Debt collection crisis

A new survey into the credit collection process forecasts a crisis in debt collection with cases on the up and no clear solution in sight. Elliott Howard from Sopra Group summarises the research

Five years ago managing mortgage arrears wasn’t something that concerned the mainstream lenders. Today, things look very different. We have just completed a major survey into credit collection and the results are concerning, especially for mortgage lenders – and holders, too.

Indeed “unprecedented” is what the research company Vanson Bourne, the firm that carried out the survey, told us when it saw the large numbers respondents came back with.

Our research team polled senior finance professionals and company leaders at financial services companies; in fact, banking and mortgage lenders formed the majority of respondents, finding nearly three-quarters are experiencing a number of big problems in their collections process.

Specifically, respondents cite the fact that the debt collection is slower, less successful and more resource-intensive. Three quarters of respondents (74 per cent) told us debt is taking more people/resources to collect; another 77 per cent believe that debts are taking longer to be paid back, so costs are escalating. A further 74 per cent confirm margins are being impacted due to extended payment timeframes

This is the backdrop against which the most astonishing element to the results emerged: an almost 20 per cent increase in forecast debt collection cases in the next year. More worryingly, nearly half (46 per cent) of respondents say they expect volumes to grow further – that is, by over 20 per cent.

Process re-engineering

The data strongly suggests that processes require some re-engineering. Existing debt collection systems look unlikely to be able to handle the increase feared. Only 29 per cent are confident their system will cope with extra case loads, too many manual processes hamper others (37 per cent) - and a lack of integration (29 per cent) is a challenge for others.

“It is difficult to redefine and automate existing processes,” was the response given by two financial services companies, for example.

The survey also suggests that segmentation or profiling processes are far from perfect, with just 46 per cent describing their segmentation profiling as “fully optimised”.

Compliance

The banking and mortgage lending sector, which is arguably under the most scrutiny, is not immune from compliance challenges, with 71 per cent experiencing some difficulty in demonstrating compliance in response to industry regulators.

Finally, when asked about debt collection systems, 66 per cent of those polled admit some difficulty in demonstrating compliance with industry regulations, 17 per cent struggle with the task, 29 per cent are partly able to demonstrate compliance and a significant 20 per cent acknowledging “we need to address this more fully”.

What’s really worrying is that businesses seem to lack any clear notion of a remedy. Large numbers seem to be looking at a technology-based solution and/or outsourcing the issue.

Two thirds of financial services companies are interested in outsourcing systems (65 per cent) and over half are looking at replacing (56 per cent) their software solution, rather than attempting to fix existing processes (50 per cent) and put extra staff in place (50 per cent).

Debt recovery difficulties

Asked to name the greatest challenge in debt collection in the next twelve months, the response that came back time after time: the difficulty in actually recovering debt. That’s a problem compounded by the recessionary pressures the country is under.

One insurance company respondent sums it up: “The steady increase in burdens of debt as a result of the financial crisis.”

Notwithstanding our expected 20 per cent plus increase, that difficulty will grow if systems and processes are left to drift in an inadequate state. The issue that respondents thought loomed largest was the inadequacy of systems and processes and a lack of resources.

For instance, “Increasing costs and overheads involved in collecting debts” and “Our current systems are inflexible – making changes is very difficult/not possible”.

All in all, it’s a grim outlook for the financial services industry unless some radical process overhaul and technology spend is set in motion. “[The] amount of debt has been very high for several years.

Collecting it is more difficult (as several creditors are chasing the same debtors)” is a representative quote from a manager in a financial services company. With economic conditions such as they are, this is not a wholly unsurprising response.

So is it all doom and gloom? No. But banking and mortgage industry senior managers know that these issues are prevalent in their business and they need to find a way to deal with them.

Interestingly, the exercise showed that senior managers are readier to act than front-line staff. So, there is clearly plenty of will there to change, and where there’s a will there’s a way.

Financial services companies seem more ready than other industries to acknowledge that these issues are prevalent in their business and foresee greater change than other sectors, so let’s hope they seize the day.

But there’s no denying that UK plc’s debt problem, four years and counting into the global credit squeeze, is probably as bad as ever and mortgage arrears will be a challenge for the UK for some considerable time to come.

Elliott Howard is director at Sopra Software Solutions in the UK, a provider of credit collection management software. If you would like to receive  a free copy of the full survey report, register at http://www.sopragroup.co.uk/creditresearch2012