When it comes to technology, early adoption doesn’t always lead to ongoing efficiency.
Britain’s railway system, for example, is the oldest in the world, with wagonways first built in the 1950s. Now, though, the system is out of date and proving tricky to improve. Just 34% of British train lines are electrified, the trains and carriages used are 21.1 years old on average, passenger complaints are on the rise and just 62.5% of British trains arrive at station stops on time.
The Japan National Railway, on the other hand, was privatised in 1987, with much work done to improve its infrastructure in the years since. As a result, the average length of the delay is just 0.9 minutes on the Shinkansen line, and Japanese trains are built with a lifespan of a maximum of 15 years to keep things new.
What the Japanese have achieved - and what the British must strive for - is efficiency: of infrastructure, of process and of service.
It’s the same story in the global retail banking system.
A techUK report from 2013 describes how - as a result of the evolution of technology - legacy systems have been built upon rather than replaced, creating systems out of thousands of programmes linked by ‘fragile connections’.
The bigger the bank, the bigger the issue. In 2016, Deutsche Bank managed to remove nearly 500 applications from its IT systems (still leaving the bank with almost 4,000). M&A activity, regulatory requirements and the significant costs involved in migrating systems to newer models add to this sluggishness.
Specialised collections and recovery systems can optimise each and every stage of recovery operations, with the right offer at the right time able to improve collections performance, raise self-cure rates and increase the chances of successful recovery.
For banks, the best way to crush competitors is to focus on making the collections process as efficient as possible. An efficient system not only differentiates a brand from its competitors but offers a huge business opportunity too, with three key benefits.
For both consumer and corporate-lending, spotting the likelihood of borrower delinquency is vital for managing risk exposure and efficient collections processes.
Nowhere is this more evident than China. Ten years ago, McKinsey chronicled the country’s private and public lenders’ difficulties in pricing loans according to risk. Smaller institutions were lending at rock-bottom rates to improve market share, while state-owned larger banks had little incentive to develop basic commercial skills like risk-based pricing. Historically, the state had written off bad debt, which encouraged bankers to keep loan pricing low, despite government attempts to raise benchmark interest rates.
Ten years on, China’s total debt stands at 257% of GDP (up from 150% ten years ago). Borrowing purely to pay off interest on existing loans is rife, and the IMF warn that Chinese debt levels could be the trigger the next financial crisis.
The Chinese debt crisis highlights the importance of inadequate risk assessment, with a failure to build accurate pictures of borrower risk at the outset creating an inefficient system.
Collections software allows financial institutions to use scoring tools to rate risk and flag the likelihood of delinquency; create warning lists for the highest risk customers for closer monitoring, and segment portfolios based on recovery needs and risk scores for more effective collector targeting.
The result? A more efficient and streamlined process that provides tools to monitor, analyse and diagnose at-risk portfolios to help banks avoid problems further down the line.
Gartner’s March 2016 report on Loan Collections Technology Analysis highlights how inefficient current loan collections processes can be. Financial institutions often have three separate specialised departments - often operating from different geographical locations - to handle early stage delinquency, mid-to-late stage delinquency and recovery, recording collections activities separately.
While sticking with a strategy may seem easier than introducing a brand new way of working, the current process means that employees often need to intervene manually to understand the relationships between the data held by each system, adding an unnecessary degree of cost, complexity and time.
According to EY’s 2017 Global Banking Outlook report, 43% of global banks stated that their top reshaping priority was to simplify or restructure business operations in 2017, while 39% wanted to develop partnerships with industry disruptors/FinTech companies. In addition, 63% wanted to optimise customer channels (digitisation in particular, with self-serve a focus), while 62% were keen to ensure strategic efficiency and cost-reduction.
A centralised collections system can help loan collection teams to achieve these goals and stand out from the competition. The ability to collect, assess and manage portfolio performance under one roof gives collection teams the ability to view the customer journey and share relevant documentation from loan disbursement to delinquency. It also allows for multi-channel contact and self-serve functionality to connect with consumers who, as outlined in EY’s 2015 report, “now want to interact with their bank whenever they want, however they want, and wherever they want, and to be able to shift seamlessly between channels.”
Should debt recovery fail in the early stage of delinquency, the subsequent move through to litigation can be costly in time and resource. Financial institutions need to handle legal document collection, payment arrangements, and tracking assets and expenditures, which can be a struggle with clunky, outdated systems where information is stored in multiple places, in legacy formats.
The current lack of efficiency in banks’ debt collection systems can be seen in the increasing number who outsource collection to professional agencies.
In Singapore, firms are outsourcing their debt collection earlier than ever before. Matthias Chen, market-communication and product manager at Singapore Commercial Credit Bureau (SCCB), is clear why. "The main reason companies are outsourcing their debt collection early is that it is more cost-efficient and effective to do so," he says. "Doing it early also helps in tracing and tracking defaulters."
He continues, "By outsourcing earlier to debt collection agencies, it sends an important signal to the debtor of the severity of the case which could potentially be escalated to legal actions being taken against them."
Instead of turning to such agencies, collections software is an alternative solution. It allows banks to hand power to their customers, letting them manage their own debts and repayments rather than being chased by agencies. Self-service solutions are already widely used in other areas of banking, so why not collections? Such software can improve on recovery performance from early on, reducing the chances of litigation, but still enabling banks to manage legal proceedings more efficiently should legal action be required.
The perils of inefficiency in risk scoring, account management and legal recoveries are clear. High-efficiency means high ROI; low efficiency creates problems like those faced in China.
Collections software gives banks a real opportunity to take advantage of the full economic impact of being a first-mover, putting their organisations on the road to highly efficient, competition-crushing collections operations.
Don’t be the British rail network with its outdated legacy systems. Instead, look to Japan and its individual solutions for each network, making it a place where speed and efficiency are paramount.
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