Identification and action in pre-arrears has been a topic addressed on and off by lenders for a while. The opportunities are clear. Lower levels of default for the organisation and a better experience for the customer seem like a good outcome for all. And yet progress has been slow and not always at the top of the agenda. You may have noticed recently however that there has been a number of papers and news articles relating to pre-arrears which have brought the subject back into the spotlight.
In December 2016 the UK FCA published the Thematic review “Early Arrears Management in Unsecured Lending” TR16/10 in which the FCA reviewed practices in this area. Starting from the point of identifying customers in probable difficulties at a pre-arrears stage to the point at which the lender formally defaults the customer or charges off the debt.
The FCA concluded that whilst there is a lot of good practice in the industry when dealing with customers in early arrears, there is also room for improvement. It recommended that all firms across the wider industry that collect consumer credit debt consider their approach to arrears in light of the paper’s findings and to make improvements where necessary. Along with the recently published consultation paper on persistent card arrears this really puts pre–arrears in focus.
With the paper concluding that the FCA expects firms to promote, embed and enforce the right culture regarding pre-arrears within their organisations and with further FCA interest in card debt the direction of travel is clear.
The challenge in the above is that customers in pre-arrears stages are very often not recognised until they default. They are then not treated in the best way, often passed between departments and with action not being taken until there is a level of arrears. As a result, this means higher than necessary arrears accrue and charges accumulate. This is bad for the customer, and bad for the lender in terms of customer satisfaction, the overall levels of debt, compliance with regulation and overall debt provision. What is needed, and what is increasingly possible, is a single view of the customer that pulls together a number of different data sources, as well as a holistic view of their indebtedness (not just a single account). Armed with the wider view it becomes easier to deal with the customer rather than the account and apply resolutions consistently and effectively.
The future pre-arrears strategy needs to have access to as much account level data as possible. This provides a more complete picture of the customer, which together with other related data (e.g. from Credit Reference Agencies CRAs), means it should be possible with a little assistance from some clever data analytics to provide a richer and so clearer picture on which to predict, and then have an informed conversation with the customer and ultimately take the right action to prevent arrears. We believe that this is a path well worth investing in. From the work we are doing with our clients, we are seeing that the benefits for the customer and the lending organisation are clear and in a crowded market could provide a clear point of differentiation.
Let me know your point of view and leave a comment or get in touch.