What sort of debt collector are you? - Comment & Profiles -

With unemployment set to rise in the advanced economies, a wave of defaults can be expected. But sensitive and effective debt collection is not a key strength of banks – outsourcing could be one solution.

As in all recessions, the current downturns in the major economies are going to push a lot of people into a financial crisis that is not of their own making. Unemployment is set to rise as government support schemes are removed and firms face the reality of cutting back their operations to adapt to post-Covid 19 business levels.

Banks should be thinking now about how they are going to deal with this – pursue the old strategy of do little and collect little or take a more enlightened approach of dealing with customers on an individual basis and working out a plan.

Under the old model, for example, unpaid credit card debt might be written off and sold off at cents in the dollar only for a more professional collection operation (which bought the debt) to clean up by doing one small thing – contacting a customer and agreeing new repayment terms.

In previous recessions mortgages might be foreclosed on and properties sold off quickly at knockdown prices and considerable losses.  But had the mortgagors been offered similar write downs in the first place, they could have stayed in their homes and serviced their debts.

Not only do banks lose money when they get debt recovery wrong, they also lose something more valuable: reputations that have not sufficiently recovered from the financial crisis. Regulators will also be watching their actions carefully and making noises if they think customers are not getting fair treatment.

Banks should start thinking about a better approach now before the defaults start to escalate. This time around they need to take account of homeworking which could well be back in the autumn as a second Covid wave strikes.

If it’s not possible to scale up debt collection by moving staff around or if in doing this there is any loss of competency, outsourcing could be a better solution. It may be tough for bankers to admit that actually their debt collection operation is not up to the task facing them. But asking the tough questions of themselves now (rather than of the customers) is a better long-term strategy.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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