The credit landscape in Europe is best understood by examining the significant UK market. Research from the consulting firm, L.E.K, shows that unsecured consumer debt balances represent approximately 100% more than the other Western European countries combined, and at the time of the economic downturn, the UK was actually the most indebted country in the world (The Independent). The last four years have seen lending continue to increase with estimates showing the total UK unsecured debt to be around £1.47 trillion according to the Centre for Social Justice. This is against a credit active population of around 44 million.
The fallout from the economic downturn in 2007 has brought about some of the most significant regulatory change in financial history. Most notable are the new regulator’s demands for designating named individuals with the responsibility for the conduct and best treatment of the customer throughout the life of the agreement. Essentially, the Financial Conduct Authority (FCA) is ensuring the credit issuer continues their responsibility to an account even if it is with an outsourcer or third party agency.
Naturally some of the larger first party issuers have stopped issuing contingency debt and are focusing entirely on the sales channel, therefore passing on the responsibility to the new account holder (the purchaser). If first party entities haven’t done this, they’ve certainly reduced the number of third party agencies on their panels. The majority of agencies now work accounts on behalf of purchasers, rather than issuers, and much of the insight and ancillary data that used to be obtained through years of working with and building relationships with issuers has gone, reducing the validity of any scores or analytics and increasing operational costs.
The regulation means that anyone that works the accounts has to prove that the account was treated fairly and the best possible outcome was determined from the customer’s point of view. Affordability assessments are required for repayment plans and these have to be auditable for future reference. All of this ultimately has an effect on the bottom line. In fact, the average call time has increased from 10 minutes to 25 minutes and the account to collector ratios have decreased from around 700:1 to sub 500:1 — significantly increasing the cost of service. Many of the purchasers are now working close to single digit I.R.R due to the increased costs of servicing. This approach is now also spreading into other parts of Europe, with similar regulation recently deployed in Ireland and an intention from the European central bank to follow FCA principles as “best practice.”
In pursuit of continued growth, the established UK purchasers are looking beyond the depleted UK market and are looking at Europe with mixed success. Some organizations are concentrating their efforts in Southern and Eastern European countries, but it’s not an easy landscape. One company pulled out of Spain after just 12 months of activity. Operating in a completely new environment, with no historical performance data or a thorough understanding of the social and cultural attitudes to debt, has led purchasers to invest heavily in analytics, online scoring tools and financial modeling as well as other technological solutions.
Technology is the “Must Have” Commodity
Investment in technology is definitely the key to future economic viability. Some of the larger first parties are already using automated voice messaging as a precursor to the call to provide a small Steven Preston efficiency gain back into their call centers. Almost every entity now has an IVR and an online payment portal as a minimum.
Most noticeable however, is the migration towards digital communication channels, with some of the superior technology vendors offering affordability assessments, decision engine backed workflows, online portals and two-way customer communication channels. Advanced vendors, such as Telrock, come incorporated into first and third party systems, negating the need for a system integration process.
The business benefit from digital communications is significant. For first party they can increase the number of customers that self-serve, especially on the last day of the month when they get paid — which is traditionally when an inbound call center is at it busiest. These small aggregate gains in customer engagement equate to significant increases in provisioning capital requirements. For first and third party entities, the use of this technology significantly reduces the volume of these now increasingly expensive calls, crucially moving businesses towards more economically viable operating models.
The biggest wins can be delivered by technology such as decision engine-based enabling servicers. These work by specifying rules around acceptable tolerances for repayment plans and terms, which are designed in accordance with the organization’s own risk appetite. Customer journeys are then completely automated and determined by the underlying decision engines, meaning that each customer will receive a completely compliant customer journey — significantly reducing the conduct risk of servicing and the overall costs.
Technology is pivotal to the success of the credit industry in Europe. It is no longer just a ‘differentiator’ between services it is a ‘must have’ commodity that must be adopted if the industry, its organizations and the European financial markets as a whole are to thrive in this new regulatory landscape.
Preston has worked in the collections and purchase industry for both first and third party companies. He currently works with sellers and purchasers in the UK, Ireland and Spain and specialises on the best technology, operating model design and collection strategies against the continuously evolving regulatory landscape in the UK and Europe.