Bruce Curry, vice president for collections and recovery consulting and sales at FICO, believes the current confusing picture of consumer finances could lull lenders into a false sense of security

The latest data from MoneyCharity.org shows that in Quarter 1 2021 lenders wrote off £1,042 million, of which £355 million was credit card debt. These eye-watering numbers, viewed alongside the Financial Conduct Authority’s estimate earlier this year that 52% of adults (27 million) in the UK could now be considered as financially vulnerable, suggest that the size of the task for debt collections in the coming months and into 2022 should not be underestimated.

But the data is confusing. There are contradictions in the pace of economic recovery, accurate real-time analysis of household incomes and anecdotal evidence suggesting higher than expected paydowns of household borrowing. There are also reports saying the UK is bouncing back as payrolls continue to soar.

On the jobs front, the picture is even less clear. Furloughs are yet to be fully withdrawn, although the Treasury has indicated they are now winding down to a hard stop in October. And it's a mixed picture right now with around 1.9 million on furlough - down from a peak of 5.1m in January. Over a quarter (28%) of employers have been obliged to furlough staff, again down from 35% at the end of April.

Maintaining a genuinely accurate picture of customers’ financial position and fully understanding the pandemic’s true impact on household finances has to be the priority for lenders. Now is, therefore, the right time for banks, lenders and card issuers to ensure they continually interact with customers to better understand their genuine financial position — especially if household incomes are likely to take a hit later in the year.

Payment Priority Switches

The key to managing future potential delinquency hinges on the ability to spot — and flag — payment priority switches, as households are pushed into making harsh financial decisions. Mortgages, food, medical and education bills may take priority over credit card payments for some segments. Others may be inclined to behave in the opposite way if their ability to maintain living standards is dependent on access to revolving credit. Knowing who is likely to behave in which way is critical.

The ability to predict and pre-empt non-payment may also lead to stronger customer relationships, as lenders are viewed as being more understanding, helpful and caring. It’s worth considering why maintaining routes to repayments across the entire customer base is better than receiving nothing from some segments.

But lenders will also be facing an acutely tricky balancing act while being mindful of the regulatory requirements of IFRS9. Timing is everything, in considering the impact on balance sheets of extended repayment arrangements offered to some, while continuing to ensure appropriate customer outcomes.

Lenders may opt to enhance their customer assistance and collections capabilities. Risk analysis and assessment can also be adapted to help shape greater social responsibility. Insight into customer finances via Open Banking, real-time analysis and more AI-based analytics creates stronger long-term resilience for lenders. In turn, this leads to continued stakeholder satisfaction.

Digital-First Collections

It’s clear more and more customers are now happy to conduct communications via digital channels, and far less inclined to simply respond to ‘robo-calls’, which also now face regulatory scrutiny. Effective customer engagement, of course, helps lenders better align with regulatory requirements, which favour offering customers every opportunity to find a mutually agreeable debt avoidance or repayment solution.

As the industry continues to move towards more light-touch communications — digital-first, SMS, email and such — while offering extended payment holidays and freezing interest, it’s in everyone’s interest to try to avoid customer delinquency, or deal with it appropriately. It’s a position that’s clearly been flagged by regulators, which have offered clear guidance on how institutions should pursue equitable goals.

Lenders that can get the right combination of digital-first customer support are likely to reap benefits, including long-term customer loyalty. As a handy bonus, this also provides insurance against being left in the wake of more tech-savvy, ambitious peers.