Arrears on the rise – outsourcing can help

As lenders struggle to cope with the inevitable escalation of arrears, more are looking to outsource some or all of their arrears management work. Matthew Vallance of Firstsource discusses how outsourcing firms can help lenders

The UK economy is in unchartered territory. With a new 315 year historic interest rate low of 0.5 per cent, and the Chancellor’s authorisation to pump up to £150 billion into the economy through the country’s first ever use of quantitative easing, the impact on businesses and consumers is exceptionally tough to call.

The speed of contraction in the economy has been faster than most economists and businesses anticipated - and the International Monetary Fund (IMF) recently revised down its outlook for 2009, announcing that the UK would contract by 2.8 per cent in the year, more than any other advanced nation.

The impact on the housing market has been immense: house prices fell almost 18 per cent in the year to February, according to Halifax, and arrears and repossessions have been rising in line with unemployment. The number of mortgages in arrears of three months rose by 31 per cent to nearly 220,000 mortgages at the end of 2008, according to the CML, and the number of repossessions is due to rise from 40,000 in 2008 to 75,000 in 2009.

Looking for solutions

What should mortgage lenders do? Certainly, to maintain revenue, they must focus on helping as many of their customers as possible continue payment of their mortgages and not fall into arrears or repossession. They must also focus on cost cutting, yet, at the same time, maintain and enhance their levels of customer service, not least to maximise their income from at risk customers or those already in arrears. However, they must also ensure that their customer service model is flexible to scale quickly and effectively enough to rising demand when the economy turns.

Specialist outsourcing companies, who have in-depth experience of and understand the mortgage market, can help lenders with much of this additional arrears work. At the same time, outsourcing companies can also carry out much of the regular mortgage administration, allowing lenders to focus on developing their business strategies and products.

On the arrears management side, there is an opportunity to derive value from outsourcing at many stages of the customer management cycle, from pre-arrears, right through to four months worth of arrears outstanding for one month after due date and beyond.

Outsourcers are able to provide greatest value for those customer services that need to be conducted at volume and that can be broken down into discrete processes. Such areas common to many stages of the arrears cycle are managing customer contact through the telephone, and other modes such as email and webchat, negotiation with customers, production and mailing of automated letters to them, and sourcing their updated ‘ability to pay’ based on information including the value of their property and their credit rating.

Pre-arrears

At the pre-arrears stage, for example, outsourcers could provide guidance on payment plans for those customers that get in touch to report potential or actual financial problems. Conversations with these types of customers can be long and complex, which have the potential to be expensive for lenders. Outsourcers can bring efficiency to such calls, by using experience of debt collecting in other business areas to communicate effectively with the mortgagor and get to a satisfactory outcome far more quickly for both the customer and the lender.

Indeed, outsourcers that have invested in sophisticated analytics technology to micro-analyse customer accounts and categorise customers according to their risk of defaulting on payment, are able to go one step further by pro-actively contacting borrowers that might fall into arrears, to offer advice for avoiding payment problems.

Arrears outstanding

For those customers that have one month of arrears outstanding for one month after due date, a typical first step by a specialist outsourcer would be to send them an automated letter drawing attention politely to the situation and encouraging contact to resolve the matter. The outsourcer would follow this with a telephone call, if the borrower has not got in touch after 14 days of receipt of the letter. As in the pre-arrears situation, the outsourcer would have sourced the customer’s updated ‘ability to pay’ ahead of a call, and the agent would discuss a range of payment options, as well as offer details of free sources of advice, such as the Citizens Advice Bureau.

Typically, this is the best time to resolve arrears issues because the outstanding amount is still within reach of settlement over a relatively short time period, so lenders should focus effort here to ensure that customer situations do not get worse. However, given that this is a particularly high volume area, many lenders struggle to provide enough resource, making it an obvious area to outsource.

Two months plus

Outsourcers would follow the same process for borrowers that have two, three and four months worth of arrears outstanding for one month after due date, but would use increasingly assertive communication about the need to solve the problem. At the two month stage, for instance, the letter would declare the lenders’ ‘Power of Sale’ of the property

Letters to borrowers with three months of arrears would introduce the concept of a personal visit from a professional financial counsellor. The outsourcer would also forward automated instructions to the counsellor to arrange an appointment for a review of the borrower’s personal finances, and discussion about options for the way forward.

Customers four months in arrears would receive an automated letter saying that the case will move to legal action for exercising the Power of Sale. The outsourcer would also bundle the case information and pass it to the litigation team.

Clearly, customer service skills are critical to the success of the arrears process. Agents must have the ability to communicate effectively with customers that are probably going through one of the most stressful situations of their lives. Providing this kind of highly valuable customer resource requires ongoing investment in excellent training programmes for customer agents. Furthermore, at all times lenders are obliged by the FSA to both treat customers fairly and store records validating that they have done so. (Indeed, evidence that lenders have treated customers fairly will be needed as part of the legal process to gain an Outright Order of Possession.)

Cost reduction and process efficiency

Specialist outsourcing providers that are focused on customer management and mortgage administration are able to cut costs through economies of scale, and by leveraging continuous process improvement tools like Six Sigma and LEAN to maximise operational efficiency.

On the cost reduction side, outsourcing arrears management to a specialist service provider can deliver double-digit cost savings on doing the work in-house.

Lenders could consider a ‘right shoring’ strategy, which means using a mix of onshore and offshore locations to carry out the most appropriate stages of the mortgage life cycle. Cleary, this rightshore strategy requires considerable investment in due diligence, including assessment of countries, service providers, talent pools, investors and other key stakeholders, but it does offer businesses the opportunity to develop solutions that are highly bespoke and flexible to their needs.

One outsourcing model is to offshore back-office processing, such as data analysis and customer segmentation, and e-mail communications, and keep the highly sensitive phone based contact with customers in arrears onshore. Another strategy is to test and refine some back-office processes onshore before moving them offshore to generate further cost savings.

What next?

Mortgage lenders can be sure that arrears management will become an increasingly important part of their daily businesses. They need to do it in a way that maximises revenue, yet is achieved at the lowest cost possible, without compromising on the quality of their service to customers. Outsourcing partners that specialise in the lending markets are well equipped to add great value to mortgage providers through managing a lot of this work. Our expectation is that many lenders will be taking a hard look at their customer arrears situations and analysing how their can drive greater returns though outsourcing.

Matthew Vallance is president for Firstsource, a global business process outsourcing company