New models of credit management and debt collection are critical as COVID trauma lingers

Levels of consumer and business financial distress were profound in 2020 and are now deepening in 2021 as COVID-19 looks set to rule the global landscape for months, if not years to come. Given the enduring and domino-devastation wrought by the pandemic, new approaches to credit risk management and debt collection will be key in managing the fallout of diligent customers who now find themselves in an untenable bind. What was once anticipated (hoped) to be a 21-day lockdown from 27 March 2020, now continues months later, like an unwelcome ground-hog day.

“South Africans are struggling with significantly higher unemployment levels than a year ago, a drying up of the TERS disaster relief fund, growing retrenchments and company liquidations.  According to Statistics SA, total liquidations increased by 20.5% in the fourth quarter of 2020 compared with the fourth quarter of 2019. There was also a year-on-year increase of 14.2% in December 2020. Seasonally adjusted insolvencies increased by a massive 67.4% in November 2020 compared with October 2020.  2021 is likely to be a year where we see further job losses and more consumers in financial distress and unable to meet their debt obligations,” explains Gareth Levinsohn, Commercial Director of Shapiro Shaik Defries and Associates (SSDA). SSDA is part of Alefbet Holdings which owns numerous collections and customer service BPO providers including iContact and Shapiro Shaik Defries and Associates (SSDA) and Metro Collect.

At the time when the pandemic broke in March 2020, banks rapidly responded to the imminent crisis facing their account holders, with a much needed but unqualified debt relief programme for individuals and businesses affected by the Covid-19 pandemic and national lockdown. In a report prepared by specialist collections agency Shapiro Shaik Defries and AssociatesNavigating through South Africa’s Debt Relief Programme and the Implications for Indebted Consumers – the debt relief programme continues to have tremendous implications for both previously and newly indebted consumers, and for how credit providers go about collecting outstanding debt in future as well as supporting distressed customers.

“I don’t think anyone anticipated that almost a year later we would still be fighting this pandemic on such a significant scale and still be in such a high level of economic lockdown. And for now, the end is still not in sight.  The reality is that for many consumers, their financial positions have further deteriorated from the initial debt relief provided, and they are still not back on their feet and able to service their restructured debts,” Levinsohn adds.

Credit providers and collections agencies are however alive to the fact that the sector needs a more collaborative and data-driven approach to work with indebted consumers to find their way through their constraints based on their current circumstances.

“There is a fine balance to strike – for creditors, unpaid debt hurts already distressed cash flow, which in turn will limit the ability of the business to recover and grow. On the other end, customers who were previously in good standing and, through no fault of their own, may now find themselves defaulting on their financial commitments. One only has to think of the impact on workers in the hospitality and tourism sectors which to all intents and purposes, has been close to a complete shutdown for almost a year.

“There is acknowledgement that we need new models of engaging with and supporting indebted consumers to restructure their debt over a longer term and protect their creditworthiness for the future.  Creditors cannot assume a “business as usual” approach given the massive ramifications of COVID-19 on livelihoods.  For those consumers who genuinely find themselves in financial distress and proactively engage, they will find that creditors are a lot more amenable and willing to find workable solutions in the wake of the continued pandemic hangover,” explains Levinsohn.

In building new models of managing credit risk and better understanding debtors, their behaviour and financial position, SSDA has invested heavily in data and analytics capabilities.

“Every customer is unique in terms of their personal and employment circumstances, and by utilising and corroborating both internal and external data sources, we’re able to empower our collections agents to have far more meaningful and constructive conversations with them.  By better understanding each debtor’s circumstances and behaviour at the current time, we are able to segment and risk rate them more precisely and activate the right conversations – the ideal being to rehabilitate their account and bring them back on track, but if that is not possible then we may look at a restructuring of their debt, offering individual settlement packages or even payment holidays if their immediate situation is untenable.

“The bottom line is that not all debtors are the same so we cannot assume a blanket approach.  Most fundamentally, for millions of people, they are certainly not in the same financial position now as they were when they applied for the credit, and prior to the pandemic. Consider the example of the home loan client who has paid his bond fastidiously for ten years, but now finds himself retrenched or unemployed, and potentially his spouse as well.  We simply cannot adopt the same collections approach with him as you would with someone who was intentionally not paying their debt despite having the means to do so.  We cannot manage the collections process and engagement on the assumption that their position has remained the same, using outdated information.  This is where data and analytics capabilities are proving invaluable in ensuring that we treat all customers fairly and based on their genuine individual circumstances and credit track record,” concludes Gareth.

There is a readiness by credit providers to engage in a more customer-centric, empathetic and data-driven approach, based on the understanding that South Africans and businesses are all grappling with the impact of a globally synchronous, black swan reality.

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