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Are you in debt? This is what you need to know about debt recovery

One of the lasting impacts of Covid-19 is going to be a significant increase in distressed, financially vulnerable consumers, many of whom will find themselves with impaired credit records through no fault of their own. File Image: IOL

One of the lasting impacts of Covid-19 is going to be a significant increase in distressed, financially vulnerable consumers, many of whom will find themselves with impaired credit records through no fault of their own. File Image: IOL

Published Jan 6, 2022

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One of the lasting impacts of Covid-19 is going to be a significant increase in distressed, financially vulnerable consumers, many of whom will find themselves with impaired credit records through no fault of their own. Credit providers simply cannot assume a business-as-usual approach in the Covid-19 recovery stage.

“It is imperative that we comprehensively understand and collaboratively approach the business and consumer landscape that Covid-19 will leave in its wake. We cannot sit back and develop debt recovery strategies after customers have defaulted without an understanding of their situations and our engagement strategies. Call centre capacity, recruitment, training and data and analytics all need to be in place, aligned and tested before the new ‘Covid Debtor’ category receives a collections call.”

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This is according to Gareth Levinsohn, Commercial Director of Shapiro Shaik Defries and Associates (SSDA), one of the top debt collection businesses in South Africa. As the financial fallout from Covid-19 becomes more pronounced, he warns that the approach to how collections are done, and how credit bureau data is used in future cannot be done on a ‘business as usual’ approach – one of the reasons why SSDA is already well down the line in terms of new approaches to data and analytics relevant to the pandemic circumstances.

SSDA has spent the last few months working collaboratively with clients to unpack some of the key issues around how debt recovery will be approached in the recovering Covid economy, and what it means for credit providers and their customers going forward, including:

  • Who is the post Covid-19 distressed customer (debtor) and how are they different to traditional credit risks? The reality for banks and credit providers is that current bureau data on their consumers is almost a moot point when viewed independently, because people who are coming into the debt collections space are not your traditional bad risks. They have a risk-factor that is based on a single black swan event, rather than their consistent credit behaviour, which means that entirely new datasets need to be built, and credit vetting and risk assessment processes need to evolve with the changed circumstances.
  • How to combine a collections and customer service engagement in a post Covid-19 economy and understanding the ‘new normal’ in your future customer base. The big question is, with the pandemic rolling into multiple waves for much longer than anticipated, how will this impact the recovery phase for South Africa’s financial services sector, as well as the millions of consumers who continue to find themselves under significant financial duress? How can new primary datasets be used to determine whether consumers who found themselves in distress as a result of the pandemic, be reassessed as credit worthy in future, given that traditionally a credit blight stays on your record for a number of years? How do the credit risk assessment practices need to evolve given that we are dealing with entirely different circumstances that relate to an event rather than an individual’s consistently poor credit behaviour? And through all of this, how do you maintain positive relationships with a defaulting debtor who needs a far more empathetic response to their circumstances?
  • The importance of putting your brand first in constrained economic times - We are now dealing with a world and credit data that is divided into pre- and post-Covid times. As the threat of further waves and global travel restrictions remain, we can expect to see an unprecedented rise in unemployment and business closures, putting even greater strain on the solvency of customers and companies who were just barely recovering. It’s an incredibly delicate balance to strike. For companies, unpaid invoices and accounts hurt already distressed cash flow, which in turn will limit the ability of the business to recover, invest and grow. On the other end, we are dealing with customers who were previously in good standing and, through no fault of their own, may now find themselves defaulting on their financial commitments. Collections are more challenging than ever, and are likely to take longer due to the circumstances consumers find themselves in. By using collection strategies driven by in-depth analytics of high-volume debt recovery, and starting much earlier in the collections process, we can use this primary data to determine the best time and channel for debt recovery, but at the same time maintain the bond of the customer relationship.

Closing the loop between customer acquisition and customer debt - With interest rates at an all-time low, many credit providers have been reluctant to open the taps on new business because we simply cannot predict where things are going to go from one month to the next. However, in the last two months we have seen banks opening to new business and client acquisition. The new primary data that is gathered now will help to inform the risk ratings going forward, and also help to understand the changed consumer demand and appetite for credit and for what purposes it is being used. At the same time, are credit providers running the risk of driving new client acquisition with people working in sectors that run a high risk of secondary fallout from the pandemic? How do credit providers open up for new business, and to the right customers given that the credit datasets of the pre-Covid stage have very little, if any relevance in guiding this analysis and risk assessment? How do we make sure that there's no leakage on the collections side, while the processes and procedures of the pre-Covid stage play catch up? The bottom line is that new primary data gathered over almost two years of pandemic collections can inform all these decisions and strategies going forward.

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“Credit Bureau information is retrospective and as such cannot be relied on to provide entirely accurate insights for banks or credit providers in these radically altered circumstances that customers find themselves in. Credit history is no longer indicative of what can be expected from consumers going forward. To gauge the future and navigate the way forward with a customer-centric approach will demand that financial services providers engage with each of their impacted customers to obtain current, primary data on their financial position and how they are impacted by Covid-19 in the long-term.

“The value of having a direct line of sight of the primary transactional account to clarify the position of the customer will be crucial in terms of when they expect to return to full employment, and whether there are any extenuating family circumstances or health and related issues for example that could impact the customers’ ability to financially recover. There is a significant opportunity to arbitrage for efficiencies in the collection and analysis of such primary data by working with your collections partner in a collaborative approach.

“The landscape has changed dramatically for traditional collection practices. In collections, clients should be looking for alternative ways to contract with collections service providers who have historically work on a ‘success basis’, and success cannot solely be measured in Rand Collections alone. There are numerous factors to consider, both from a legislative perspective as well as progressive thinking on putting the customer first. There is a fine balance to be struck - banks and their collections providers need to act in the best interests of the customer given the ongoing Covid uncertainty. However, debts remain exactly that, and must be collected to ensure that financial services providers avoid blanket debt write-offs or any other actions that might place depositors’ funds at risk or otherwise undermine the integrity of the financial sector.

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“Traditional statistics and approaches cannot be amplified to the present situation, as this is a completely new phenomenon, unprecedented in scope and nature. The full and long-term impact is still unfolding before us and will continue to do so for many months, if not years. For our financial services sector to navigate through the post-Covid economy will demand that a new approach is developed, and as such, there must be a readiness to restructure, with a more customer-centric, empathetic approach driven by current, forward looking customer data and analytics based on people’s changed realities, rather than retrospective analysis of pre-covid credit data,” concludes Levinsohn.

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