Several years on from the world financial crisis, banks still have to deal with its consequences. Besides the financial impact and the damage to their reputations, banks have had to learn to operate in a new world – a world of flat economies and rising levels of customer debt. Non-performing loans have increased and customer indebtedness, in general, has been seen to have a significant effect on the banks’ net profitability. Increasing collection costs, growing bad debt write-offs, and the requirements for higher provisions against loan losses have all combined to make managing credit loss a key business driver, with a direct impact on the banks’ profits.
While the situation in America and Asia-Pacific regions has improved, percentage of Non-Preforming Loans in Europe, Middle East & Africa continues to worsen. Loan balances in Europe are suffering as a result of economic crises in Italy, Greece, Portugal and Spain. In Italy, Monte dei Paschi’s NPLs at the end of 2015 (22.84%) had more than doubled since 2012 (11.35%) while NPLs for Unione di Banche Italiane (UBI Banca), the country’s fourth biggest lender, soared from 7.3% in its 2014 results to 15.1% at the end of last year. From 2011 to 2015, the share of NPLs in Greece increased from 14% to more than 50%, according to the European Central Bank. World Bank’s graphic clearly sets the picture. Only a handful of European countries have managed to keep NPL rates to the levels we were all used to before the crisis.
On the same time, technology advancements present financial institutions with new opportunities and challenges. Internet & mobile banking, cloud services, mobile wallets, payment gateways & big data initiatives are announced by banks all over the world, in their effort to guard their customer base against the soaring fintech companies looking to get a piece of the same pie. Non-Performing Loans (NPLs) management is one of the areas that is being transformed with the advancement of such new technologies. As noted by Gartner in their Loan Collections Systems Technology Analysis, “… loan collections costs have been the fastest-growing cost segment in loan servicing. The cost to service a delinquent loan was eight times the cost of servicing a performing loan in 2008; by 2013 this multiple rose to 15’. Financial institutions face the challenge of managing a growing numbers of delinquent customers, while holding or cutting operational costs. The banks that have risen to the challenge have either restructured their internal Collection & Recovery organizations or rethought their collection strategies – usually both. One of the main facilitators that helped these organisations thrive is the adoption of specialized IT systems. This is why, according to Gartner’s study, 28% of retail banks intend to adopt or replace their loan collections technology before 2019! New generation C&R systems may achieve a remarkable ROI and their implementation may also be used as a tool for rethinking collection strategies.
One notable trend along those lines is that of Collections Self Service. Modern customers use more channels than ever to bank and communicate, with increasing emphasis on social media and mobile. According to eMarketer, more than 61% of people worldwide own and use a mobile phone, with the percentage reaching a high of 81% in the case of Western Europe. Additionally, the amount a bank recovers is directly dependent on the number of customers it manages to contact. A simple call no longer suffices, and it’s easy to miss out on a possible settlement when only one communications channel is used. A self-service collections tool is a better option than collector outreach because it maps more closely to how consumers behave online:
- They want 24/7 convenience.
- They want to receive all information and options at their fingertips, in a format that gives them total control.
- And they don’t want to engage with company representatives until they’re ready.
Unfortunately, many firms respond to outstanding debt obligations with behavior that directly contradicts these preferences, such as interruptive contact via phone or mail that produces few results and high-pressure tactics that push for settlements while alienating customers.
Banks can substantially improve their collections operations’ efficiency by embracing alternative channels, such as web & mobile portals that allow their customers to self-manage their debts. People want to help themselves, banks should allow them to do so.