Why collections teams are struggling with a Covid debt hangover
For the finance sector, 2020 will forever be remembered as the year that COVID-19 forced everyone to scramble to remain relevant amidst an unprecedented and unforeseen sea change. For debt collections, it simply made what was already a sensitive and complex process even more sensitive and complex.
Individuals and businesses that would not normally find themselves in debt were forced to face fresh challenges and those already mired in debt generally sunk even further. Collections teams struggled with a balancing act between understanding the ever-evolving landscape and remaining sensitive to consumer issues and regulatory shifts
And these challenges are likely to remain through 2021, at least.
With so many thousands of people out of work due to the pandemic, collections have never been a more unpleasant business to be a part of. However, it’s a necessity that needs to be undertaken in a way that’s helpful rather than destructive. Collections right now should be about consumer advocacy and helping them resolve their financial concerns; not hounding them for payment.
Establishing a strong consumer connection that isn’t completely negative has always been a challenge for collections teams and COVID has added further complications into the mix. The pandemic has opened the floodgates for scammers and spammers, to the extent where an unsolicited phone call will rarely be answered and an unsolicited email will simply be consigned to the spam folder. The key here is in collections teams investing in more flexible digital debt collections software solutions that put the consumer in control.
A different kind of debtor
With millions of people across the world experiencing “financial insecurity for the first time (or the first time in decades)” according to Deloitte, many of the customers who now find themselves in arrears don’t fit the traditional debtor profile. These are the kinds of customers who might never have experienced serious financial difficulties before. For example, they may have significant property equity or other assets and while they may have capital, it’s often tied up in longer-term investments.
Agents have rarely dealt with these customers before and they might require a gentle hand. Remember, in any other situation they would rarely fall into debt so might need to be guided through the process a little more directly. In any situation, however, customers will never respond well to aggressive tactics. but will be more likely to respond positively to warm and regular communication, flexibility, and collaboration. Debtors will rarely have fallen behind on payments due to any fault of their own, particularly this year. To chastise them would also be to potentially lose them.
Depending on the country or region, there are always going to be various laws and regulations to tangle with. For collectors, this means being both aware of these regulations and agile enough to pivot at a moment’s notice. Regulations are shifting all the time right now as governments struggle to come to terms not only with how to keep their economies afloat in the wake of the pandemic but with how to keep businesses and individuals from collapsing into hopeless debt.
Some Asian jurisdictions, for example, have taken steps to adapt their insolvency laws by, for example, suspending the obligation to file for insolvency. In the MENA region, there are also plans to improve the regulatory and institutional structure and explore better synergies between agencies. In the UK, meanwhile, the government is consulting on changing the eligibility criteria for debt relief orders as the economic impact of the virus continues to clamp down.
Across the board, regulators will, in the short term at least, be pressing for greater tolerance to help soften the harsh landing that’s coming after summer when the various schemes and loans come to an end. This is going to make the job of collectors even more difficult.
A third-party problem
We’ve also seen a consistent drive towards third-party servicing and debt purchase – going from empathetic treatment to a toxic assets view in line with what happened in the wake of the 2008 financial crisis. The mindset has already shifted from “How do we get back to normal?” to “Some people will need to look after themselves, I’m afraid.” However, the number of third-party collections firms is shrinking as consolidation continues to play a major role in the collections sector.
Still, with banks now struggling to recruit enough people to service dramatically increased levels of debt, this leaves ample room for third-party collectors to step in and pick up the slack. It’s going to be vital for lenders to avoid the mindset adopted by these often predatory third-party debt purchasers or we could be in for some pretty Orwellian consequences.
COVID 19 completely changed the way consumers spent, saved, and addressed debt, ushering in a wave of global economic uncertainty and endless worries with no clear solutions. And this is before we factor in that millions of households and businesses were in a state of financial fragility even before the COVID-catalysed recession.
Lenders that offered modification or deferral programs are now faced with growing concern about the debt that will still be due and will have to be collected at some point. The projections are that there will be continued growth in delinquency across all delinquency types as support schemes start to tail off. Collections teams will need to monitor, adapt and respond in real-time to debt management changes during the ongoing emergency.
Uncertainty and negativity
The collective sigh of relief that hit the world when the vaccines were announced quickly turned sour as it began to dawn on collectors how much harder things were actually about to get. Indeed, the end of the pandemic arguably brings more questions than answers. For example, what happens once a client’s holiday expires?
Also, SMEs that go out of business as a result of the pandemic won’t be able to pay back their loans once “the world is back to normal” and even the businesses that manage to stay open will have significant shortfalls. All this leads to a culture of negativity that will put pressure on interest rates, particularly if inflation rises. In that eventuality, we see many Tier 2 lenders going under and low pits and high losses for those that remain.
The way collections teams react to these challenges today will determine whether they can retain customers in the future and they are only going to get more varied and complicated as time and the virus itself moves on.
Finding the middle ground between acting fast and acting tactfully enough to keep everyone happy while removing anything aggressive or potentially stress-inducing from your collections practices is going to be a tricky balancing act. Moving too quickly is certainly not a good idea either as you could end up crippling entire families and businesses. But move too slowly and the debts will begin to stack up and become more difficult to tackle, potentially jeopardizing the future of your own business.
Regardless, there is going to be a major rise in the number of NPLs throughout the working world, with some estimates predicting unpaid loans could reach upwards of €1.4 trillion in Europe alone. With these daunting figures looming on the horizon, lenders need to start focusing not only on their bottom line but also on their customers. The former is a slightly easier pill to swallow and requires adopting more cost-effective and scalable collections strategies across the board.
But these strategies need to be able to take into account individual context. And that’s going to require a power that is beyond human; a digital debt collections strategy that is able to offer transparent and practical self-service solutions to help businesses and individuals alike feel like they have greater agency over their own debt. Warm and regular communication is an absolute must and you need to make the customer feel as if they are the ones driving the conversation every step of the way.
Because if this pandemic has taught us anything it’s that people are always going to feel more comfortable when they’re in control.