In the wake of the unprecedented COVID pandemic, we’re facing a ‘debt tsunami’. The pace of global debt accumulation spurred by the fallout of 2020 is going to leave the global economy struggling without a major intervention. According to the Institute of International Finance, the total level of global indebtedness increased by $15 trillion in 2020, reaching around 365% of global GDP by the end of the year.
Many people are highly leveraged and banks will have to start collecting debts from potentially millions of customers who seemed like a low credit risk at the start of the year but are now struggling to pay bills as a direct result of the pandemic. That’s going to be a monumental task for today’s collections teams, particularly in emerging markets where debt burdens have risen by 26% since 2019.
If 2020 was the year of the debt tsunami then 2021 is going to be the year of dealing with the fallout. With the year just two months young and looking to pose its own set of unique challenges, let’s shine a spotlight on why this is happening and how the debt collections landscape may have to change in response.
COVID: Creating a world of debt
The main difference between 2021 and 2020 is that, whereas the pandemic came almost completely out of the blue and we were all ill-prepared to handle it, this year we know what we’re dealing with. Not only that but successful vaccine rollouts have inspired hope in many. So, in 2021 we’ll hopefully see some market conditions normalize. 2020 was a decidedly muted year for the collections sector, with a substantial decline in overall balances and a decline in overall credit accounts.
But while the public health impacts of COVID will hopefully decline sharply this year, the long-term economic impact is going to be felt in the debt left in its wake. Both governments and banks managed to halt an immediate economic downturn using payment holidays and furlough schemes, but that holiday will soon be coming to an end.
The pandemic also affected customer service channels, with fewer customer service representatives available to answer phones due to absent workers and cutbacks. Some agencies and banks allowed staff to work from home but in many developing countries, this wasn’t practical, as the infrastructure and resources that would allow for this simply were not there.
With more customers calling to defer mortgages or credit in such uncertain times, the fact that there’s nobody there to take their call could lead to a mass exodus. Investing in digital options is a major aspect of this, of course, but customer retention is just one of many challenges lenders will face in the coming months.
There has also been a substantial shift in business debt. In the UK, as things stand, the £44 billion business rescue program is going to collapse into chaos soon when the rug is pulled out from under countless UK businesses after all furlough and grant schemes come to a close. Many businesses are going to be forced to default on their loans as a result and UK debt collectors want to play a larger role in helping recover some of these debts.
In all, 2020 was a period of suspended animation in many regards for the debt collections sector as a whole. So there’s every chance that 2021 will see consumer credit performance default to more typical patterns. In that case, collections agents will have no choice but to get more aggressive and if this intensity is mishandled it could lead to lost customers. It’s a delicate balancing act that’s going to require some fresh approaches and the best place to start is in identifying the challenges.
The debt collections challenges
The main challenge here is fairly obvious – more collections activity for already stretched teams. However, it’s actually a more nuanced challenge than you might think. For one thing, many of the customers who now find themselves in arrears don’t fit the traditional profile of people who fall into a lender’s collections process. 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 tied up in longer-term investments.
These are the kind of debtors agents have rarely dealt with before and the kind of debtors that might require a more gentle hand. These are the kinds of customers that haven’t fallen behind on their payments due to any fault of their own and to chastise them would be to lose them. This is unfortunate given that, in any other situation, they would most likely be model customers. These customers will not respond kindly to aggressive tactics but will to warm and regular communication, flexibility and collaboration.
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. It’s going to be vital for lenders to avoid this mindset or we could be in for some pretty Orwellian consequences. In fact, debt collection agencies have a major advantage here as banks can’t recruit enough people to service this debt, leaving ample room for collections to step in and pick up the slack.
It’s a tricky balancing act and moving too quickly is certainly not a good idea as you could end up crippling entire families. But move too slow and the debts will begin to stack up and become more difficult to tackle, potentially jeopardizing the future of your 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 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.
Modernizing debt collections – now
What’s required, above all else, is a pivot towards a more customer-centric approach with a more organic adoption of digital technologies. The obvious solution is investing in a modern debt collections software platform, which has never been more relevant. It’s predicted that the total number of online and mobile banking users will exceed 3.6 billion by 2024. That’s almost half the population of the planet. If debt collections are still stuck in the doldrums of phone calls and intimidating chase-up letters then there really is no hope.
The debt collections software market is set to be worth $4.49 billion by 2026, so things are obviously moving in the right direction. Investing in the right software, however, should just be the foundational step of a wider movement to modernize debt collections. This is going to involve lenders becoming more sympathetic and emotionally invested in their debtors and investing more heavily in customer-first initiatives.
Technology can help in this regard too. For example, by utilizing real-time sentiment analysis to interpret the language and emotions of debtors during conversations (both online and over the phone), lenders could alter their language accordingly. In fact, it might be possible for this to be done automatically by a chatbot, given enough time and resources.
According to research firm Tractica, the global market for emotion recognition and sentiment analysis is projected to reach $3.8 billion by 2025 so it’s certainly not a sector to be sniffed at. You’ll want to ensure, however, that you choose the right software for your needs. The best digital debt collections solutions are flexible, able to analyze and segment customers effectively and have built-in self-service functionality. Debt collections software exists to automate certain jobs, make other jobs easier, and allow customers to access their accounts from any location at any time.
Debt collections software is also an investment that will allow lenders to make more informed decisions about their collections. By using machine learning algorithms, intelligent recommendations can be made that inform lenders how and when to act which makes it easier to choose the right tactics and communications channels for the right customers. These techniques have been used by the marketing sector for years now and they can be used to inform not only collections but also lender decisions too.
An argument for consolidation?
One of the most powerful trends shaping financial institutions in general over the last 12 months has been the accelerated shift from offline to online. Indeed, online has become a primary component of all collection models. But where does this take the industry as a whole? There is certainly an argument to be made for consolidation.
According to Glen Goldstein, executive vice president of diversified markets at TransUnion: “Consolidation in the collections industry has taken place for the better part of the last decade, and the COVID-19 pandemic helped accelerate that trend. Less credit activity, smaller balances, and a large number of accounts in accommodation status certainly slowed collections activity, but the pandemic brought on a whole new set of challenges. Most notably, work-from-home mandates that many collectors were not equipped to handle.”
Could one central authority be useful in terms of centralizing the collections process and saving a lot of these problems? Talks between some of the biggest banks in the UK have stalled in recent months, but that’s not to say other regions and authorities can’t come to some sort of agreement. Having one central authority responsible for collecting all debts would greatly reduce duplication of effort for the banks and would be a much better experience for customers too.
Getting banks to work together is not easy at the best of times though and these are most certainly not the best of times. PSD2 and the rise of open banking have proven that it can happen, given the right circumstances, but it’s a change that is going to take a lot of time and a lot of persuasions.
Modernizing the tsunami
Ultimately, the modernization of collections practices becoming the norm amongst lenders of all sizes is going to be one of the few positives drawn from 2020. There is still a long way to go, as globally, more traditional channels were still cited as the most effective way of communicating with customers. Indeed, 44% still cite manual telephone calls as the most effective method. But even in countries that are slow to adapt, there are seeds of change being sown.
It’s up to individual lenders and agencies to double down on these changes and do so while keeping the customer at the heart of every move they make. Because after the year we’ve all had, it’s compassion, transparency and humility that are going to win friends and influence people in the uncertain months ahead.