In Focus Consumer Credit


Preparing for a corona debt tsunami


The suddenness at which COVID-19 hit the economy has left limited time for organisations to strategically re-focus, how can collections operations adapt to plan for the tsunami of arrears likely to build in the coming months


Ulrich Wiesner Senior consultant, Analytics, FICO


Most collection departments in north- western Europe have not seen inflated volumes yet, but as soon as the regulatory payment holidays expire collection departments are likely to face substantial volumes of customers who will be unable to return to their contractual instalments. Consequently, collections managers


should brace themselves for a tsunami of account volumes and potentially big operational challenges, with the resulting substantial credit losses.


Good customers, just bad circumstances Many customers – who are now feeling financial stress – are good customers in bad circumstances. Historical data shows they want a quick rehabilitation, typically becoming financially stable sooner rather than later.


Banks able to identify and offer the


appropriate solutions to these good customers are more likely to avoid unnecessary losses, strengthen their customer relationships and hence secure future revenues. However, there is not much time for


organisations to prepare for a potential tsunami. The focus should, therefore, be on some key tactical measures.


Addressing high call volumes Higher volumes in collections require a stronger focus of available staff on relevant accounts, as well as a higher level of automation of standard processes. Automated communication platforms


allow a fully automated, interactive communication with customers via voice, text and chat. Such cloud-based solutions can be launched with minimal integration effort within weeks and provide almost unlimited scalability. They allow for fully automated processing


It makes sense, therefore, for banks to review their toolkit as a priority and update the respective guidelines and policies, to assess which forbearance tools should be offered to which customers once the government directed payment holidays have finished. It is also important to understand the impact of such measures on the bank’s liquidity


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of low-risk cases, including capturing payment commitments. With additional integration effort, they even allow for agreements that do not require detailed discussion or explanation, such as due-date modifications, simple payment-plan adjustments, or a repetition of an agreed direct debit. At the same time, such platforms allow


customers to address their issues at any time, even outside standard office hours and without the perceived and uncomfortable need to justify financial delays to a human collector. Increasing volumes will force operational


units to focus their actions on important cases. If the propensity of a customer rolling


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to the next arrears bucket is known, then the higher loss-incurring accounts can be targeted more easily. There may not be enough time to develop and implement scorecards or machine learning models ahead of the wave. But there should be enough time for the


development of data-driven segmentation trees. In addition, existing regulatory models such as propensity to default models can improve segmentation quality, if such score values can be brought into operational systems.


Structural financial difficulties Customers with structural financial difficulties require appropriate forbearance measures to address their financial hardship. In the past, many banks have used such


tools only by exception. As a result, the range of tools in place is often limited and related policies are not up to date. However, in most cases a successful


restructure of a loan is economically more favourable than the termination of the loan, even in the case of financial concessions. It makes sense, therefore, for banks to


review their toolkit as a priority and update the respective guidelines and policies, to assess which forbearance tools should be offered to which customers once the government directed payment holidays have finished. It is also important to understand the impact of such measures on the bank’s liquidity. And to ensure appropriate conversion


rates, a successful hardship framework should include streamlined operational processes and avoid bureaucracy and unnecessary paperwork.


July 2020


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