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How can lenders better support borrowers facing delinquency?

Mortgage arrears rates and distressed sales have been rising recently amid financial instability, but what does debt collection best practice look like? Corey Smith, FICO’s senior partner, for client success, explains.

Australians are stressed and struggling.

A record high of 1.5 million Australians are at risk of mortgage stress. The official cash rate is 4.1 per cent, the highest in over a decade, and the household saving ratio is at its lowest level since the global financial crisis.

As delinquency rates on Australian home loans surge, what are lenders to do?

From identifying vulnerable customers to leveraging the right data, here are best practices for debt collection that we think lenders should be following during the ongoing squeeze on household incomes.

Debt support

We anticipate increased need for digital-led payment plans and loan modification to mitigate longer-term financial impacts.

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With debt collection in the spotlight, lenders must:

  1. Achieve a rich, holistic customer view by leveraging data to inform enhanced decisioning.
  2. Translate data into actionable insights with predictive and prescriptive analytics to anticipate and assess customers’ financial hardship and to identify long-term, sustainable solutions.
  3. Offer sophisticated omnichannel customer engagement for enhanced personalisation and self-managed resolution.

These practices are elements of ongoing digital transformation for many financial institutions.

But stepping up these efforts is critical to lenders’ ability to respond to warning indicators and offer timely debt support options to customers.

Dedicate more data

To gain a deep understanding of individual customer circumstances, credit providers can leverage a combination of three categories of debt management data:

  • Internal data – customer financial behaviour such as:
    • Credit reliance information – e.g. card utilisation, renewal of unsecured personal loans.
    • Financial products usage – e.g. direct debit payments, lines of credit.
    • Changes in card transaction spend type and velocity.
    • Credit stress indicators – e.g. number of new credit applications, use of credit for essential expenditures, increasing dependence on overdraft facilities, use of short-term, high-cost facilities.
    • Industry and occupation stability.
  • External data – credit bureau and open banking data:

    Analysis can highlight employment and disposable income changes or significant spending in real time, which may predate a slide into arrears. Open banking data can reveal more subtle changes: a reduction in eating out, fewer subscriptions. or shopping at cheaper supermarkets.
  • Customer-provided data - Regular communication is essential to understanding the changing nature of customers’ circumstances, as is capturing data about reasons for hardship, impact duration, disposable income, and affordability.

1. Improve affordability assessment

Income and Expenditure Assessments are critical to understanding a customer’s circumstances, but the detailed conversations they require represent significant operational overhead.

Lenders could use open banking, collect data through digital channels, and automate affordability calculations to identify the right solutions for the growing number of customers in need of support.

A scalable, digital-first approach provides more convenience, avoids embarrassing conversations, and encourages engagement.

2. Engage customers through the right channels

Effective customer-led strategies offer flexibility and convenience. Simple mechanisms invite customers to disclose relevant information and give easy access to guidance to aid their decision making.

True omnichannel communications are critical and multiple contacts might be necessary, including technology that enables customers to auto-resolve e.g. SMS, interactive email, mobile apps, online, or via secure electronic document fulfilment.

Contact strategies must be adaptable to keep pace with the rapidly changing environment, maximise customer engagement, and rapidly find sustainable solutions to help customers through financial issues.

3. Review

Customers’ financial circumstances and stresses are continually evolving. The treatments used to provide the right, sustainable outcomes need to evolve, too. Consider where automation and optimisation can be used to improve decisioning.

Regularly review your options, tools, and restructure agreements against the evolving debtor profile of customers. Only long-term sustainability can be considered a good customer outcome.

4. Make better, faster change decisions

Simulations and scenario testing capabilities are game-changing practice and vital to helping businesses make informed decisions on how to treat customers and best leverage finite resources.

What are the implications of maintaining or reducing staffing levels given increasing volume of customers entering hardship? What are the potential impacts of regulatory changes? What are the likely impacts of macro-economic change on key business metrics? What impact will this challenger treatment have on provisioning for this risk band?

Decision optimisation has applications across the collections life cycle, from pinpointing the engagement approach and appropriate debt solutions for vulnerable customers, to focusing resources and appropriate treatments to maximise the proportion of customers returning to order in early collections, to enabling cost-effective management of non-performing loans.

5. Ensure operational alignment

The effective execution of any collections or recovery strategy depends on having the right people, in the right places, enacting the right procedures; leveraging automated decision and communication systems; and using IT infrastructure that provides the required data, communication, review, and change capabilities.

This should be lenders’ target state.

Corey Smith is the senior partner of FICO, an analytics provider to financial sectors around the world.

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