managing customers with credit problems, june 2009

8/7/2019 Managing customers with credit problems, June 2009

1/28

Managingcustomers withcredit problems

M a y 2 0 0 9


2/28

Contents

03 Executive summary

04 Introduction

06Overview of collections process management

08 Managing the customer account pre-delinquency

10 Managing delinquency

16 Managing non performing loans

18 Management of bad debt

20 Performance management of collections

22 Branch Vs centralised strategies

24Conclusions


3/28

3

Executive summarys a result of the economic downturn, banks are experiencing

an increasing number of non performing loans. As the potential

loss from these loans increases, management must focus on

optimising the overall collections process.

- This Finalta/Efma briefing is based on research with 42 banks

across Europe to understand practices and performance in

managing debt for credit card, mortgage and small business

customers.

- Banks frequently monitor customer accounts for early warning

signals, and many contact customers showing signs of financial

strain. Few, however, take proactive steps to provide financial

advice to these customers.

- Of the banks surveyed, those with a fully centralised process were,

on average, more effective at collecting debt. This process however

neglects the potential role of branch staff in the early stages of

delinquency

- Banks must also address the balance of customer service and bank

reputation against low cost, effective, debt recovery. The majority

of banks use KPIs to monitor the value of loan recovered. Few

however monitor customer service alongside this.

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

A


4/28

4

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 personaland 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 thoseshowing signs of financial difficulty, before delinquency.

Introduction


5/28


5

It will then go on to address the management of delinquent loans,

from returning accounts to order to writing off debt. This includes:

Processes and techniques to manage delinquent accounts in the

early and late stages of debt;

Strategies to return the account to order;

Support to branch and back off ice staff to fulf il their role incollections;

Communications between teams to improve collections efficacy;

and

Reputational risks of selling debt.

Performance management of collections has become a high priority

for many banks. The briefing will also look at which KPIs banks

currently use in order to manage process and staff performance. It

will also look at the role of different units in managing the customer

experience throughout the collections process.

Lastly, the briefing will examine benchmark data emerging from theresearch. Trends will be assessed to suggest best practices for efficient

and effective debt collection.


6/28

6

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.

Overview of collectionsprocess management


7/28


7

Pre-delinquency Delinquency Non performing

loan

Bad debt

Stress signson customeraccount but nodelinquency

Use of balance /transaction datato monitorcustomeraccount

Customer hasmissed a paymentor payment is late

Branch and/orback officeinvolved to returnaccount to order

Account isregistered witha collections team

Largely managedby back office,some branchinvolvement toreturn accountto order

Debt is writtenoff / sold

Four stages of loan recovery

Figure1

Source: Finalta


8/28

8

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 onlythe 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. Thisis 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.

Managing the customeraccount pre-delinquency


9/28


9

For other customers, a letter is often sent to begin a dialogue and

prevent loan delinquency. 41% of the banks surveyed would use the

letter to invite the customer to contact the bank if they are concerned

about keeping up repayments. In some cases, the bank would reduce

the customers credit limit and advise them of the same through a

letter. However, only 21% of banks surveyed would offer to extend

financial advice to the customer.Finalta has seen several examples of financial advice campaigns within

banks, usually directed towards personal customers. Such campaigns

can be relatively low cost to implement, for example budgeting tools

or financial management advice can be provided on the website. Best

practice banks provide a comprehensive service to customers both

online and in the branch. Bank B, for example, has trained branch

staff to offer support to customers with financial management

concerns. This role is unrelated to sales and is designed to build trust

and help mitigate problem accounts. A dedicated advertising

campaign has also been established to promote the service to

customers, emphasising that the financial advice is free and impartial.The bank has also developed extensive branch literature to

complement the online tools that it provides. Branch staff can use

these as a discussion tool during the meeting, and customers can

take the information with them when they leave the branch. Although

most banks currently offering this service do so reactively, Finalta has

seen a trend to start contacting customers proactively to offer financial

advice. Customers are usually happy to receive this proactive offer of

assistance. One bank surveyed its customers and found a general

receptiveness to unprompted contact from the bank if warning signs

were identified.

Monitoring and intervention at this early stage may be effective for

some customer accounts, however, for many customers, the

progression into delinquency is unavoidable. How banks manage these

accounts is addressed in the next section.


10/28

10

Managing delinquency

Percentageof respondents

Pay inthe

branch

Committo payon an

agreeddate

Freezepayment /interest

for aperiod

Pay ininstall-ments

Reducepaymentamount

Payoverthe

phone

Removeinterest

from

payment

100% 86%

62%

35%27% 24%

19%

8%

80%

60%

40%

20%

0%

Q: What options do you provide to customers

when they have first missed a payment?

Figure2

Source: Finalta / EFMA Collections Survey, 37 banks

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 banks shadow limit for a particular product

or customer. However, almost half of the banks surveyed will contact the customerimmediately after a payment has been missed.

Making contact with the customer

The banks surveyed use varying methods to contact the customer once the initial

delinquency had been registered. In western Europe, 52% of banks rely on back office

units to lead the contact with the customer. This could be through a combination of

automated mailings to the customer, call centre action or through a dedicated collections

team. In CEE, however, the tendency is to rely on the branch to contact the customer. In

this case, the branch manager or relationship manager would lead the process. Only 32%

of CEE banks indicated that the customer account is handled independently of the branch.However, Finalta believes that this may change rapidly as banks build up collections teams.

Returning the account to order

When a customer is contacted at this stage, banks may provide options to return the

account to order. The most commonly offered solution is to ask the customer to make a

payment at their branch (Figure 2).


11/28


11

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, willingnessto 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 meansthese 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 customers 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 credithistory 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.


12/28

12

Managing nonperforming loansWhen the customers debt is recognised as a problem account, it is often

passed to a dedicated collections team to manage on a full time basis.

Management of the account

The transfer of non performing loans to a collections team may be a

fairly rapid process, or may take up to three months. This transition maydepend on the banks credit policy, the degree of centralisation and the

product. In most mortgage cases, accounts will have been passed to a

collections team by the end of the first month of delinquency. For credit

card customers, it is often a lot later, sometimes up to 3 months or

more. For small business customers, the speed at which the account is

registered with collections varies across banks. This is unsurprising as

relationship managers often remain involved for longer periods to try and

return the account to order. Bank D for example, will grant the

relationship manager an opportunity to work with the customer before

the account is passed to collections. If the RM thinks the account can

be returned to order, they are given one month to demonstrate progress

before the central unit takes over.

For many banks, the collections unit is a dedicated in-house team,

however in some instances banks outsource the function. Bank E

outsources part of its collections function after the loan has exceeded

a defined period of delinquency. Although still undertaken in the banks

name, the collections capabilities of this unit is perceived as being more

effective for problem accounts. One of the reasons for this is that the

unit has access to information sources that are unavailable to the bank.

An example is a database to help locate addresses and telephone details

of customers that the bank has been unable to contact. In other cases,

the collections process is outsourced to individuals who work

independently. Bank F for example, felt that its RMs did not have the

capacity to take on the additional work of collections. Rather than

compromising RM sales time with small business customers, the bank

assigns non performing loans to outsourced individuals that work on

commission, and who report into the RM. They will take on up to 150

non-performing customers each and are responsible for managing the

collections process of these accounts.


13/28


13

In general, relationship managers and branch managers decrease

their active involvement in the credit management process at this

stage. However, 72% of banks will keep the branch informed through

some means. This could be through regular updates provided to the

branch, or through updates to the CRM or other relevant data platform

to which the branch has access. In some cases, branches have

access to a dedicated phone line to the collections unit which theycan use to obtain updates on accounts.

Keeping the branch informed of the progress of non performing loans

is important for a number of reasons:

The customer is unlikely to see a distinction between branch staff

and back office functions. Indeed, the customer may still prefer to

use the branch channel to interact with the bank. If branch staff

are unable to talk with the customer about their loan product, it

could be a lost opportunity to return the account to order, particularly

if the customer has come to discuss possible solutions to credit

problems.

Linked to this, banks should not lose sight of the customer

experience during the collections process. Branch staff that are

willing and able to help will demonstrate to the customer that the

bank values their business. Maintaining customer experience and

building a relationship could help ensure that the customer

prioritises the repayment to the bank. This is important if the

customer has additional debts to pay with other organisations.

Keeping branch staff informed will help to manage the

appropriateness of sales calls. The CRM system should ensure that

staff are aware of customers that are in financial difficulty. This will

help staff to judge which products are appropriate to offer to the

customer. In addition, the risk of making a sales call to a customer

that is also being contacted by the collections unit will make staff

reluctant to conduct proactive sales calls at all. If the CRM data is

linked to collections activities, staff will have more confidence to

make these sales calls.


14/28

14

Once a day6%

Once a week or less55%

3 times a week39%

Q: How frequently will a customer be contacted

through outbound telephone calls once their debt is

with the collections team?

Figure3


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. Finaltas 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).


15/28


15

Many banks indicate that inbound customer calls are important.

Customer initiated contact with the bank often demonstrates a

willingness to determine solutions to debt problems. Effective

engagement of this customer contact is an opportunity to start a

dialogue to this end. However, of the banks surveyed by Finalta, only

26% prioritised incoming calls to the collection unit. Respondents for

credit cards were more likely to do this than for mortgage or smallbusiness banking.

Supporting call agents to manage customers

During an economic downturn banks are likely to find that more high

value customers suffer financial difficulties than previously. This is

significant as a poor customer experience through the collections

process could deter the customer from maintaining a relationship with

the bank. This is particularly pertinent where small business customers

are also high value affluent clients. How these customers are

managed is therefore critical to maintenance of an otherwise lucrative

relationship. Communication between units and complete CRM data

is essential.

Bank H has implemented a programme to professionalise the

collections unit and ensure that customers receive good service, even

during difficult interactions. The bank has increased training, including

empathy training, for collections staff. In addition, it revised scripting

to help staff to manage difficult conversations. Monitoring customer

service through call recordings, or complaints analysis, will help banks

to supervise staff conduct.


16/28

16

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 customers 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 toget 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 customersare 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.


17/28


17

Returning the account to order

At this stage of the process, the options to return the account to order

that are provided to the customer vary from initial delinquency stages

(Figure 4). Banks are more likely to offer payment by instalments, or

to reduce the repayment amount. It is marginally less likely that they

will encourage the customer to commit to a payment on an agreed

date or to remove the interest amount from the payment.

It is increasingly important that banks help customers to find a

resolution to their debt. In the current economic conditions, it is much

harder to sell bad debt on. In addition, the value of any collateral

secured against the loan is declining and the ability for customers to

take on further lending is limited.

If the customer account is not returned to order at this stage, however,

the bank will need to address the loss and write off the debt.


Delinquency stage

Non performing loan stage

Pay inthe

branch

Committo payon an

agreeddate

Freezepayment /interest

for aperiod

Pay ininstall-ments

Reducepaymentamount

Payoverthe

phone

Removeinterest

frompayment

100%85%86%

59% 62%

41%

27%32%35% 32%

24%18%19%

3%8%

80%

60%

40%

20%

0%

Repayment options provided to customers at different

stages of delinquency

Figure4



18/28

18

Management of bad debtBanks 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. BankJ 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.


19/28

19


45% of banks surveyed would sell debt to an external

agency at this stage. In other cases, banks

commission agencies to assist them in the debt

recovery and any legal proceedings required. How this

debt recovery agency is chosen is important from a

reputation perspective. For the customer, legal

ownership of the debt by a new body will notnecessarily remove the perceived link to the bank.

Choosing an agency based on customer service or

industry ratings is therefore important. Whilst the

majority of banks that sell debt choose an agency

based on reputation as well as price, some banks do

not. In one country it is known for customers to be

followed by debt collection agency staff, wearing

brightly coloured clothing identifying them as debt

collectors. The idea is to shame customers that will

not pay into resolving their debt issues. However, the

impact on the bank reputation is damaging.


20/28

20

Performance managementof collections


%value

recovered

%accountsback toorder

Valueper FTEper day

Ratiopromiseto pay/kept

promise

Timespentwith

customer

No. ofkept

promise

No. ofpromiseto pay

Customerservice

measures

Volumecomplaintsreceived

No.automatedcontacts

withcustomer

70%

47%

23%20%

17% 17%

10%7%

3%7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Figure5


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. Thiscan apply to branch staff as well as staff in central collections units.

Metrics to measure performance

Of the banks surveyed by Finalta, the top three KPIs used to manage

collections performance relate to the value recovered and the volume

of accounts brought back to order (Figure 5). 70% use the percentage

of loan value recovered as an indicator of collections performance. Banks

are also measuring how effectively staff interact with customers. 10%

of banks monitor the number of promises to pay as a key performance

indicator. Using this target, bank L found that staff would try to obtain a

commitment to pay in order to meet their targets. However not all

commitments result in payment. A more effective measure of process

performance is how many of the promises to pay obtained by an advisor

are kept. This is measured well by the number of kept promises, or the

ratio of promises to pay to kept promises. 20% of banks use the latter.

Q: For the collections unit, which KPIs are

used to monitor performance?


21/28


21

Performance management of staff

Performance monitoring is, for many banks, focused on financial performance. Bank M,

for example, currently has commission based targets for its collections unit. Agreements

with outsourced agents are also based on commission. Bank N links a substantial amount

of staff pay in collections to performance targets on a monthly basis. The use of larger

sums as incentives is important to motivate performance in an often challenging job.

Bank N also finds that substantial performance bonuses are an effective way to attractcustomer service agents into collections. The customer management skills that these

agents bring is often useful in the collections process. Another bank is using incentives

to encourage RMs to identify early warning signals on business accounts.

Management of customer experience

A balance should be found between financial performance targets and customer care.

Relatively few banks measure customer service or complaints data. One bank has a

much lower call answering speed in collections. Only 70% of inbound customer calls

are answered within 20 seconds, compared to 85% in other units. As indicated earlier,

the customer experience of collections can be critical to loan recovery and to futurecustomer retention. One bank measures the number of customers coming back to the

portfolio as an indicator of customer care and performance. Calls can also be recorded

in order to monitor customer service. Best practice banks also use operational measures

in their process management to track the customer experience.


22/28

22

Branch Vs centralisedstrategiesFinalta 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 inpayment 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


Initialdelinquency

Branch led

Managed internally External debt collection agency

CentralisedBranch and back office led

Majordelinquency

Nonperforming

loan

Debtwritten off

Stage of debt collection

100%

80%

60%

40%

20%

0%

43%

33%

24%10%

41%

29%

71%

45%

55%

49%

Units that lead the collections process

at each stage of delinquency / debt

Figure6



23/28


23

involvement at any stage) and those where some

branch involvement is retained (at least in the initial

stages of debt recovery). Figure 7 shows the

average debt recovered at each stage for these two

processes. The graph indicates that at the Initial

Delinquency stage, banks with back office led

collections units only marginally outperform thosebanks that retain branch involvement during all or

part of the process. However, as the stage of debt

develops, centrally led processes recover on average

a higher percentage of the debt before it is written

off than those banks that kept the branch involved.

Nonetheless, branch involvement appears effective

at the initial delinquency stages. This indicates that

where appropriate, branch staff can be important

to returning an account to order, particularly where

a relationship manager is involved. Often, the RM

would have the product and customer knowledgeto discuss restructuring options with the customer.

Percentagedebt recovered

Initialdelinquency

Majordelinquency

Non performingloan

Debtwritten off

Fully centralised process Process includes some branch involvement

Stage of debt collection

50%

60%

40%

30%

20%

10%

0%

Average debt recovered at each stage

of the collections process

Figure7



24/28

24

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 reinforcingmonitoring 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.

Conclusions


25/28

25

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.



26/28

26

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 servicesworldwide, including 80% of the largest European banking groups.

The data provided in this briefing is drawn from bespoke research and Finaltas ongoing

service quality and sales productivity programmes.

Finalta1, 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


27/28


Copyright 2009 Efma. All rights reserved

This report not be reproduced or redistributed,in whole or in part, without the written permission of Efma.

Efma accepts no liability whatsoever for the actions of third parties in this respect.


28/28

Managing customers with credit problemsMay 2009

managing customers with credit problems, june 2009

Documents