for debt purchasers and collections agencies throughout Europe. From leading large, complex systems upgrades, to heading up operations and strategy, Bob is a well-respected voice in the sector . Here Phil Rolfe, CEO of P2 Consulting talks to Bob about collections and how important it is for the banking sector in the current period of economic difficulty.
Question: for collections, this period is a challenging one. As the recession bites and customers have cash flow issues, what advice do you have for banks?
Bob: The pandemic has underlined how important it is for lending organisations to be on the front foot when it comes to collections capability, data and practice. Too often the industry has been in reactive mode when impairment values increase, meaning it’s too late to recover. We shouldn’t let it happen again, although if banks are only reacting now, it might already be too late. With furlough closing at the end of October, customers coming off payment holidays, Christmas on the horizon, followed by the usual hike in winter fuel bills, there are testing times are ahead.
How do you approach risk management in collections?
Collections best practice includes deep segmentation of accounts to manage risk and capacity effectively. It is really important that all communication channels are used to connect with customers. And you can’t underestimate the importance of technologies like artificial intelligence (AI) and conversational middleware to use deep, real time internal and external data to make decisions and ultimately, manage your risk level.
How important a role does data have in collections?
Data is paramount to the success of collections and even more so in pre-collections activity – the objective is to spot problems early, minimise exposure and help the customer. If you’re a bank offering current accounts and lending products, all that data should be at your fingertips. A current account customer will almost certainly have another lending product with you, a card or loan. A customer’s life is reflected in their current account – it is their P&L – you know when their salary arrives in their account, when the loan or card payment is due and how much it is. It is not difficult to look at the current account seven days before payments are due, to see if the customer has the funds to pay it and to work out if there is a regular income to make payments. If not, you can mobilise customer services to find out if the customer needs help.
And what impact can technology have?
The correct collections platform on top of data management is vital. All too often banks are guilty of a ‘sticking plaster solution’ – but the building blocks have to be right. Banks need to invest in collections technology, particularly at the moment. If you don’t invest, you’ll fall behind. As mentioned, AI and conversational middleware play an important role in dealing with routine enquiries 24/7, taking payments, arranging plans, detecting vulnerability etc. Investment in this type of technology will quickly make a return – customers don’t want to be in a precarious situation and will welcome interventions – but that’s dependent on the banks identifying a problem.
How has the introduction of IFRS9 changed the collections landscape?
The new accounting standards – introduced in January 2019 – have an impact on the calculation of impairment and consequences for early arrears management. Rightly or wrongly, impairment – the depreciating value of a loan or card – is how the CRO/CFO gauges the performance of the collections team. Under IFRS9 all accounts fall into three stages – the first, is when loans perform in line with expectations, stage two is when they show credit deterioration and stage three is for accounts that are in arrears. As soon as an account enters stage two, the impairment loss becomes the expected loss for the entire lifetime of the loan – so it’s in the interest of collections teams to manage customers back from the edge of stage two and by doing this, they save their companies a significant amount of impairment. So the strategy needs to be collaborative, involving the executive team, collections and risk and operations teams, with the focus being on reducing the monthly impairment charge.
So what should the approach for collections strategy, in the COVID-19 environment?
Whatever you do now to cope, don’t use half measures. Create a designated project team to manage any changes and improvements you need to make to your collections business – but don’t expect them to manage business as usual (BAU) at the same time. Expecting teams to work on a project whilst juggling BAU is a recipe for disaster, with neither being served well. Assume nothing is the same as it was.
You need to review your suppliers in general: software, strategy, communications, capacity, procedures, policies (all affected by FCA changes) as they might have been impacted by the COVID-19 crisis. And you need to develop a plan to stabilise the portfolios. Inevitably you will need help from collections experts, contractors or consultants – this is not just to facilitate BAU management and drive the project, but for external expertise and the objective viewpoint they will provide. There will be quick wins you can make, such as the tighter segmentation of accounts for targeted collections and even the temporary use of a collections outsourcing consultancy to help with increased volume.
P2 FinCrime have the experience and capability to support your collections strategy and execution.To find out how we can help you and your business please email me at firstname.lastname@example.org or call +44 (0) 7798 666 454 today.