Only a decade after the Great Recession, danger seems to be looming once again.
In his parting shot before stepping down as Germany’s Minister of Finance, Wolfgang Schäuble warned that spiralling levels of global debt and liquidity present a big risk to the world economy.
“Economists all over the world are concerned about the increased risks arising from the accumulation of more and more liquidity and the growth of public and private debt. I myself am concerned about this, too,” he told the FT.
Schäuble’s economic perspective is defined by austere caution, but his pessimism is far from fringe. The Australian economist Steve Keen, who predicted the financial crash of 2008, has rung the alarm as well. Writing in the Conversation recently, Keen said the lessons of the last crisis haven’t been learned and soaring global debt levels pose the risk of another.
Currently, the total global debt bubble is over $217 trillion. In the UK, debt excluding student loans climbed to £192bn (the highest figure since December 2008) while in the Eurozone, the debt-to-GDP ratios in Greece, Italy, Portugal and Belgium remain north of 100%.
“We have built a so-called economic recovery on debt,” as Mark O’Byrne noted on Zero Hedge. “Spending has been encouraged on a pile of low interest rates and easy-to-reach cheap lines of credit. It has not been encouraged with the thought that one day interest rates will have to climb.
“A sudden uptick in interest rates could not come at a more precarious time for global finances. It is not just personal debt levels that are of concern, especially when the Bank of International Settlements is aware of $13 trillion of ‘missing debt’.”
The EXUS view
Considering this dark picture, we ask: what is to be done? If a downturn is coming, then effective debt collections will be a crucial step in protecting your bank.
Banks need to identify and treat delinquency early. While financial institutions are (as Gartner’s Craig Focardi noted in the Gartner/EXUS webinar on loan collections) more stable than in 2008, with higher capital adequacy ratios (CAR) among major institutions, impaired loan ratios have remained high.
They sit at 7% for European banks (and at 12% in countries that were directly affected by the Eurozone financial crisis). Another debt crisis will likely see this number spike dramatically. Spotting borrower delinquency early will help manage your risk exposure.
Optimising and adapting your collections processes is the most powerful way to identify these patterns. Business as usual won’t work. You will need to work more closely with your customers, using easy to use and intuitive tools that capture the entire debt cycle. Collections is a process, and your tech needs to reflect that.
Collections departments have historically struggled with data dispersed across multiple systems. By consolidating data under a single collections management authority and specialised collections software, you will be able to measure important metrics from the start of the collections process all the way through to recovery and abandonment.
As the number of delinquent borrowers increases, banks will have to employ additional channels (like collection self service) to reach many more customers and allow them to settle their debt by themselves. As we’ve emphasised elsewhere, organisations need to assess whether their collections processes make it simple for customers to settle their debts.
During tough times, customer service will be the key difference between you and your competitors – and whether you can maintain a high return on equity or not.
Look beyond call centres (which still have their place) and offer customers numerous ways to contact you: chatting, messaging and email are a less intimidating alternative, opening up numerous lines of communication that are simple for a bank to automate.
With the cost of servicing a delinquent loan climbing to 15 times the cost of servicing a performing loan, you might be tempted to outsource your customer service - but keeping as much of the collections process in-house as possible remains the best option.
Third-party vendors will be useful if your in-house teams are overwhelmed by a spike in NPL ratio, but their effectivity will be limited unless your business can carefully monitor their activity and adequately incentivise them with accurate metrics.
Even in a healthy economy, repositioning your debt collections process makes sense. But as the dark economic patterns from 2008 rear their head once again, it could well prove vital. There’s a new way forward. It’s time to learn from the mistakes of the past and reimagine the collections process.
Should banks be worried? The time to prepare is now. Find out how EXUS can help you not just survive but thrive in the next downturn.