In the aftermath of the financial crisis and the accompanying recession, consumers retreated heavily on debt. Growth rates in debt began to accelerate around 2012 and today about 90 percent of new debt has come into auto and student loans, according to Schlagenhauf and Ricketts 1. CardHub calculates that the average American has about $7,879 in credit card debt 2. These rising NPAs are a concern of not only banks but regulators and federal auditors as well.
Banks today find that their access to capital is constrained with weary shareholders and depressed markets. With limited borrowing, the opportunity to increase earnings on their loans portfolio is extremely low. They have had to move away from business models that relied on high liquidity and low cost access to capital and are pursuing unpaid loans through debt recovery activities. Saddled with inflexible and aging IT investments and little process improvement, this assignment is extremely difficult for collection and recovery operators. Adding complexity to the situation is an intricate business environment where customers have multiple debts in multiple products and increased regulatory focus on debt collections.
Collections operators need to invest in IT systems that enhance productivity and provide capabilities for omni-channel initiatives, self-cure, self-service options and data management. Such a system would leverage today’s flexible, and responsive technologies and help bridge the gap between how financial institutions collect on a borrower’s delinquent account and the borrower’s experience throughout the debt collection process. Here is a brief analysis of what an ideal collections system should look like for financial intuitions to build more proactive and effective collections strategies.
The collection system should have the capability of integrating with applications of external entities such as agents, attorneys, and
data providers. This allows for seamless flow of data and avoiding data loss, inconsistencies and duplication of effort. Most banks have their channels – Web, Branch, ATM and Call Center operating in
silos, integration of applications allows banks and agencies to gain a complete
view of a customer accounts and relationship.
In a majority of the banks collections operations are based on
the lines of business – mortgage, credit card, personals, auto loans, etc. This means
customers are contacted several times for different delinquent loans resulting
in unhappy and frustrated customers. This approach also prevents lenders from getting
a 360 degree view of all the customer’s accounts and relationship with the bank
inhibiting the bank from providing options that may be most suitable to cure customers’
delinquent debts. Additionally integration between internal and external applications
of the agencies and other parties is poor or does not exist. Recovery data is sent to agencies in spreadsheets, often missing key documents and other critical
information related to the customer's collections history. Agencies have to,
therefore, start afresh rather than continue from the point where the bank ended
its recovery efforts. This results in unnecessary delays and increases
turnaround time. A collection system that is designed to service all consumer
products throughout the entire delinquent life-cycle will enhance debt recovery
efforts, eliminate duplicate process and optimize operational costs.
Over the past couple of years the banking industry has undergone significant technological transformation but debt collections still largely involves manual processes bloating cost and turnaround time of recovering debt. Done in isolation by various entities, both internal and external, manual processes cause data inconsistencies and unnecessary delays that erode both efficiency and the ability to derive maximum value from the debt recovery process. An end-to-end automated system that sits on top of a sophisticated business process management capability can streamline the entire collection process and enhance operational efficiency. Automating work flows reduces effort and time helping employees to focus on value-oriented tasks that contribute to improving business results. Real time reporting capabilities can help monitor agencies and employees effectively.
Several financial institutions and collection agencies still use historical experience and expertise to prioritize or rank delinquent accounts for collections. There is very little analytical intelligence used while segmenting customers. There are several draw backs to this approach – It lacks sophistication and is limited by a small data set, strategic decisions are based on personal experience and limited to structured data that rarely changes or is up-to-date and prioritization of debt collection is done based on accounts not customers. Borrower centricity is an approach where lenders and agencies employ a system that provides a 360 degree view of all the accounts of the customer and segments customers based on certain parameters and calculates appropriate priorities for payment collections for each customer segment. The borrower-centric approach effectively identifies a customer’s ability to pay his delinquent debt.
Once customers are segmented, what bankers and agencies need is an intelligent system that is able to provide the best possible payment options for customers to cure their delinquent debts.
In conclusion, the growing complexity in the debt collection industry requires lenders and debt collection operators to make significant changes to their existing processes. A fully automated and integrated collections system that is able to service all consumer products throughout the entire delinquency life-cycle, will be able to inject efficiency with improved workflows, enhanced internal and external communication, easier documentation, agency management and reporting. All of these can increase recovery rates and optimize operational costs.