Non-performing loans (NPLs) are on the rise. New regulations constrain capital usage. And in the background, the lingering effects of the credit crunch still squeeze balance sheets and bottom lines. 

While the European Banking Authority still reported a €658 billion total NPL value at the end of 2018, NPLs are definitely in decline across Europe. The ratio of non-performing to performing loans has halved since 2014.

Further economic slowdown could stall this progress. So, it’s important for banks to manage the NPLs they have on their books, retaining the momentum the last few years have built.

Collections and recovery processes are both more important than ever – and more complex. Gone are the days of simply deciding to collect and sending the bailiffs round. Customers use more channels than ever to borrow, pay and communicate; interactions between customer and lender take place across devices, not countertops. Debts are multiple too; customers often have several credit obligations with a bank or company, complicating case management and recovery efforts.

How do you know if your collections and recovery process isn’t up to the job? If you’re running your operations off an Excel spreadsheet, if you have different systems for banking, mortgages, credit cards and debt, and if you don’t know exactly how effective your collections strategy is, something is missing.

What’s needed? A comprehensive, technology-centred and multi-channel approach that takes in the entire credit cycle, from origination to write-off.

How can we do that? With data. The right data, fed into the right systems and processes, can give insight into customer motivations, risk levels and revenue opportunities, as well as improving productivity and performance within the institution. With more information on how they work, who they’re working with, and how best to produce the desired outcome, organisations can improve collections and recoveries to the point where some at-risk accounts never become delinquent in the first place.

Bringing in the policies, processes and systems is a process of digital transformation – a loaded phrase which makes a lot of people nervous, from the executives who pay for it to the collections team who have to use it. The main thing to remember? You don’t have to go all-in, all at once. Your digital transformation can and should be guided by awareness of where you most need to change; points in the credit cycle where a change can make the greatest difference.

Change is never easy, but we’re here to help. We’ll take you through the key stages of the credit cycle and show you how to choose the right tools at each point. Let’s begin at the beginning.

Origination

Change in collections and recovery starts with the very first stage of the credit cycle – debt origination. When the customer applies for credit, when you approve them, and when you The trick is to set the right credit terms so that the customer can repay on timeimplement the credit by setting the terms of the agreement, you’re setting up a potential delinquent. The trick is to set the right terms so that the customer can repay on time.

Successful change here is a matter of insight, managing the risk of customer delinquency and improving collections and recovery operations if delinquency occurs. The basic principle is prevention is better than cure.

What does best practice look like?

Adopting best practice in origination involves a set of key tasks and responsibilities.

• Centralise information and insights. Tasks, responsibilities and user groups should be collected in an aggregated viewing and reporting system, with automatic notifications of changes. Everyone responsible for a customer account should be able to discover everything they need to know about that account with a simple process.
• Closely manage documents. Credit origination creates many, many documents. By organising and digitisting as many of these as possible, you will create an unbroken record of everything that’s happened during the account’s creation. That record will inform your recovery strategies if an account becomes delinquent.
• Adopt robust risk analysis models. Ensure that your risk analysis tools and personnel have access to the necessary data, such as financial statements and balance sheets, and can calculate appropriate risk-related metrics such as probability of default and loss given default. Recovery rates from comparable customers will also be useful to inform these calculations.
• Institute productivity reporting. By tracking team productivity you can manage operations in real time. Whatever tool or process you introduce here should allow you to sort, filter, visualise and export data.

A specialised origination system will help you work more productively, cutting down on paperwork and processing by making the application and approval process more streamlined. It will provide comprehensive risk assessment and management features, and allow you to respond to risks as they emerge.

Loan monitoring

Loan monitoring is your first line of defence against delinquency. It provides accurate risk assessments to your collections and recovery teams, and can create early warning systems to detect borrower problems early, making delinquency a short-term problem or potentially avoiding it altogether.

What does best practice look like?

With improved loan monitoring, financial organisations will see fewer defaults, better risk assessment of new business, and less risk on existing business as scoring models become more accurate. Here are the core responsibilities that will improve your loan monitoring.

• Collect internal and external data. Data is everything to loan monitoring; you need information on current customers, past behaviours, and the risk presently on the books. External data, such as credit scores, let you create a comprehensive model of delinquency which you can apply to customers present and future.
• Don’t discount qualitative data. The collections professionals who interact with accounts and customers every day know things which cannot be measured, and which may not align with the predictions of your EWS model. If a particular customer responds to being contacted by phone, they should be – even if the model says it’s not right for their demographic.
• Identify pre-delinquency warning signals. Your financial goals and analysis of regressions will determine exactly why your customers stop paying and their accounts become delinquent. You will also be aware of which signals carry more weight; it may be that your delinquent customers become less likely to pay after sixty days, and so the duration of overdue payments is more important than the amount.
• Develop and monitor watch lists. Watch lists allow you to organise your customers based on the severity of the warning signals and the scores indicated by your data analysis. You’ll be able to tailor actions and responses based on the particular list.

Be sure that every member of your team learns the EWS system. Early warnings improve monitoring and help you identify liabilities and risk sooner, possibly preventing a delinquency.

Loan delinquency

The loan may be delinquent, but that doesn’t mean your relationship with the customer is done. Delinquency is an opportunity to recapture revenue and retain a customer. The key to effective recovery is smart strategy, supported by robust tools that make it easier to communicate with The key to effective debt recovery is smart strategy, supported by robust tools that make it easier to communicate with your customeryour customer. The operative word here is tools, plural: a single interaction over a single communication channel is unlikely to get results, and too many banks are continuing to rely on channels that have fallen behind in terms of effectiveness.

The traditional approaches to debt collections – strong-arming by field agents, inflexible terms and a low-tech, on-a-budget approach to user experience inside the institution and out – are no longer adequate. A modern approach to collections and recovery treats the debtor as a customer, applying the same principles that banks use to streamline the user experience in other aspects of their business. Empower your customers to pay and most of them will pay - they don’t want to be in debt any more than you want them to be.

What does best practice look like?

Best practice here starts with understanding the phases of delinquency: soft, pre-litigation, litigation and recovery.

You’re looking to accommodate their needs in order to keep them on your side

During the first two phases, the emphasis is on helping the customer find a solution. The assumption here is that the customer wants to pay but is having trouble; you’re looking to accommodate their needs in order to keep them on your side, minimising the number of cases that move on to the later stages. The approach is customer-first thinking, focused heavily on asking questions, providing tools and services, taking out the need for stressful and intimidating personal contact, and communicating.

Beyond this, there are five important approaches to take.

• Appoint a single collections management authority and organisation. Centralising your operations in this way allows you to industrialise them, controlling costs and optimising returns while remaining consistent in your approach.
• Segment delinquent portfolios. Use static metrics (product type and account balance) and behavioural metrics (the ratio of promises to pay which the customer has kept) to segment portfolios, and you can make the right offers to the right people at the right time.
• Provide delinquency education to your personnel. Introduce company-wide, transparent education to keep all departments appraised of delinquency status. Define and train your collections professionals for dedicated roles.
• Measure and motivate collections professionals. By monitoring the competence, performance and compliance of your collections team, you can attract and retain the best of the best, improving recovery performance across the board.
• Communicate clearly across multiple channels. Communication success directly relies on opening up more ways your customers can reach you. You can retain professional consistency by using clearly defined tools and scripts that meet the required ethical standards.

In support of this person-first approach, you should implement technology that enables this tracking, monitoring and communication throughout the credit cycle. A powerful and far-reaching suite of financial tools will improve the efficiency of your collections and recovery operations, cutting out unnecessary paperwork and presenting account data to people who need it. 

"You can start thinking strategically, looking for the operational activities that will address these factors and encourage customers back into payment"