Many Asia-Pacific countries are notorious for the complexity of their debt collections operations, with a report from credit insurance company Euler Hermes ranking the vast majority of APAC region countries as ‘severely’ complicated.
Issues with local payment practices, court proceedings and insolvency proceedings all factor into the problem, which seems to be uniform throughout the region. Indeed, only Singapore managed to scrape past with a ‘high’ ranking in the Euler Hermes rank
ing, though Singapore law provides no guidelines regarding late payments, and contracts are the only reference when business relationships sour.
Someone needs to step in and set a respectable precedent. Can the region's banks take the lead and offer a customer experience that makes the debt collections process easier and more accessible to the end user, and more successful for the banks themselves?
The debt collections landscape in APAC
Going back to the Euler Hermes report, Western European countries are shown as taking the lead in reducing debt collections complexity - with Sweden, Germany and Ireland coming out on top. This is primarily because the financial landscape in Europe is more secure, and Europeans are generally more open about their debts. The only way APAC countries are ever going to catch up is if they are able to bring their debt problems out of the shadows.
In Thailand, for example, years of auto financing and unsecured loans have led to household debts doubling between 2008 and 2014, with debt reaching 80% of GDP in 2015. The banks, as a result, can simply not take much more. This is compounded by deflation in the country, with Thailand currently exhibiting the highest deflation of any emerging market.
Many Thais also favour ‘off-system’ forms of credit (In 2009, the Abhisit Vejajjiva government estimated that 1 million Thais owed money outside the official financial system), so the problems might be even worse than official figures suggest. Much of this can be put down to a lack of financial understanding on the part of the borrowers, but this is something that could be rectified (at least in part) by the country’s banks taking a different operational approach.
Another facet to consider is the laws of the land and how they govern debt collections in the region. In Singapore, debt collections isn't regulated, which has led to 'pirate' debt collections practices such as intimidation and even threats of violence. In Indonesia, it's even worse due to a combination of overly lenient payment terms and a court appeals system that is complicated, lengthy and costly (not to mention inconsistent). This has led to overly messy debt situations for both countries.
Malaysia is also a country racked with unsustainable debt. Household debt-to-GDP might have moderated in recent years, but it still stood at a whopping 83.8% in the first half of 2018 (compared to 84.2% in 2017). The Malaysian government has instigated strict rules that debt collectors are required to follow, but couple this leniency with easy access to credit cards (many with no credit limits) and personal loan facilities that encourage excessive spending, and it's no wonder the country currently sits as the third most difficult country on the Euler Hermes report.
Whether they are being too harsh or too lenient, what could really help shift the debt collections landscape would be for the region's banks to take the lead and offer a customer experience that makes the debt collections process easier and more accessible to the end user. Maybe then there would be more incentive for debtors to avoid falling into delinquency - and it would be through a more sustainable incentive than bullying and intimidation. This is customer-first thinking.
The value of customer-first thinking
Customer-centricity is defined by The Boston Consulting Group as “a way of banking based on trust and fairness that uses knowledge of customers to meet their needs and achieve sustainable, valuable, long-term relationships.” Essentially, it relates to business practices that put the customer's needs first in order to drive loyalty and (eventually) profits.
Extraneous circumstances (everything from the financial crisis to the rise of smartphones and social media) have meant that banks across the world have been prioritising customer-first operations in recent years, but the debt collections and recovery sector appears to have been lagging somewhat. It's certainly not too late, though.
Shifting the focus to customer-centricity in debt collections requires banks to make a number of changes that are rarely difficult or costly to implement. Rather than one big change, it's often more about making a number of smaller changes, which could include (but are certainly not limited to):-
- Asking – Online customer surveys (the more anonymous, the better) are cost-effective and invaluable sources of information that will give you direct access to customer thoughts and feelings regarding your service.
- Tech – Using apps and self-service technology, not to mention more heavily tailored debt collections software, will help your customers stay on top of their debt and to organise repayment should they fall into delinquency. Offering customers the tools and services that will help them organise and salvage their debts quickly, easily and conveniently will leave them with a more positive outlook on the company and will ensure they don't jump ship.
- AI – AI is proving to be one of the major disruptors in modern debt collection and can be comfortably utilised in a manner that is resolutely customer-centric. Metro Bank, the UK-based online firm, have used an AI technology called “Computer Vision” to improve their chatbots. This tech is able to scan faces and accurately assess customer mood. The AI can then use this information to switch the script as customers become irritated.
- Communication – The first place to instigate real, workable change regarding customer communication should always be the call centre. Research conducted by Nesta has found that 91% of consumers have had to contact a company more than once to resolve the same issue, and 90% have been kept waiting on hold for too long. This is simply unacceptable. Repurposing traditional call centres in favour of 24/7 online messaging solutions will make your customers feel more at ease because they are often intimidated by call centres, particularly when discussing something as sensitive as debt.
Leading academic of economic psychology, Professor Alan Lewis from the University of Bath in the UK, believes that a customer-centric debt collections approach will increase the percentage of debt being repaid, enhance a bank’s brand image, improve its customer retention and minimise lost revenues. Professor Lewis feels that nurturing a customer-centric approach begins with teaching lenders how to collaborate with their debtors, rather than chastising them. He elaborates: “Agents that have the higher success rates are those who take a collaborative approach and there is never any sign of them chastising customers even in the mildest way.”
This collaborative approach can be something as simple as asking a question instead of making a demand when phoning about a missed payment. It's not about mollycoddling your delinquent debtors, it's about treating them as human beings and giving them the right opportunities to repay without intimidating them.
According to Sebastian Siemiatkowski, CEO of leading Swedish FinTech startup Klarna, meanwhile, banks need to move past their antiquated, self-absorbed ways. He explains: “There is a massive opportunity now to change an industry where, unfortunately, banks have been more absorbed by themselves than their customers. We can bring that focus on customers - we want to be a digital assistant but focused on financial items, managing your economy.”
Siemiatkowski adds: “I don’t think Steve Jobs built the iPhone to destroy Nokia but to make people’s lives better. We are trying to do the same. The consequence is: I’m not going to care about it if the banks’ profits go down.” That's the customer-centric approach in a nutshell; making people's lives better first, product second. This results in a brand that customers feel genuinely cares about them and a brand they will stick with through thick and thin, which is particularly relevant in debt recovery, where “thick and thin” is very much the bread and butter.
In the States too, there is a definite push towards a customer-first approach. The US bank displaying perhaps the most obvious customer-centric practices is the USAA – a group that provides financial services to US military personnel. Consider the specific needs of deployed military personnel: limited access to physical branches; away from home for months at a time; a lifestyle that can put strains on their households when financial issues arise. As a result of the unique needs of its customers, USAA has instigated a mobile-first policy. What makes this so relevant? According to Ron Shevlin, director of research at Cornerstone Advisors, it's all about building a service around customer needs, not vice-versa. He explains: “USAA isn’t mobile-first because some survey said consumers are relying more heavily on their smartphones to do things, it's mobile-first because the consumer segments it serves require the firm to be mobile-first.”
British startup bank Monzo is another company that was designed with the needs of the customer at its core by foregoing brick and mortar branches completely and forming the entire business around a card and an app. The CEO, Tom Blomfield, doesn’t even refer to Monzo as a bank, he calls it a “control hub for your financial arrangements.” As a result of these practices, the bank doubled in value in 2017, increasing their user base from 120,000 to 47,000 in just 10 months.
On the UK high street, meanwhile, Metro Bank is a relative newcomer (launched in 2010) that is the first completely new bank to hit the high street in over 150 years. Metro is a bank where everything has been designed to help the customer, with founder and CEO Craig Donaldson taking a noticeably different approach to banking than his more established peers. This is an approach that starts at a a foundational level with the language used borrowing from the more 'relaxed' retail sector. So “branches” become “stores”.
Donaldson explains: “You go to a store for service. You go to a bank branch to wait in a miserable dark queue. Language is really important for us. We want to create a culture where we have fans.” He adds: “Last year we only spent £100,000 on advertising. Our customers go out and tell their friends and family about us for nothing.”
Metro Bank also opens seven days a week, with Sunday being their most popular day, because they understand that Sunday is a common day for many workers (particularly self-employed workers) to do their books. In short, it's a bank that launched with customer centricity at the beating heart of its operations from day one and it seems to be working for them and their customers.
Can it work in APAC?
When examining whether or not the lessons learned in Europe and the US can be applied to APAC banks, there are a number of factors to take into consideration, many of them cultural. There are factors at play that are specific to APAC countries, which make it difficult to transpose a Western way of thinking about debt collections to the region.
Metro Bank would appear to represent the gold standard when it comes to banks utilising the customer-centric approach, but in developing countries such as Thailand and Vietnam, the infrastructure for these retail “stores” simply doesn't exist. Tech investment is an obvious area for improvement, and there are numerous companies such as Klarna and Monzo that offer examples which banks in the region could and should be following. However, what APAC banks really need to examine in order to gain better debt collections results is their customer etiquette and customer understanding.
In Singapore, for example, where there has been an increasing trend in recent years towards home and business loans, debt collectors have been known to openly hassle their debtors at home and even at work. Debt collections in the country might not be regulated (which is arguably what has led to these practices being seen as worryingly commonplace) but there is a code of conduct that exists to protect debtors; one which collectors should be adhering to at the very least.
Indonesia is another APAC country where there is disastrously negative sentiment surrounding debt collections. The country's financial institutions expanded rapidly in the late 1980s, but this was at a detriment to the country's overall financial security. Around this time, the banking sector was open enough that anyone with enough money could open a privately-owned bank, which led to a dramatic rise in small banks offering even smaller loans (by the mid-90s, there was an estimated $16 billion USD in outstanding loans floating around). The laws surrounding debt collections back then were largely unclear, which led to a lot of intimidation and a lot of violence. In 2012, the central bank issued rules to protect consumers from the violence of the debt collections industry, but the negative stigma remains.
To this day, many Indonesian banks hire third-party debt collectors to intimidate debtors into paying and there's an argument to be made that, without these 'thugs,' the banking industry would collapse. Ina Primiana, an economics expert at the Centre of Reform on Economics, said of the industry in Indonesia: “The debt collections industry is like a safety net for banks. At the end of the day, banks have to secure their assets.”
There has to be another way. With household debts in the country reaching $102.2 billion USD in May 2018, something surely has to give. Banks implementing customer-first policies would be a good start for both countries and could help completely reframe the narrative surrounding debt collections.
Ultimately, the entire customer-centric approach to debt collections can be succinctly summed up by Harvard Business School professor, Dennis Campbell: “Don't be a debt collector. Be a debt resolver.” Campbell was referring to the practices of the Turkish debt collections company, Turkasset, which not only treats debtors as customers, but actively tries to help them transform their relationships with money.
Campbell continues: “Usually, with debt collections, the object is to dial for dollars—collect as much as you can in the first phone call, and then outsource the work to the legal system.” Turkasset, meanwhile, has made great efforts to nurture relationships with its customers, starting with taking time to learn more about individual circumstances. Campbell elaborates: “Instead of doing one three-minute call with each customer, Turkasset were doing 15 to 20 calls lasting 15 minutes each. So, they might be spending five hours with each customer before getting any money.”
It's an approach that required a dramatic overhaul, but the investment paid off, dropping the turnover rate of employees below 30% in an industry that typically sees 65%. The company were collecting a much higher percentage of the amount owed to them and were also collecting on loans other companies would never even touch because they would deem them too risky. Today, Turkasset has grown its portfolio to over $2 billion in NPLs from over 700,000 customers.
Culturally, debt is seen as a great source of shame in Turkey and this is a sentiment shared by many APAC countries, where banks have traditionally used this to their advantage. Looking back at Thailand, banks in the country could learn a lot from the Turkasset approach. By making debt collections less scary and more approachable, it might lead to fewer Thais seeking off-system loans, which would, in turn, improve the entire debt landscape in the country.
Catalysing cultural and ideological changes and reframing a bank to think of debtors as customers obviously takes time, but it's not an insurmountable task. It's also worth noting that there is no one-size-fits-all approach here; what makes life easier for a customer in Europe and the US might not necessarily be easier for a customer in Singapore or Thailand.
Customer centricity is also, of course, just one area of improvement banks can make to get better debt collections results in the APAC region and it won't work on its own. It's certainly a start though, and could lay the foundations for an organisational change that will finally bring debt out of the shadows and shed a little light on the debt collections landscape.