We found Gartner’s Technology Adoption and Investment report - the first ever global technology analysis of loan collections systems by an industry analyst firm - exciting for several reasons.
Having EXUS's financial Suite recognised as the “Best-In-Class” debt collections software in the world was a tremendous honour, of course. Plaudits aside, however, the report confirmed many of the trends we’ve been emphasising for a while.
Recouping a delinquent loan is no longer seen as inherently adversarial. Instead, as Gartner’s principal executive advisor Craig Focardi explains, it can be a powerful way to extend the lifetime value of your customers.
Following the report’s publication, we hosted a fascinating webinar with Craig Forcardi to speak at length about its findings. He gave us some brilliant insights, which we’re now able to share.
1. Capital ratios are increasing (but impaired loan ratios remain high)
Across Europe’s financial institutions, we’re witnessing an increase in capital adequacy ratios (CAR). It’s a positive sign, indicating that the continent’s banks are moving to a more stable footing. It can be attributed to the scheduled implementation of Basel III in 2019, which will mandate higher capital reserves, explains Craig Focardi.
While there’s reason to feel optimistic, things are dampened a little by the European region’s stubbornly high impaired loan ratios. The impaired loan ratio across European institutions, while it has plateaued somewhat, remains too high, hovering at 7% for European banks (and at 12% in countries that were directly affected by the Euro Crisis).
As the European Central Bank noted last year, a “number of banks in Member States across the Euro area are currently experiencing high levels of non-performing loans”. At the same time, as Craig Focardi’s research shows, return on equity has fluctuated in Europe specifically, and although return on equity has increased to 7% this year, it’s still below historical levels.
2. Europe’s economic picture remains difficult
The compound annual growth rate in GDP for the EU remains at the low end of regional growth, and with limited economic growth come challenges which pose risks for loan collections.
Regarding unemployment, explains Craig Focardi, EMEA has the highest rates of any global regions, presenting obvious implications for defaults and NPL trends.
Delinquency rates are slowly trending down, but remain unfavourably high in Europe. “What this means is there’s still a key need for efficiency in loans collections operations given that default levels are likely to persist for a number of years,” Craig Focardi explains.
3. Collections is a step in the customer life cycle
This is a point that we have been making for some time, and one that that Craig Focardi emphasised too: customer experience matters at every stage of the life cycle.
A customer who is delinquent on a loan is, first and foremost, a customer. If handled correctly, a collections customer can still yield new sales. If handled incorrectly, current and future sales could be lost.
Efficient and user friendly loan collections are a critical step in extending customer lifetime value (CLV). “If banks are failing to help and collect on their troubled customers, then they are failing to achieve the customer’s full lifetime value and place other customer assets at risk,” Craig Focardi says.
It’s not just a customer retention and loss mitigation activity. Loan collections are an opportunity to cross sell and direct marketing activities, increasing the “need to bring collections fully into the digital customer engagement area,” Craig Focardi explains.
4. Collections must be digitised!
The collections process is often sequential, involving different departments, systems and locations. For the customer, it’s a profoundly alienating and confusing arrangement. For banks, it creates gross inefficiencies that affect the bottom line.
Digitising collections processes empowers institutions to be more circular and interactive with the customer. By creating a cohesive portrait of a customer’s debt portfolio, a bank can adapt, pursuing different types of actions depending on the situation.
Leading collections technologies offer end-to-end process automation, helping banks manage large volumes of varied loans. As Gartner’s recent report on loan collections tech illustrated, end-to-end process automation has a high potential ROI and it is market ready today.
5. What institutions are investing in (and why)
According to Gartner’s research, 28% of institutions surveyed said they are either replacing their existing collections system or are adopting systems for the first time.
Compared to the other tech categories in the survey, this is a very large number. “Collections is an area that will continue to see strong demand between now and 2019,” Craig Focardi says.
This steady growth in demand is driven by the tech’s ability to reduce risks: credit risk, operational risks, fraud risks, and even compliance risks, making it easier to identify risks and weaknesses in underwriting and origination policies.
The appetite for risk reduction is followed closely by a strong desire for process improvement. “The disconnectedness between customer communications, data collection, analytics and document management are key issues they’re trying to overcome,” says Craig Focardi.
Banks looking to replace or invest in collections tech have the luxury of a mature, well populated market. But as Craig Focardi says – and Gartner’s research bears out – while there are myriad options, only a few systems stand out.
We’ve come a long way since 2008. Many lessons were learned and regulatory frameworks like Basel III will go a long way to creating a more stable banking system.
Despite this, effective loan collection remains a challenge. Difficult economic circumstances, high unemployment and persistently high rates of NPLs will require proactive steps.
Technology is one way you can positively affect your success in handling NPLs and impaired loans. The tech is ready today - and if your competitors are investing, it’s worth asking ‘Can I afford not to?’