Are you ready for that bubble ahead of you?
If you are a lender who entered the crisis with an active loan portfolio, you have without a doubt been thinking about managing credit stress in your portfolio. Providing payment relief to distressed borrowers was likely an integral part of your reaction, and it has several considerations like I discussed in an earlier blog post. Recent data from Transunion now shows an enormous spike in the percentage of accounts in hardship across loan categories. It is noteworthy that some banks have deferred payments for more than 15% of their loan portfolios, according to Janney Montgomery Scott in this Bloomberg article. Trends in serious delinquency rates are however nowhere close to such extremes, masking the true nature of risk here.
Source: Monthly Industry Snapshot, April 2020, TransUnion. Delinquency rate measured as 90+ rate for Bank Card and 60+ rate for other categories
While lender provided relief and government benefits have shielded consumer loan portfolios from a sudden deterioration in performance, it is important to recognize that these programs are time-bound. As the first wave of lender relief programs expires, lenders will want to exercise more discretion in providing continued relief. Continuation of government support is subject to a range of factors that may not be taken for granted. Call it a bubble or a ticking time bomb, large volumes of distressed accounts will likely make their way from early to late stage delinquency and then to charged-off status. Lenders who are unprepared to respond will experience much higher losses than what they have seen in recent years.
If you are a Fintech lender who started and grew your business in the last several years, you likely decided to manage delinquent borrowers using a combination of in-house servicing strategies and external collections agencies (''agency''). For organizations of your scale and some larger ones including banks, the trade-off between developing an extensive in-house collections operation versus spending precious resources elsewhere was fairly clear. Relying on an agency can however create some challenges and limitations to collections performance if the partnership is not managed effectively. With this sudden onset of credit stress in vast swathes of your portfolio it is now more important than ever to establish a highly functional partnership with your agency to align on strategy, tools, treatments and execution. As might already be evident from your loan book, customers seeking relief from payment burden are spread across risk bands, product types and geographies, and the situation demands a fairly comprehensive risk management response.
Treating the agency as an integral part of your risk management strategy involves establishing an effective feedback loop through which both parties evaluate collections effectiveness over time. It will enable connecting well with distressed customers, quickly adjusting collections strategy and leveraging additional tools and treatments as and when appropriate. The feedback loop also provides important insights into customers' situations that can be used to manage other borrowers who haven't entered delinquency yet.
If you haven't had the opportunity or the means to deeply engage with your agency in the past, now is the time to start a meaningful dialogue. There's always a place to begin and build the engagement from thereon. A collection of questions and considerations like the ones below should get you started.
Customer Segmentation:
How exactly does your agency segment customers for collections treatments?
While agencies segment customers using customer/loan attributes and sometimes model scores, how reliable is that segmentation approach in current times?
Given the currently impacted borrower populations, are the attributes and model features still appropriate and relevant?
Asking these questions will educate your risk managers about current approaches, areas of opportunity and strategic elements that might need to be jointly addressed. Your internal knowledge of how a customer was originated and how they were managed in the past, for example, is important context in deciding how the relationship should be handled from now on. Similarly, past payment behaviors and other customer attributes provide valuable insights for such decisions.
Treatment Approaches:
Does your agency provide both first party and third party servicing?
At what point does it transition customers from one approach to the other?
How can you as the lender influence that decision?
These questions bring lenders close to both the borrower experience provided by the agency and the capabilities that the agency has at its disposal. They allow lenders to engage with the agency on fairly tactical elements such as agent talk-offs and escalation approaches. It creates opportunities for lenders to influence decisions about which tools and treatments are deployed at what times throughout the delinquency cycle.
Contact Strategies:
How much have your customers leveraged self-servicing options provided by the agency?
Are there some contact channels that the agency prefers over others, and if so, why?
Is the customer experience here consistent with your brand, values and experience that you have provided elsewhere in the account life-cycle?
Time is of essence as you attempt to contact customers and target payments, and precious time could be lost when contact strategies are not optimized for your customer base. Blunt contact approaches, for example, while ineffective can also impact your customers' willingness to pay. Sub-optimal outbound contact strategies, as another example, could take away crucial call center bandwidth from servicing inbound calls.
Realistic Negotiations:
How is your agency attuned to borrowers' situations and today's realities driven by the crisis?
Are agents flexible enough to recognize realistic potential payments from customers and negotiate effectively for those instead of sticking to rigid targets?
Have you given agents adequate and defined authority to negotiate custom plans and settlements?
It is important to recognize that borrowers may not have the ability to bring their delinquent accounts to current status right away or in the near future but may be able to make smaller payments if they see light at the end of the tunnel. It is also important that collections agents be able to leverage their experience and persuasion skills in customer interactions and 'lock a commitment' from the customer when they see the opportunity. They should be able to do this without having to seek approvals from their floor manager or lender before setting up each custom arrangement.
Contingency Planning:
What exactly is the agency’s contingency staffing plan?
How do they go about ensuring adequate agent staffing levels to handle outgoing and incoming call volumes?
As agents work remotely these days, how does the agency ensure their agents are getting the right support and guidance on a daily basis?
A collections operation with well thought out strategies and treatments can still fail if staffing requirements are not properly forecasted and addressed ahead of time. Matters get worse with a deluge of delinquent accounts needing immediate attention, and you simply can’t afford lengthy lead times to hire and onboard additional agent capacity in such situations.
Debt Specific Considerations:
If the debt is collateralized, or is accompanied by liens or personal guarantees, how exactly does the agency leverage those elements?
How does it decide when to pursue legal action, and on which accounts?
At what point should you consider a debt sale and how do you go about making that decision?
It is crucial for your agency to have as much information and documentation about each loan as possible so they can figure out the best overall collections approach. Product type, presence of collateral and asset class all play a role in these decisions which need to be made at both pre- and post charge-off stages. In some cases, clear break-even analyses must be conducted prior to investing in and deploying cost intensive recovery efforts.
Active Dialogue:
What expectations has the agency set with you on collections performance and process quality?
What reporting can they provide to track those expectations?
Have you established thresholds for specific metrics that, when breached, would trigger management actions?
It is important that you have an active collaborative dialogue with your agency on their performance, expectations and remedial actions for under-performance. Performance should be monitored and evaluated using mutually agreed upon metrics that are clearly defined. While agencies typically provide reporting on standard performance metrics, having access to granular data from your agency can enable analyses that will supplement their reporting and deliver deeper insights.
When collectively evaluated and addressed, these aspects and others will lead to a firm foundation for the lender-agency relationship. Here at AQN, we have advised clients on identifying collections agencies best suited for their businesses, evaluated agencies currently working with our clients to help identify opportunities, and managed relationships with agencies on our clients’ behalf as they worked to enhance their collections effectiveness. While it is important to critically analyze the considerations I have raised, identifying tactical solutions and executing them is no straightforward task. Our clients have benefited from our practitioner experience as we worked with their teams side by side to holistically address opportunities. As you prepare to respond to what the crisis might bring next, and if you are interested in discussing how AQN can assist you, please send me a note at pkalla@aqnstrategies.com or give us a call.