FINANCE TODAY | ISSUE NO.3
THE NEWLY REQUIRED NEED FOR CHANGE IN CUSTOMER SERVICE
The current COVID-19 crisis has financially affected people in every sector of society (Fulcheri et al., 2020). Any institution that is currently expecting future receivables (ex. retail banks, retailers, universities, etc.) will experience difficulties collecting them, as forecasts of credit card losses in the United States between 2020 and 2022 predict a potential increase in delinquencies (falling behind on required payments) to more than three times the current levels (Fulcheri et. al., 2020). Canadian credit card delinquency rates are also expected to suffer an impact of similar proportions. Below is a graph summarizing the trend in Canada’s delinquency rates from the last two years using data from the TransUnion Q1 2020 Industry Insights Report.
Canada was doing well in combating a high delinquency rate in past years but began to see a rise in Q1 of this year. The effects of the virus have the potential to cause an increase in the delinquency rate higher than the rates observed in 2008. The increased risk of delinquency now forces these institutions to critically think and adjust their current credit risk strategies to mitigate the losses they may incur and effectively support their current clientele. To create a functional plan, risk teams must reshape four core dimensions of delinquency management.
REWORKING THE CORE DIMENSIONS OF DELINQUENCY MANAGEMENT
Depending on the size of the organization and various other factors specific to each of them, risk leaders are required to make decisions on how to build their operational capabilities in four key areas.
1. Retooling Segmentation
Currently, segmentation is the process of using historical data to analyze the risk of customers based on past performance (Fulcheri et al., 2020). Many of the current models being used today are becoming outdated due to the effects of the COVID-19 pandemic. Older models for predicting the risk of customers do not take into account the differences in income due to the field they work in, which is relevant now having seen the varying effects that COVID-19 has had on different areas of the economy. Additionally, the pandemic has stressed the need for machine learning techniques to be implemented into segmentation models so that they may quickly adapt to more accurately assess significant variables in a post-crisis setting.
2. Managing the Front Line
Institutions will now be receiving more customer service calls than ever, which makes it important to properly manage front-line workers as they are also affected by the pandemic. Most lenders have capacity constraints in their call centres, regardless of whether operations are internal or outsourced (Fulcheri et al., 2020). This reduces the number of front line workers these institutions can utilize, so they must now develop ways to improve operational excellence with limited capacity. The organizations that have adopted the shift to working remotely must decide whether they will follow through with the strategy long-term. While remote work would provide added flexibility to workers and an increase in operational resilience, providing remote workers with customer data leads to an increased risk of cybercrime (Fulcheri et al., 2020).
3. Adding Digital Channels
The use of low touch channels (Ex. SMS, messaging apps, email, etc.) to make proactive contact with soon-to-be delinquents and remind them that their payments are due soon is an effective way to mitigate credit risk. Through these channels, borrowers can then be prompted to visit self-serve channels where they can provide lenders with more information about their current cash flows, so lenders can adjust their payment schedules accordingly (Fulcheri et al., 2020). Having a strong relationship with clientele and flexibility with payments will incentivize borrowers to make payments on their loans when they have the available cash flow, reducing the risk of having customers default on their loans. These digital channels must also provide customers with seamless customer experiences to be truly effective.
4. Making Decisions on Debt Relief
Due to the effects of the pandemic on the economy, many borrowers may be more than willing to make payments on their loans but simply lack the financial means to do so. There are several practices lenders can use to determine the right level of debt relief they can afford. At a minimum, lenders can suspend associated fees and interest to shrink the size of a customer’s due payment (Fulcheri et al., 2020). The ability to tailor solutions to individuals will need to be balanced by the associated operational complexity (Fulcheri et al., 2020).
NECESSARY FUNCTIONAL CAPABILITIES
Alongside reworking the four core dimensions listed above, there are also functional capabilities that are required of these institutions to improve their operational proficiency and keep up with the pace of changes caused by the pandemic. To quickly test and implement operational improvements across all facets of delinquency management, lenders will have to adopt agile principles and methods into their operational practices (Fulcheri et al., 2020). This will allow lenders to quickly test and develop new approaches to tackle the issue. The increased need for speed in decision making will require advanced-analytics modelling capabilities. These new modelling capabilities will replace traditional modelling methods which simply are unable to account for the changes caused by current events.
With many options available as to how lenders will deal with the influx of financially distressed customers, creating a fully functional long-term strategy for the task will inevitably take time. It is predicted that with proper support and focus, most lenders will be able to implement a strategy within four to six months (Fulcheri et al., 2020). Lenders must begin to brainstorm and build the necessary organizational capabilities needed to minimize the effects of the COVID-19 pandemic on their customers.
Fulcheri, P., Higginson, M., Jacques, F., & Litterio, F. (2020, June 30). Reimagining customer service to manage delinquencies after COVID-19. Retrieved July 14, 2020, from https://www.mckinsey.com/business-functions/risk/our-insights/reimagining-customer-service-to-manage-delinquencies-after-covid-19
TransUnion Industry Insights Summary [PDF]. (2020, May 21). Burlington, ON: TransUnion of Canada Inc.