In 2012 there was a significant shift in the recoveries market. The importance, influence and focus of the industry regulators increased dramatically and started to fundamentally change how creditors think about their defaulted accounts. Having traditionally focused on individual accounts in isolation, during 2012 progressive creditors began to think about the debtor at an integrated level with the Treating Customers Fairly (TCF) agenda starting to play a key role in their overall recoveries strategies. We expect this shift to continue in 2013, with the regulators taking an increasingly firm line on how consumers are treated once they enter recoveries. Similarly, the emergence in the US of the CFPB (Consumer Financial Protection Bureau) has completely altered the regulatory landscape, with creditors increasingly concerned with how their third parties act on their behalf.
As a result of these changes in the UK, most creditors will need to invest significantly in how they manage recoveries in 2013. New technology will ensure they can interact with their defaulted consumers across all channels, and new data sources will enable them to more fully understand their debtors’ overall financial circumstances. We believe that 2013 will also see a real drive to join up activities within recoveries. For too long the sector has been characterised by inconsistent data, often batch processed, providing an incomplete or inaccurate picture of a debtor. At the simplest level, this could take the form of a more joined up dataflow between placements at agencies, so that information provided by a debtor in first placement (or collections) can be fully utilised in subsequent placements.
We expect the personal insolvency market to continue to be relatively stable in 2013, with a modest decline in overall volume, and contributions continuing to fall as a result of the tightening in general lending since 2008, and the squeeze on disposable income.
In contrast, we expect continued turbulence in the debt management plan (DMP) market, with the new voluntary code failing to address many of the key dislocations that exist in the market. Some unintended consequences of the new protocol will create interesting dynamics in the market for acquisition of new DMP cases. More generally though, this market will continue to operate as a ‘catch all’ in the debt market and will remain the wrong product for the majority of people who sign up.
We believe that the prevalent theme for 2013 will be one of customer-centricity, with all players in the market increasingly keen to understand as much as possible about their debtor and making TCF-based decisions using that information. Interestingly, we believe that whilst this change will initially be driven by the regulators, it will actually fundamentally improve overall liquidation performance as well as enhance customer experience. It will become very apparent through 2013 those who get this right and those who do not.
1. TCF will impact processes more than ever before
The key trend in the second half of 2012 was the increased prominence of the regulatory agenda. For some creditors, this has always been a key priority, but for others it was thought of almost as a hygiene factor. In 2013 we believe there is going to be a more significant change in the market around ensuring adherence to the compliance agenda because it is becoming clear that the spirit of these regulations is much tighter than many are currently interpreting.
One place this will become apparent is debt collection agency (DCA) commercials. Traditionally, DCAs have been incentivised almost exclusively based on the cash they collect from debtors, and whilst agency audits and strict policies have always been in place to protect the consumer, these incentives do not align with a model centred on TCF. Some creditors have already started the move towards a TCF-centred incentive programme by introducing balanced scorecards for DCAs which take into account all aspects of performance.
The other key impact this is likely to have is the polarisation of the DCA market between those who can afford to invest to meet the heightened TCF agenda and those who cannot. There is a requirement for significant investment in policies, procedures and technology to ensure compliance, but historically the DCA market has not been renowned for its ability to invest, and some DCAs will definitely not be able to bear the burden. For creditors there will be an increased cost of supplier management which will lead to some reducing the size of their DCA panels to reduce the overhead cost of managing the panel.
2. There will be a huge increase in the use of electronic channels
At the end of 2012, online payment of outstanding debts in collections and recoveries only accounted for around 5% of all payments, with DCAs and creditors preferring to speak directly with consumers. However, in 2013 we expect this to change dramatically. As seen across many other industries, when consumers have the choice to interact online, they take it – and in vast numbers. Our industry will be no different. From a consumer perspective, many signed up to a financial product, and managed it, online; it is only when their account enters collections that they are forced to engage offline. These consumers clearly prefer electronic channels, but have historically not been given the chance to exercise that choice.
One barrier to online payments in collections and recoveries has been a lack of understanding of the compliance agenda and what can and cannot be done electronically. As understanding grows, creditors are increasingly willing to embrace new communication channels.
Technology has also been a barrier, with many agencies and creditors offering only poorly promoted and rudimentary payment portals devoid of functionality and intuitive customer interfaces. Some online payment providers are now moving into this sector and are having real success with their tailored portals that allow personalised offers, online negotiation and a clear, simple way to resolve a debt issue.
We expect 2013 to be the year of online payments in the collections and recoveries market as the industry catches up with the penetration level of online channels in other parts of the credit cycle. We expect the use of online channels to at least double in 2013, accounting for over 10% of all payments in the sector, and then more than double again in 2014. A lot of this growth will be from the mobile market that already accounts for 40% of the online payments.
3. US debt buyers will move into the UK
The US debt market has been fuelled by the combination of US GAAP provisioning rules, and the ability to transfer risk (financial and reputational) to a third party over the last two decades. However, in recent times the mood in the US debt sale market has changed significantly. The newly formed and highly influential financial regulator, the CFPB, has the debt sale market firmly in its sights, and is intent on ensuring that creditors do not transfer their obligations to individual consumers to a third party through a debt sale. As creditors are forced to review their approach, supply is being restricted. In addition, many of the larger purchasers have seen their funding costs decrease dramatically over the last 18 months, enabling them to actively bid-up the price of assets. In short, a bubble is being created in the US market.
For US debt buyers these are troubling times. Many of them are now looking for alternatives to hedge their US position, and it appears the most likely outcome is that those who are not already active in different geographic markets will look to diversify over the next 12 months. The obvious first step is the UK market. Whilst debt sale is competitive in this market, US players have a crucial advantage; their scale dwarfs the current UK incumbents and as a result they have almost unrestricted access to significant funding at extremely low cost. One significant US buyer recently commented, “… buyers are increasingly looking towards European markets, especially the UK, to protect existing revenue streams and potentially drive future growth.”
For years many of the debt sale techniques and processes we currently take for granted in the UK were originally conceived and rolled out in the US. In 2013 we should expect to gain a little more from across the Atlantic – in the shape of more purchasers.
4. Customer-centricity will drive both compliance and results
Another key trend we expect this year is for all participants in the sector to focus on the debtor, over and above any individual debt. Industry data highlights that each consumer in debt typically owes money to eight different creditors. However, most organisations have traditionally treated each customer as if the only debt they have is with them. Most creditors would like to adapt their approach to become more consumer-centric, but data protection laws and technology constraints have previously stymied their efforts. This year we expect that utilising data to give a better view of the consumer’s full circumstances will not just be a “nice to have”, but will be a requirement in the recovery process. For those creditors using multiple DCA placements, visibility of interactions and outcomes across each of those placements needs to be available to all subsequent agencies.
Entering into collection and recovery discussions with individuals as if they have a single debt with a single creditor, will become recognised as sub-optimal from both a TCF and liquidation performance perspective.
5. Big push for technological enhancement and real-time data transfer
The technological gulf between the recoveries sector and other parts of the credit cycle continued to grow in 2012. The majority of players in the recoveries sector still rely on batch data transfers and encrypted excel spreadsheets as a means of transferring information. This technology is antiquated and some market participants are already stepping up their capabilities with the use of portals to manage the DCA to creditor query process. This is just the first step in the process and we expect that 2013 will see many creditors improving their processes and adopting new technology to ensure the process of managing collections and recoveries is more efficient.
There will also be a significant growth in real time data transfer between creditors and agencies, ensuring all collectors are armed with as much up-to-date information on the debtor as possible. This will be facilitated by improved technology and the increased use of third party specialist technology providers. With the rise of online payment behaviour and the growing technology expectations of consumers, it is no longer acceptable to have systems that can be up to a day (or in some cases a week or a month) out-of-date.
6. DCA activity data will make a difference
The use of external DCAs has long involved handing accounts over to a third party and then receiving a fairly binary result set; either a payment or a non-payment. While this is a simplified version of the truth, it is understandable when compared to the wealth of data that is available and captured by agencies.
Creditors have always audited and checked agency activity to ensure compliance with relevant policies, strategies and regulations, but activity data holds so much more than that. More often than not it also holds information about the nature of call outcomes, the time of day the call was made, what activity triggered engagement (or disengagement) and so on. This information should be used to inform future strategies and segmentations. It also allows monitoring and exception reporting to ensure activity is both taking place at the desired level and is in line with the specifics of the contract.
Today, however, most creditors overlook this data and focus only on the monetary result. We anticipate the power of DCA activity data to be more widely recognised in 2013 which will create a new focus for many creditors and agencies.
7. Emerging sectors will polarise the DCA market
In 2012, the majority of accounts placed at DCAs originated from financial services companies, utilities or telcos with a smattering from other smaller parties. In 2013, this is largely expected to remain the same, but there are a few emerging sectors starting to absorb DCA capacity, including public sector (central and local government) as well as pay day lenders and other short term lenders.
These new sectors (especially the public sector) will place a significant administrative and audit burden on the agencies they work with, which implies that only the larger agencies will really be able to invest to meet the compliance requirement, thereby further polarising the DCA market.
8. The average IVA contribution will continue to decline
In the individual voluntary arrangement (IVA) market, we expect many of the 2012 trends to continue. Notably, overall IVA volumes will continue to decline, although this is likely to be partially arrested by increased volumes of low value IVAs. The rise of the low value IVA will see average contribution per IVA continue to decline and hence overall IP fees also decline.
The amount of work involved in processing an IVA is almost entirely independent from the overall balance on the arrangement, and hence insolvency practitioners (IPs) will have to exert similar effort for reduced fees. As a result, we expect continued consolidation of the sector with the larger, more efficient players continuing to grow and expand. There will also be an on-going focus on streamlining IP processes with new technology providing a means to improve operational activity and reduce their cost base.
9. Debt Management Plans will continue to fail consumers
Much fanfare has surrounded the new debt management protocol especially how it will significantly impact the position of many of the most disadvantaged debtors in the market. Our view is that the new protocol could have a negative impact on those most at risk. At present, there are over 100,000 new DMPs created every year and with the exception of the free sector, these DMPs typically attract a fee to the debtor of around 35-40%. Whilst most Debt Management Companies (DMCs) will quote fees in the 10-15% range, there are minimum fee levels applied that increase the percentage significantly.
The voluntary protocol will forbid the charging of upfront fees and will make the process more transparent for debtors which, on the face of it, should be good for the sector. The challenge is that the code is voluntary. Competition amongst the key DMCs is usually played out on the online forums, Google and generic online advertising. For the last three years, competition has increased the price for some keywords on Google Adwords to unsustainable levels and DMCs have sought to recoup this through greater upfront fees and attaching other products around DMPs to retrieve a greater slice of the repayment.
For those DMCs who volunteer for the new code of practice, there will be a significant issue around the generation of new leads. They will be comprehensively ‘out-marketed’ by those providers who do not volunteer for the code, and will therefore be able to charge upfront fees and afford the best advertising slots. In short, the larger, more reputable DMCs will be out-promoted by the smaller, less reputable providers, actually making things worse for the consumer. We also expect to see a lot of new smaller providers appear in the market, winning business only to then be purchased by the larger players once they have acquired a book of consumers.
Unsurprisingly, the free sector has not endorsed the protocol and remains focused on providing debt management for individuals in genuine need of impartial debt advice. It is also worth noting that the majority of debtors who enter into a DMP would not be able to repay their debt within eight years at the original repayment rate, and it is therefore questionable how this product is effective for these debtors who are most likely in need of some form of debt forgiveness. The underlying issue is that the current DMP product serves many different types of debtors, with many different needs, and, as a result DMPs will continue to fail 90% of people who take them up.
10. Macroeconomic changes will have a mixed impact on collections and recoveries
The outlook for the UK economy in 2013 is extremely mixed, as reflected in credit agency Moody’s recent downgrading of the UK’s AAA rating due to anticipated “sluggish growth” to continue past 2015.
The three key macroeconomic factors to watch in 2013 from a collections and recoveries perspective are inflation, the proposed changes to benefits and the unemployment rate.
Inflation will remain persistently high driven by a potential further round of quantitative easing and the shift of focus of central banks from inflation on to economic growth. Inflation has both long-term and short-term impacts on the debtor. Short-term, the debtor will experience a decrease in disposable income that will impact ability to repay. In the longer-term the picture is less straightforward. For those debtors whose debts no longer attract interest, inflation will erode their debt and, as wages gradually rise, so too will affordability and ability to repay.
The second key change for 2013 is the fundamental review of benefit payments. Benefit claimants make up a significant proportion of debtors (especially in the DMP and IVA sectors) and a reduction in overall benefit levels will inevitably lead to a decline in repayment rates. The exact scale and scope of the reduction is still not fully apparent, but any wholesale change will materially impact collection and recoveries rates.
The final macroeconomic driver is unemployment, which, to date, has not reached levels seen in previous recessions. Market commentators and economists have associated this with the resilience of the private sector, but the question remains around how much longer unemployment rates can hold given the wider economic environment. Our expectation is that this rate will rise in 2013, negatively impacting collections and recovery rates.
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About Stuart Bungay
Stuart has over a decade of experience in leadership and analytical roles in retail banking – including working in and leading international teams at Barclaycard and TDX.
He joined TDX in 2007 and, as well as managing our Spanish and Latin American operations, has also held roles in the development of new ventures, debt sale and advisory.
Stuart prides himself on developing individuals and teams focused on international markets and data analysis. He is passionate about converting data into information that is meaningful and making complex challenges simple. This is a skill that he applies outside work as well – as he dabbles as a part-time economist and share-trader… in between cricket matches.
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