Needing to be different to make a difference – Part 1

Unpacking the changing face of debt collection and resolution in a radically strained and altered economy

Opinion by Tej Desai, CEO of Alefbet Collections & Recoveries and Bruce Curry, Independent Collections and Recovery consultant

Everybody in the South African Credit Industry is aware of the economic challenges, their causes and the medium to long term outlook. Views differ on GDP growth between 0.2% and 0.7%. Power outages are not improving and there are forecasts of unprecedented stage 8+ load shedding this coming winter. A hoped-for reduction in fuel costs to ease the pressure on the cost of living has been met with indecision by OPEC, and a high chance that the cost of fuel will be driven up through lower oil production.

The electricity crisis, a lack of structural economic reforms and resultant weaker Rand have left the MPC with little choice but to continue its rate hiking cycle, with the repo rate now at 8.25% – the highest level since 2009.

These global and local challenges mean that the financial hardship of the South African consumer is likely to get worse before it improves, and that the tail on this economic downturn will be long.

Meanwhile, the unemployment rose 1% on 2022 to 29.81% and the minimum monthly wage has increased by some 9%.  However, the metric that very much determines how consumer credit will perform in such economic volatility is the Household Debt to Income Ratio.

Whilst the household debt to income ratio was at its lowest for some nine years in 2022, the differing levers of repo, inflation, unemployment and for some categories, mortgage costs, are driving a worrying forecast of increased gearing for the consumer.

This means that they become more susceptible to any additional financial strain, such as further repo rises, and the time it takes them to repair is significantly extended. However, we also know from previous research that certain segments of ‘economic victims’ have a much shorter return to ‘financial good’ period than might be expected. The challenge for the collections and debt resolution industry is how to discern the difference and how best to cater for each.

As the gearing on the wallet increases, so too does the necessary period of financial tolerance for customers experiencing financial difficulty need to increase. The problem is the all-encompassing components of the debt management system – Policy, Analytics, Process & Technology, IFRS9, balance sheet strategies, cost of tolerance, differential data insights, adaptive strategies, agile processing adjustment and the contingency debt management operating model – are not, and have previously been proven not to be fit for purpose for the customer, the credit grantor or those partners of the first party creditors charged with managing the customer in financial difficulty, during extended periods of a challenged economy.

The table below calls out some of the gaps between what is needed and how the debt management sector typically operates:

Need Typical Impact Cause
Proactive identification of economic victims. Steady state risk segments. Haemorrhaging of future good customers. Inadequate Data Insights.
Understanding of reason for delinquency, duration of impact, disposable income. Policy / Roll rate determined arrears collection targets. Disenfranchised future good customers, high operating cost, creditor caused increased impairment Gearing on the wallet does not meet the creditors demand.

Creditors systems not set up to leverage the information

Tolerance aligned with repayment ability in terms of amounts and time. Internal stages of collection, external set periods of placement and all focus on cash collected now. Only customers whose situation falls within the creditors policies have a chance of debt resolution. Internal and external placement stages and treatments are based on an archaic debt collection structure.
Flexible and adjustable financial solutions. Pre-determined rules as to how much a customer must pay, by when. Failed debt resolutions, compounded problems, and higher losses. Restrictive policy driven solutions that rarely meet needs.

 

With this backdrop, it is important to start a long overdue disruption of the well-embedded collection and recovery framework. Not all the industry has to change, in fact it might be too risky for too much to change, in too short a time.

However, the ‘first mover’ will gain a distinct advantage in terms of the cost to resolve early arrears and bad debt, the ability to retain good customers who find themselves in bad circumstances (much like the early pandemic months), market share growth through better customer retention, strengthening of brand reputation and confidence by doing something meaningful for customers, the economy, staff and shareholders.

Imagine having an early understanding of which customer will be able to resolve their debt by when and how, the means to effectively manage those customers to that ability over time, to doing so in a way that mitigates adverse balance sheet impact, whilst securing two-way loyalty between the customer and your brand?

There are some very clear ways to make a difference by being different, and in our next blog on this topic, Tej Desai and Bruce Curry will unpack how this can be achieved.

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