Traditionally, the first quarter of any calendar year sees a dilution of both collection and recovery yields given the overspend that occurs over the December holiday season. Therefore, optimal strategies and operational execution are key to mitigating the effects of the first quarter ‘hangover’.
And this festive season is expected to have its traditional impact on consumer debt levels. South Africa finds itself in tight economic circumstances and this is aptly illustrated by:
- Domestic debt-to-income ratio stands at approximately at 78%,
- Consumer credit extension in SA equates to R 1.8 trillion, with roughly 9% of this debt three months or more in arrears, and
- Approximately 45% of the 22.5 million credit active consumers have impaired credit records.
On top of this, credit providers are having to deal with a recent wave of regulatory change which makes it increasingly difficult to optimise delinquent account management, in particular where the debt is unsecured and the client has multiple exposures to various credit providers.
As with any hangover, there is no silver bullet to curing the post-holiday collections headache. However, in order to achieve superior yields, credit providers need to ensure synergy between a number of key, distinct collection and recovery disciplines that extend across strategy, people, process and technology. In the end, the best remedy is doing the “basics brilliantly.”
Doing Basics Brilliantly
An ounce of prevention is better than a pound of cure. It is always better to focus on limiting the propensity of current clients rolling into a delinquent state. The key to doing this successfully is by segmenting your debtors by how likely they are to pay or roll into a delinquent state the next month, and then treating each segment accordingly. Remember, these clients have not defaulted – the point is to reach them with the relevant treatment before they do.
The easiest approach is to develop a propensity-to-roll scorecard, which is derived from a combination of internal (payment, account maturity, etc.) data and external (bureau) data which divides your current portfolio into distinct high, medium and low propensity to roll categories.
Next, prioritise your high-propensity-to-roll population segment using a suitable treatment framework (call, SMS or other) and remind them of the importance of maintaining their current credit standing. The primary treatment here would be educational.
‘Knowledge’ as they say ‘is power’. Superior credit providers and debt collectors should be able to segment their delinquent accountholders into clear categories that relate to their ability to pay. This ability to understand and predict who is most likely to fail to meet their obligations in the short term is underwritten by analytically derived propensity-to-roll scorecards.
As per the preventative steps above, these perspectives are sourced from a combination of internal and external data; the latter primarily derived from credit bureau information. Whilst there are other data sources that might point to a propensity to roll (or cure), such as social media or mobile data, their veracity has yet to be proven.
Segmenting a portfolio into discrete risk segments allows for optimising workforce management, campaign prioritisation, and suitable treatment frameworks to address the real (and perceived) risk and aligning effort (and, by implication, cost) to an acceptable collection or recovery outcome.
Another effective way of improving collection rates is by creating a holistic policy framework that gives both the credit provider and debtor sensible, workable opportunities to regularise and/or exit the delinquent debt on a ‘win-win’ basis.
There is an old adage in credit that states: ‘’your first loss is often your best loss’’ and forward roll-rate statistics seem to confirm that unless an exposure is contained within 60 days of becoming delinquent, there is a high probability that the account will eventually roll into a state of write-off.
Part of the lost opportunity here is that some credit providers have not considered when to rehabilitate, when to seek repayment and ultimately, when to institute recovery proceedings in a logical, sequentially driven policy framework. ‘Doing the same thing and expecting different results’ is a well-known definition of insanity, yet how many debtors receive different tilted collection and recovery treatments as they progress along the delinquent credit lifecycle? By tilted, we mean the (1) type of collection action (2) the tone of collection action, and ultimately (3) the timing of the collection or recovery action.
Therefore, the key to an optimal policy framework is articulating the following three treatment frameworks:
- When to rehabilitate (and what to offer to the debtor to support the philosophy),
- When to seek a mutually beneficial (and commercially astute) exit by way of compromise/settlement, and finally,
- When to consider commercially sound debt recovery proceedings.
Underpinning all of this are the credit provider brand values, the regulatory environment, and ultimately, the defined reputation risk framework within which a credit provider wishes to navigate.
Having identified who may or may not pay you, and articulated a policy framework that allows the credit provider to apply differentiated, tilted treatments to specific risk segments, the next ‘basic that needs to be executed brilliantly’ is how to operationally deploy this strategy to ensure adequate portfolio penetration and activation rates.
This component is arguably the most challenging to execute and is probably one of the prime drivers for misalignment between risk and operations. Given that there are so many moving parts - capacity management (now more frequently referred to as workforce management), contactability, agent productivity, and dialler optimisation to name but a few - this execution component requires a carefully considered approach to maximise portfolio yields.
In this space, one needs clearly articulated collection and recovery calendars that specify:
- what campaigns are run and when they are retired,
- what treatments are executed (sometimes in parallel),
- the optimum time to call,
- when to retire accounts from the dialler campaigns and escalate trace activities,
- a good combination of predictive and preview dialler campaigns,
- alignment between capacity and likelihood of debtor engagement (you don’t want redundant agents and idle dialler time) and ultimately,
- the capability of monitoring productivity and granular dialler campaign outcomes to ensure appropriate mitigation of risk inherent in the portfolio.
There are a number of software models that can facilitate and enhance this process by calculating the required productivity and performance outcomes to support given collection targets. These models, extract salient operational data to provide insights and validate real-time decision-making.
Finally, if one considers the extent of actual collection and recovery activities and outcomes that occur in a real-time environment for a mid- to large-scale credit provider, then it is a business critical requirement to have superior insights at a strategic, financial and tactical level.
This business intelligence is drawn from a variety of platforms (host, dialler and collection/recovery systems) and should be able to tell a compelling story in terms of the following key metrics (not exhaustive):
- Portfolio yields and collection/recovery rates per propensity-to-roll or pay segment,
- Transition matrices to track movement of delinquent balances,
- Granular campaign outcomes - the relationship between attempts/connects/right parties and promise-to-pay outcomes,
- Granular campaign penetration - extent of accounts worked and activation (payment) rates,
- Productivity and capacity management by way of operational insights in terms of accounts worked/not paid; accounts worked/paid; accounts not worked/not paid and accounts not worked/paid,
- Underlying costs to collect and recover,
- NAEDO/AEDO tracking and outcomes, and
- Compromise/settlement performance.
There are many other important metrics, but broadly speaking, if there is adequate coverage in terms of the above, then there should be good understanding of ‘cause’ and ‘effect’.
Getting through the over-indulgence of holiday shopping with minimal headaches
In summary, the ability to optimise collection and recovery outcomes rests on a number of key pillars which are synthesised by these five themes:
This is not to say that other components – such as performance management, practitioner management, and regulatory management - are not fundamental to the success of any credit provider navigating the increasingly precarious South African debt enforcement process. However, get these disciplines right, and you are well on your way to getting through the “over-indulgence” that comes with the holiday shopping season with reduced collection and recovery headaches.
If you believe that the best remedy is doing the “basics brilliantly,” I recommend my eBook on "Mastering the Fundamentals" for Collections & Recoveries for further guidance on improving yields and profitability through simple enhancements to your processes and strategy.
About the Author, John Garde
John Garde has accumulated over twenty five years’ experience across all fields of retail and commercial banking in the South African banking industry with particular focus on the credit and operational risk domain. He has extensive retail, commercial and high net worth credit assessment and secured lending experience as well as the implementation of compliance and governance standards relating to Sarbanes-Oxley and the National Credit Act. John was also instrumental in influencing and articulating credit policy and strategy in many of these roles.