Professional Documents
Culture Documents
customers with
credit problems
M a y 2 0 0 9
Contents
03 Executive summary
04 Introduction
10 Managing delinquency
24 Conclusions
M a n a g i n g c u s t o m e r s w i t h c r e d i t p r o b l e m s
Executive summary
s a result of the economic downturn, banks are experiencing
3
Introduction
This briefing is the product of a joint Finalta / Efma survey, published
at a critical time for our clients and members. The effects of the
financial crisis are emerging throughout Europe, and the economic
outlook is poor. Most EU countries are expecting little or negative
growth in 2009.
This economic downturn has had significant implications for
businesses and their employees. As a consequence, many personal
and business customers are experiencing financial difficulty. One
country has seen close to a 300% increase in the percentage of
delinquent loans over the last year.
Banks will come under increasing pressure as economic problems
persist, with staff focused heavily on loan quality and asset retention.
Doing so effectively is emerging as the principal challenge for many
banks. Banks must balance minimisation of losses and maintenance
of capital requirements, against the cost of collections and the
damage to customer relations and the bank reputation.
This briefing addresses how banks across Europe approach this
challenge. It is based on a survey with 42 banks from western Europe
and central and eastern Europe (CEE). Finalta also conducted follow
up interviews with several leading banks. Respondents answered
questions based on one of three loan products:
• Small business unsecured loans (less than €100,000);
• Mortgages; or
• Credit cards.
The briefing will examine the importance of minimising loan
delinquency, specifically:
• Monitoring customer accounts to identify and act upon those
showing signs of financial difficulty, before delinquency.
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Overview of collections
process management
The collections process is complex. Furthermore, banks follow different
strategies, and at times different stages, of the collections process. For
the purposes of this briefing, Finalta has segmented the collections
process into four broad categories, as indicated in Figure 1. These are:
• Pre-delinquency: when the customer account displays warning signs
that it may become delinquent;
• Delinquency: early or minor underpayment / late payment;
• Non Performing Loan: when the account has been delinquent
sufficiently long enough to be recognised as a ‘problem account’. For
the purpose of this briefing, Finalta refers to non-performing loans as
those registered with a collections unit; and
• Bad Debt: the debt is written off. At this point some banks choose to
sell debt to external agencies, while others manage debt recovery
through internal teams.
These stages will be examined sequentially in the sections that follow.
Where results vary markedly between regions, or products, this will
be noted.
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Figure 1
to monitor involved to return
customer account to order involvement to
account return account
to order
Source: Finalta
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Managing the customer
account pre-delinquency
Before the customer has defaulted on their loan, there are often early
warning signs that the customer may experience financial difficulty. It
is critical that banks are aware of the opportunity to help the customer
manage loans. Proactive contact with and assistance to the customer
at this stage could help mitigate future loan delinquency.
82% of the banks surveyed by Finalta monitor or occasionally monitor
customers’ accounts for signs of financial stress. Good MIS systems
will help indicate accounts which may be at risk and can be supported
by credit bureau data. Such monitoring can be conducted as
frequently as on a daily basis, depending on the risk status of the
account. Business accounts may also be subject to site visits, where
the relationship manager (RM) can make a judgement on the level of
monitoring needed. Warning signals for small business accounts could
include decreasing turnover, or receipt of payment from fewer sources
(indicating a shortfall in client base). Other products, such as credit
cards and personal loans can be monitored through transaction and
payment data. For credit cards, for example, customers displaying
warning signs may have reached their limit on the card and make only
the minimum repayment each month. Banks may find it difficult to
identify early warning signals for mortgage customers, however.
Action upon these early warning signals can be critical to mitigating
delinquency on the customer account. 74% of banks indicated that
they would react to this information to prevent loan delinquency.
For many banks with small business customers, the RM is responsible
for acting upon early warning signals by contacting the customer. This
could be to discuss loan restructuring, reducing an overdraft or
enforcing covenants. Bank A provides its RMs with information on a
regular basis to allow them do this. Banks should have a process in
place to manage and monitor RMs contact of ‘at risk’ customers. This
is often achieved through an email information request from central
units to the RM. Once the RM completes the information in the CRM
or responds to the back office, the bank will know that he/she has
completed the task.
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Managing delinquency
Due to the market conditions, many banks have seen their estimated loss given default
increase. Consequently, action must be taken to manage loan delinquency efficiently and
effectively to minimise this loss.
Banks have different time or value triggers for action on a delinquent account. In some
cases, the bank will not react if the account is only over its limit by €100, or one or two
days delayed. Often this will depend on the bank’s shadow limit for a particular product
or customer. However, almost half of the banks surveyed will contact the customer
immediately after a payment has been missed.
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Directing the customer to the branch generates a good opportunity to talk with him/her.
If the customer is unable to make an immediate payment, a face to face meeting will
make it easier for branch staff to determine solutions with the customer. From these
discussions, the bank may be able to recommend an alternative product which will be
more manageable for the customer. Bank C for example, will offer an ‘exit’ product to the
customer, such as moving an overdraft to a medium term loan. A meeting is also a good
way to build the relationship with the customer, increasing loyalty and, ultimately, willingness
to pay.
62% of banks would also allow the customer to commit to paying on an agreed date. This
was more common for small business and mortgage customers. Only 35% would allow
customers to freeze interest or repayments at this stage, and 27% would offer payment
by instalments. Although the customer is being contacted often by outbound calls, the
option to pay over the phone is uncommon. Capturing a low value payment at this stage
while the customer is on the phone would be an ideal opportunity for the bank, particularly
for credit card customers.
Other ways to return the account to order could include extension of the mortgage term
creating lower repayments. In many CEE countries, customers have taken out mortgages
or loans in foreign currencies. The sharp decline in the value of their own currency means
these repayments are much more difficult to make. Restructuring to a local currency could
make it more affordable to the customer. The disadvantage of this is that banks may then
incur losses on this currency exchange.
Often banks can refer to a customer’s credit history and relationship with the bank to
establish possible reasons for the missed payment. Generally, customers fall into one of
three categories:
• They have forgotten to pay, and will pay soon or immediately after a reminder letter;
• They cannot pay as they currently do not have funds to do so; or
• They are unlikely to pay.
92% of banks will review the options extended to the customer according to the credit
history and relationship that they have with them.
Based on this analysis, banks can estimate the risk associated with each customer and
the appropriate actions that should be taken. Particularly for customers that cannot pay,
returning the account to order may require restructuring to accommodate temporary cash
flow problems. Knowledgeable and solution oriented staff can be critical to helping the
bank to achieve this. For customers that will not pay, or for those customers where explored
loan restructuring has not worked, banks must take more focused action.
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Managing non
performing loans
When the customer’s debt is recognised as a problem account, it is often
passed to a dedicated collections team to manage on a full time basis.
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Management of customer contact
Once the customer account is registered with the collections unit,
outbound calls are a common way to reach the customer.
59% of banks define the frequency of calls made to customers at
different stages of the collections process, i.e. 3 calls a week. This
frequency can be influenced by, amongst others, product type, risk
category for product and customer and the value of arrears. Other
banks use an automated dialler system whereby the customer is
called as frequently as the telephone cycle returns to him/her. The
danger with this practice is that customers may receive outbound calls
too frequently. In one case, Bank G was contacting customers multiple
times a day due to its automated dialling system. Furthermore, the
software used was unable to always connect the customer to a call
agent. This resulted in customers being cut off, despite not having
initiated the call themselves. Finalta’s survey showed that only 6% of
banks will contact customers on a daily basis, while 39% would
contact customers 3 times a week, and 55% would contact customers
once a week or less (see Figure 3).
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Training and experience of staff is critical to achieving performance in
collections. Friendly and persuasive agents are often the most successful
at obtaining payment or promises to pay. In addition to remaining tactful
(although still assertive), staff should be able to explain things clearly to
customers. This could include an overview of how the customer’s debt
is calculated, or how possible restructuring may work. Negotiation skills
are key, as is the ability to remain calm even if the customer begins to
get angry. Banks can undertake simple training modules to help staff
develop these core skills in collections and ensure a professional, yet
effective, service is delivered.
Scripting for staff will also help guide negotiations, with prompts of
effective ways to interact with the customer. Two thirds of banks surveyed
would provide scripting to staff. This practice can assist less confident
staff and ensure the right tone is applied. This is especially important if
staff are new to the role. Banks should be careful to avoid repetitive
scripting, however, particularly if the customer is called more than once
a week.
Staff can find it difficult to move from one call to another if customers
are at a different stage of loan delinquency. It can therefore be useful
for agents to review the customer case history before a call is connected.
This will help prepare staff for the type of conversation that will be
needed. However, a balance should be found to ensure that productivity
is not negatively affected by lengthy preparation times. If used, this
review time should be carefully managed and monitored to ensure staff
maintain reasonable call frequency. Ensuring that call centre staff deal
with customers at the same stage of delinquency could be an effective
way to help prepare for each call, though it may also be useful to assign
staff to particular cases to retain familiarity.
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Management of bad debt
Banks write off debt at different stages after the initial
delinquency. Some banks will fully write off the debt
after the first or second quarter of delinquency. Others,
however, will write off debt as much as two years after
the initial missed payment. This decision of how
quickly to write off debt may be influenced by the risk
rating for a particular industry or product group. Bank
J for example does not have a standard approach, how
the debt is managed depends on both the customer
and the product. Small businesses that work in real
estate may have a higher risk rating to those working
in other, more stable industries. The probability that a
loan in a higher risk product will be rehabilitated is
smaller than for a ‘safer’ industry. Similarly, customers
with a buy-to-let mortgage may be deemed more at
risk of non-recovery than those customers whose
mortgage is for their principal home.
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Performance management
of collections
Managing and improving performance of loan recovery is particularly
significant as banks are committing more resources to collections. Bank
K, for example, expects to increase the percentage of time branch sales
staff spend on collections to 50%. With such large commitments of
resources, it is critical that banks ensure productivity is achieved. In
addition to judging the efficacy of the collections process, KPIs and
targets will motivate staff to meet required performance criteria. This
can apply to branch staff as well as staff in central collections units.
recovered back to per day to pay/ with promise to pay measures received contacts
order kept customer with
promise customer
Source: Finalta / EFMA Collections Survey, 30 banks
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Branch Vs centralised
strategies
Finalta carries out benchmarking and best practice analysis in key
banking practices. The survey results provide initial insight into
collections strategies and which processes can lead to high
performance.
Finalta asked banks which units are responsible for managing each
stage of the collections process (Figure 6). The stages of ‘Initial
Delinquency’ and ‘Major Delinquency’ are defined as a small delay in
payment and a material delay in payment respectively. ‘non performing
loan’ is the stage at which the debt is usually registered with
collections. The level of branch involvement generally decreases at
each stage of delinquency. However, CEE banks tend to keep the
branch involved for longer than western European banks. Small
business products are also more likely to retain branch involvement
during the early and mid stages of debt collection.
Finalta also asked banks to indicate the percentage of loans recovered
at each stage of the collections process. Banks were categorised into
those whose collections process is fully centralised (i.e. no branch
80%
43% 49% 45%
Percentage 60% 71%
of respondents
40% 33%
41%
20% 55%
29%
24%
10%
0%
Initial Major Non Debt
delinquency delinquency performing written off
loan
Stage of debt collection
Figure 6
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M a n a g i n g c u s t o m e r s w i t h c r e d i t p r o b l e m s
50%
40%
Percentage 30%
debt recovered
20%
10%
0%
Initial Major Non performing Debt
delinquency delinquency loan written off
Figure 7
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Conclusions
The financial crisis has created pressure for many banks, which is likely to increase as the
economic climate worsens. As instances of non-performing loans rise, the collections
process for delinquent accounts is now the subject of heightened management attention.
Highlighted by this research, there are key questions that will need to be addressed.
How banks choose to monitor accounts for early warning signs will be a critical element
in the process. Effective use of monitoring will allow the bank to begin dialogue with
customers and develop strategies to minimise loan delinquency. Introducing or reinforcing
monitoring strategies will therefore protect the bank from unnecessary risk of loss. This is
particularly pertinent as the market value of collaterals declines for secured loans and the
amount of loss given default rises.
Many banks have a centralised approach to managing collections, some even from the
stage of initial delinquency. This approach has its merits in efficiency and benefits from a
full time team who work with customers to recover or restructure accounts. However,
particularly for business customers, branch involvement at the early stages of loan
delinquency can also be effective to bring accounts back to order. Familiarity with products
enables relationship managers to provide a solution oriented service to customers, with
constructive restructuring packages that are accompanied by careful monitoring.
Banks must address the trade off between effectiveness, i.e. the percentage of loans
recovered / accounts brought back to order, and the efficiency, i.e. cost, of collections.
The most effective process within collections may be to assign a case worker to each
customer, although this may not be the most efficient process. Critically, banks should
identify the potential for recovery from each customer early. Well judged customer
segmentation should be used to determine the frequency of contact with the customer
and the type of solutions offered. This will help to optimise both efficiency and effectiveness
within collections.
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Banks should also consider carefully the relative costs and benefits of managing the
customer experience throughout the collections process. The profile of a customer with
a non-performing loan is changing. A profitable affluent customer may also be a small
business customer in financial difficulties. Similarly, a high earning customer may lose
his/her job and struggle to pay their mortgage. The essential question is if the long-term
retention of the customer, and bank reputation, is more critical than the short-term
recovery of the loan.
In conclusion, banks must define their overall approach to collections, ensuring that it
manages the pipeline of non performing loans. This includes those loans that have not
yet become delinquent. Areas of weakness in the process should be identified and a
strategy developed to address these. Banks must benchmark performance at different
stages of the process. This will identify where appropriate trade-offs can be made
between efficiency, effectiveness and the customer experience.
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Finalta is an independent advisory company that specialises in providing benchmarking
and best practice services to financial institutions. We are currently working with a
number of European banks to help them improve Branch Productivity, Service Quality
and Collections Management.
The European Financial Management and Marketing Association (Efma), is the leading
association of banks, insurance companies and financial institutions throughout Europe.
On a non-for-profit basis, Efma promotes innovation and best practices in retail finance
by fostering debate and discussion among peers supported by a robust array of
information services and numerous opportunities for direct encounters. Efma was formed
in 1971 and gathers today more than 2,450 different brands in financial services
worldwide, including 80% of the largest European banking groups.
The data provided in this briefing is drawn from bespoke research and Finalta’s ongoing
service quality and sales productivity programmes.
Finalta
1, Little Argyll Street
London
W1F 7BQ
Tel: +44 207 851 9100
Fax: +44 207 851 9101
www.finalta.eu.com
Efma
16, rue d'Aguesseau
75008 Paris
France
Tel: +33 1 47 42 52 72
Fax: +33 1 47 42 56 76
www.efma.com
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