Revenue Management Strategies in the New Consumer Credit Markets. A Decision Analytics briefing paper from Experian

Transcription

1 Revenue Management Strategies in the New Consumer Credit Markets A Decision Analytics briefing paper from Experian February 2008

2 Introduction Rapid and, in many cases, unrestrained growth in new consumer credit markets has left lenders facing tougher debt management challenges than their counterparts in more developed credit markets. Credit professionals need to therefore consider how best to deploy their resource to manage the increasing number of accounts in arrears whilst minimising the risk of positive accounts becoming delinquent. This briefing paper explores how organisations can combine flexible and automated collection systems with new communication and payment technologies to reduce their levels of monies in arrears, whilst dramatically reducing the cost to collect. Household borrowing has exploded in recent years across the emerging credit markets of Eastern and Southern Europe and South East Asia. Economic stabilisation and high GDP growth have enabled income levels to rise, making millions of people eligible for bank lending. Bank restructuring, financial market liberalisation and increased external borrowing have also provided an opportunity for foreign bank participation in emerging markets, their aggressive credit policies fuelling further growth. Turkey has experienced 25.6% year on year individual debt growth Consumer debt in Kazakhstan, Romania, and Ukraine has risen from 5-7% of GDP in 2004 to 12%, 16% and 23% respectively in 2006, with mortgages tripling in Ukraine alone in the last year. Mortgage and consumer loan debt in Greece now equates to 44 percent of the country's GDP, up 24.7 percent from the same period last year. Hungarian individual lending is forecast to grow by 51% from India s personal finance debt is growing around 40-50% per annum. And, while uptake of credit is expanding amongst the emerging middle class and salaried employees, there is also an increased emphasis in extending financial services into non banking sectors, including improving the availability and regulation of microfinance. In Pakistan, for example, the numbers accessing consumer finance has risen from 700,000 people in 2003 to 2.6 million in 2006, with the numbers taking out microfinance loans tripling over the same period. Weaker Lending Standards Increases Exposure to Risk However, such aggressive growth in unsecured lending and the common offering of 100% mortgages is proving risky in an environment where credit bureaux and scoring systems are relatively under-developed. Although many emerging credit markets have introduced credit bureaux in the last few years, the level of detail captured is highly variable with participation often restricted to major banks. Lack of historical credit data and the initial focus on collecting only negative data on defaulters also means that it is still very difficult to identify those inexperienced borrowers who are accumulating debts to a dangerous level. Even in the US, where credit data is comprehensive and scoring tools are used as standard, three-percent down loans are foreclosed four times as often as those with ten-percent down payments. So, despite many financial regulators recent attempts to tighten loan criteria, the Revenue Management Strategies in the New Consumer Credit Markets - 3

3 previous weak lending standards are now beginning to hurt many credit providers in emerging markets, as the ability to manage credit or default risk is limited and bad debt levels start to climb as a result. In Russia, non performing loan figures of 16% are not uncommon, and mortgage loan defaults soared by 257% in Bulgaria in Although past experience has made financial institutes in Asia perhaps more cautious in their approach to unsecured lending, Fitch Ratings, in a 2006 report on consumer lending, still expressed concern that Asian banks' enthusiasm for consumer lending may be leading to growth rates that outpace the improvements in risk management capability. And as a telling sign for potential issues ahead in India, delinquencies are now rising between 10 and 20%, and debt charges have doubled in the last year, with most banks increasing their bad loss provisions between 60% and 100%. This rising inability to service bank loans also often becomes a catalyst for a more widespread problem, as an overall credit squeeze also increases the likelihood of consumers defaulting on payments to other suppliers such as power utilities and telecommunication providers. The Challenge of Debt Management As increasing numbers of consumers default on their loan repayments and household bills, credit providers in emerging economies find that additional challenges to those experienced by creditors in more developed markets must be overcome if debt is likely to be recovered. Low Self Cure Rates Whilst chasing oldest debt first has commonly been a traditional practice in developed regions, where typically a high proportion of 30 day debtors self cure, this is a more risky strategy in emerging nations where, typically, self cure rates are much lower and the ensuing time it takes to collect subsequent outstanding debt is considerably longer. As an example, the World Bank classifies Poland amongst countries with the longest debt collection periods, with the average recovery period, estimated at 1,000 days, four times the EU average of days. Indeed debt recovery success rates are particularly low for older debt, with collection success rates typically of only a few percent once the debt reaches 180 days. Difficulty in Contacting Debtor One of the most common challenges facing debt collectors in many countries is tracking down debtors in the first place, as consumers are highly mobile, moving Revenue Management Strategies in the New Consumer Credit Markets - 4

4 house, on average, once every 4 years. Skip Trace tools are now used extensively, tapping into multiple public sources and credit bureau data to obtain up to date contact details. For lenders in emerging markets, the lack of such tracking tools does impact location success rates, an issue also compounded in many countries by the extensive use of Post Office boxes rather than street address for mail receipt, and the low penetration of land line telephones which can lengthen or prevent the usual reminder cycle of letters and follow up calls. Lengthy and Complex Legal Formalities Another factor impacting successful collections management is the often lengthy and complicated process of debt recovery through the legal process. For those Polish debts that have not been recovered through the normal channels, navigating the legal route can be torturous, with the 41 obligatory formalities in debt recovery in Poland being almost three times the number required in Britain. In India, although the establishment of Debt Recovery tribunals have improved the speed for larger debt recovery (greater than $20,000 USD), companies trying to recover smaller sums going through the court systems may often have to wait years for a court decree, even when the sums are undisputed. So, rather than wait for the legal system to recover monies owed, it is very common for creditors in emerging countries to automatically engage the services of external debt collectors once the account moves into arrears. Fragmented Use of DCAs The use of debt collection agencies (DCAs) is very popular in South East Asia and is growing in Russia and other CIS countries. The business case for engaging a DCA is often driven by the sheer volume of delinquent accounts to manage and the relatively low cost of agent based collection. Although many pan-country DCAs are emerging, debt collection is often still run on a regional basis, with independent local debt collectors assigned delinquent accounts within their district. Managing such a large number of relationships can require significant operational resource from the lender and new legislations and code of conduct recommendations around the use of debt collectors in many countries puts further pressure on lenders to ensure adequate process is followed and customer data is current. Re-examining Debt Management Strategies Two critical strategies have emerged among lenders and service providers in emerging credit markets that, combined, are having a significant impact on reducing the levels of monies in arrears: Deployment of modern collection systems that allow companies to define and adapt collection process to suit their specific regional challenges Early adoption of new communications technology to optimise customer communication and facilitate bill payment, reducing the likelihood of accounts moving into arrears. Deployment of Modern Collection Systems Whereas traditional collection systems handled only those accounts in arrears, modern solutions scale to cover the entire customer account base to ensure early identification of risk and make extensive use of integrated tools and collections best practice to maximise early recovery and optimise collections efficiency. Better Risk Assessment It is now becoming more common practice for larger banks and lenders to use external credit bureau data, often in conjunction with scorecards, for evaluating risk during the customer acquisition phase. However, the credit situation of any consumer can change significantly during the period of the loan. Revenue Management Strategies in the New Consumer Credit Markets - 5

5 Modern collection systems now combine up-to-date external data with a lender s own data on each customer to derive a much more accurate, real time picture, or risk score, of each customer s propensity to pay. Even if an account is showing no signs of facing payment difficulties, ensuring a collection system is regularly updated with credit bureau data will highlight any recent defaults with other lenders, enabling immediate proactive actions to be taken to minimise delinquency risk or further financial exposure. In the absence of robust external data, using scoring models to combine data from internal billing, CRM and collection systems still enables the development of a profile based on the previous behaviour and payment performance of each customer and known associates such as business partners and spouses, which adds a further degree of intelligence to the risk management process. In addition to highlighting customers at risk of default, a scoring model can also predict what the payment ability will be for those already in arrears and what collection strategies would be most successful. Again, this is based on past experience and is often augmented by the inclusion of relevant geographic and demographic data where available. This use of scoring to determine payment risk and the subsequent segmenting of an account base is also now proving useful for microlenders and home credit based lenders. While microfinance has been historically characterised as small and locally based, the emergence of many large institutes serving hundreds of thousands of creditors, albeit through local offices and agencies, has developed the need for sophisticated systems. With microlenders and home credit based agencies typically providing loans to the un-banked population which, by definition, have little official credit history, many are realising the value of combining their own comprehensive database of payment history with local knowledge to build up individual risk profiles and incorporating those scores when prioritising collections activity. More Appropriate and Efficient Collections Strategies Once an appropriate risk profile has been developed, accounts can then be segmented and collections strategies developed by risk category rather than by length of time in arrears. This also allows for a more intelligent prioritisation of workload and allocation of resource, as predefined parameters and integrated workflow tools automate the allocation of cases to collection team personnel most suited to that type of account. The quicker a high risk customer is identified and placed on an appropriate debt recovery programme with the right personnel, the higher the likelihood is of recovery. Employing the appropriate type, tone and timing of a collections tactic is also critical in retaining a customer s loyalty, particularly for low risk customers who typically may need only a gentle reminder, rather than inappropriately receiving a more aggressive tactic adopted for higher risk accounts. More effective use of DCAs The deployment of modern collection systems with open access front ends has proved to significantly increase the efficiency and effectiveness of using external debt collection agencies. Revenue Management Strategies in the New Consumer Credit Markets - 6

6 This is particularly relevant for lenders and service companies in South East Asia or for home based credit lenders, popular in central and eastern Europe, who often use multiple DCAs or independent agents to collect on their behalf. For example, Indian telco Tata is using a best of breed collection system to automatically allocate accounts to the agent most likely to recover that debt, a decision based on the historic relative success rates of that agency for that type of account. An external web based and mobile interface, with appropriate access and security controls, then allows Tata s agents to have a real time view of the status of each account under their management, devise optimal walk routes and immediately update the account data. Such a fully automated system minimises resource required by the lender s credit team, while its ability to accurately report on each agency s performance provides a useful tool in negotiating agency fees. Early Adoption of New Technology Best collections practice advocates that using a customer s preferred channel of contact increases the likelihood of them receiving and acting upon the communication. Likewise, offering customers flexibility in payment channels also dramatically increases the chance of timely bill or loan installment payment. To this end, companies in mature lending markets tend to enroll a number of communication technologies throughout their collections cycle. Modern collections systems with web service enabled or open based interfaces use broadcast prerecorded voice messages as payment reminders to drive consumers to the payment channel of their choice, whether it be contacting a call centre directly, using a IVR based system or by facilitating bill payment through the internet. Indeed, many retail banks in the emerging markets are also embracing the use of online banking, with Indian banks in particular developing relationships with payment technology specialists and local municipalities, tax offices and telcos to facilitate internet based bill settlement. ICICI bank has seen 78% of its client base register for such services, with all payments made being updated in the database of the utility companies on a real-time basis. Wireless Technology But such services often depend on the ubiquitous availability of wired telecoms connectivity. For many emerging credit economies however, this is not the case and it is instead the high penetration of mobile phones in comparison to the availability of land line infrastructure that is offering the best opportunity for more direct, low cost communication and payment strategies. Astute banks and lenders are therefore moving directly to wireless technology as they develop innovative revenue management strategies that leverage the widespread use of, and comfort with, SMS messaging and more recently mobile banking to accelerate the collections cycle. Low Cost Direct Notification using SMS A typical use of SMS messaging might involve the sending of an early notification that payment is due within two days. If no payment is received by the due date, a follow up message may be sent and if no action has been forthcoming then the account can be automatically elevated to the next level within the collections cycle at minimal cost. This negates the time and risk of non receipt normally associated with postal based communication, with such delays showing a significant impact on the likelihood of successful debt retrieval. Revenue Management Strategies in the New Consumer Credit Markets - 7

7 Facilitate Early Payment through M-Banking The inclusion of mobile banking technology introduces an additional dimension to the entire revenue management process, providing a rapid and immediate means for bill payment. This is of particular relevance for a nation s unbanked population, where consumers without accounts generally depend on walk-in services to pay their bills which can introduce barriers to payment such as the incurring of high fees, lack of transport to payment office or restricted opening hours. This was particularly the case in South Africa where studies showed that it took 58 minutes for the average consumer to physically access a financial services point. This lack of accessibility plus the traditionally high cost of banking have thus provided a fertile ground for m-banking where approximately 35% of the nation s 15.3 million low income, un-banked residents own a mobile phone. In 2005, research by the CAGR, UN and Vodafone group, which surveyed users of one of South Africa s original m-banking systems, WIZZIT, showed that over 61% of m-banking-enabled customers use their mobile to pay bills. Speed, security and cost were cited as the system s key benefits. Since then, several similar m-banking initiatives have been launched with over half a million people now regularly using cell phone based banking services. The uptake of mobile banking has been equally if not more successful in the Asia Pacific region which Frost and Sullivan expected to account for more than a third of the $80 billion revenues that the total global Mobile Commerce market is likely to bring in In the Philippines, the two leading mobile operators, SMART and GLOBE, have become enablers of m-finance with over 3.5M cell phone banking users between them. Once the infrastructure and relationships are established, the savings for all parties involved in bill remittance by m-banking are considerable. Average transaction costs have been lowered from an average of $2.90 US at the counter or $0.56 US in a call centre to less than half a cent by mobile. Couple this with the convenience factor and the ability to action a payment directly upon receipt of a SMS based reminder, many of the traditional barriers to payment or reasons for late bill settlement can be eliminated entirely Agency/bank counter Call centre Mobile banking Revenue Management Strategies in the New Consumer Credit Markets - 8

8 Embracing Unique Challenges Can Drive Collections Leadership High lending growth, coupled with infrastructural constraints, is forcing lenders in emerging economies to rethink their use of traditional collection based tools. Progressive organisations are now integrating multiple data sources to accurately score and segment a customer base according to collections risk, replacing the inefficient one size fits all approach. Automation of key tasks and the allocation of cases to those most likely to recover the debt, either internally or by using external agencies, ensures focus on priority cases while implementing the most appropriate collections approach maximises the chance of debt recovery. But it is the integration of wireless based communication and payment technologies with these modern collections systems that now offers the opportunity for lenders to leapfrog their counterparts in the west and adopt new revenue management strategies, enabling them to minimise the barriers to payment and drive down the cost of collection even further. Revenue Management Strategies in the New Consumer Credit Markets - 9

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