Proactive loan managements time has come

Payment performance is a hot topic. We are looking at an economic downturn following a large amount of government guaranteed business and company loans, now lenders must take sensible steps to address non-performance before a guarantee is called upon.

In England and Wales, there were 4,896 registered company insolvencies in Q1 2022 – 6% higher than the number of company insolvencies registered in Q4 2021, and more than double the number in Q1 2021 (112% higher). In fact, the number of registered company insolvencies is the highest since Q2 2012 and the number of CVLs increased to the highest quarterly rate since records began in 1960. - Source money.co.uk and gov.uk

The functions tasked with collection and recovery have had many different names, Payment Assistance, Customer Management, and so on. However, all tend to be measured in pursuit of efficiency and effectiveness; volume per hour, and pounds collected.

In a similar vein to my previous article where I argued for the need for a new approach to credit decisions, I’m arguing a new approach here too. Value as a concept remains powerful; there isn’t any point in hitting your ‘numbers per hour’ if it doesn’t change the outcome. However, it’s better to concentrate on the drivers that change outcomes.

When we change a payment outcome, in almost all cases, we aren’t changing the desired outcome for the customers we are talking to.  

For a long time, the default view collections functions have worked with is that a payment has been missed and that has been a willing choice. This is wrong.  

Directors or owners of companies, by and large, don’t set out to breach contracts. Some do, they are fraudsters, but most people in that position are good, responsible, have something personal at stake, and are law abiding. They want to make payments.

What needs to happen to ensure the continued good payment performance of SME borrowing is  

• Early recognition of potential future non payment
• An empathic approach

These two items drive better customer treatment, excellent company conduct, and increased payment performance.  

We should direct effort to ensure payments are not missed rather than trying to collect when they are. This more complex but prevention is more efficient and effective than treatment.

A proactive approach could reduce losses and costs by up to 20%. Even if the change in approach were cost and income neutral at face value, there is a huge conduct and human argument for undertaking it.  

FCA Conc 7 applies to sole traders and partnerships and sets out the fair treatment and consideration expected, the New Consumer Duty is well on it's way, and for limited businesses the LSB standards of lending practice to business customers were formally recognised by the FCA in 2020.  

Any owner, director or officer having to explain why a payment has been or may be missed will have an experience that inhibits resolution. Humiliation, embarrassment, inadequacy, frustration, anger, and other emotions could be present.

If, however, a lender uses early warning behavioural analytics they can act proactively and partner with the client to avoid missed payments, or provide a pre-emptive restructuring of debt with a business support unit that is more efficient, and have agency over the outcome, rather than remaining a passenger.  

It’s the right thing to do and beyond the moral, conduct and human arguments, if a business has to make a hard payment choice, those who treated them with understanding and compassion will be those that will be favoured by choice.

That is how you alter outcome. If you look after your customers, the value in the ‘collections’ process will look after itself.

Abel provides monitoring and servicing that examines behaviour and selects correct customer contact approach and topic. As with all our services, we have built to solve a real problem and enhance the lending provision for SMEs, rather than optimise on the well intentioned, but wrong, approach.

• Real time servicing alerts use transactional, open banking and economic data to pin point where an immediate intervention is required as timely as possible.  
• Unique economic based forward looking analytics combined with behavioural scoring show the ability of a business payment performance to improve/not over time, and produce early views of behaviour with recommendations for action.
• Full book monitoring, with a forward-looking economic overlay, indicates granular subsectors where relationship activity may be directed proactively.

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