Terry Franklin talks risk-based collections in the time of COVID-19
For a long time, collections teams tended to look a bit like government departments, where customers are assumed to have no alternative but to put up with the process they’re given. And not necessarily by choice. Fifteen years ago I was rolling-out a collections training program for a bank in Africa, and we were speaking about the incredible role the function could play in relationship building even then, but the sad fact is that regardless of good intentions, investment often ran out before the collections department got to cash its cheques.
In today’s episode of How to Lend Money to Strangers I speak to Qualco’s Global Business Development Director, and twenty year collections veteran, Terry Franklin, about how COVID-19 might just have been the bump many lenders needed to invest in making collections interfaces more interactive and more customer friendly.
Joining our conversation to hear how the experts are shaping their collections teams, and leveraging the latest technology, to meet the challenges of delinquent debt in the time of COVID-19.
If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.
Regards,
Brendan
The full written transcript is below:
Brendan Le Grange 0:00
Yeah, so I've had a blog of training material for a while the articles on risk based collections always really popular. So you popped into my mind in terms of experts on collections....
Welcome back to How to Lend Money to Strangers. I'm your host, Brendan Le Grange. If this is your first episode, I'm afraid I can't always promise you the sexy gravelly voice, I am coming off the end of little cold, but hopefully I can promise you interesting content about lending across the credit lifecycle and around the world.
When I first became a consultant, I spent some time writing out a series of articles, primers on some of the key topics of credit risk strategy. And I put them up on a blog, which I've left rather unattended for the last decade or so. During that time, it's amassed about a quarter of a million reads across a range of topics, but the most popular are consistently my articles on how to build a profit model (the sort of topics I discussed with Graham Whitley in Episode Two) and my articles on risk based collections, which are the sort of topics I'm discussing today, with Terry Franklin.
Terry is the Global Business Development Director at Qualco. But he has more than 20 years of experience in credit risk, a large part of that spent in collections. Terry has worked across Europe and Asia, and so brings a wealth of experience to this discussion. We talk about modern strategies for risk based collections and, in particular, we talk about how COVID and the world's reaction to it have forced some really positive changes in the world of collections. Join me in a second for that.
But yeah, if you can sort of start a little bit of background of your entry into risk, what you're doing now, and where you've touched on collections...
Terry Franklin 2:00
So I actually started in the credit risk and collections industry, probably back in the early 90s. After I left the merchant navy, I joined a company called the Lewis Group. And I actually helped with collections activities - the Lewis Group back then was a debt collection agency that specialised in collecting on a contingency basis, so getting paid commission for recovering on pain monies. I remember, we had a Melita dialer at the time, and it was one of the kind of the drivers of efficiency across the contact centre. And we had an in-house collection software solution, which enabled us to segment the base and invoice the customers, all that kind of thing. So that's where I started, I spent a probably about five years there. And then I had a couple of other jobs in other debt collection agencies.
I then took a role as a regional credit manager - for those of you might remember Courts in the UK, a furniture provider, I was actually responsible for the credit risk management oversight in Malaysia, Singapore and Indonesia. So I lived out in Singapore for a period of time. And it was interesting because it was a much broader view across the credit risk spectrum. So I was responsible for assessing credit risk applications, the quality of the customers we were taking on, what were we doing from a customer management and collections perspective. Then I returned to the UK in the early 2000s, where I took on a role in business process outsourcing as a solution architect - my focus was primarily around credit risk aspects and collections. And I also, during my time at Vertex, which been about seven years, was responsible for setting up an internal collections business in the UK. So I worked on a number of different projects in different countries, including the US. And laterly, in that role, I was responsible for setting up the internal collections operation within Vertex where we would insource that from different contracts across the group.
During my time, I would say the switch from becoming a regional credit manager and working back in the UK in the business process outsourcing arena, some of the things that started to change, fundamentally, were the types of contact tools that were being used. There was a lot of manual tracing going on back in the 90s. There were a lot of different communication tools that we use to generate contact from customers to help identify who the non-payers were and really to get to grips with pursuing those those non payers and by the mid-2000s and on, there started to be a shift in terms of a more compliant view of how those interactions with customers should take place, the types of tools and messaging that was used, and being a lot more focused around the circumstances for each individual customer and how you can work with them to help create a sustainable repayment plan. So that was the kind of the start of the shift, I would say to much more customer centric approach. In terms of the collections tools, I hadn't changed massively in that time. So still letter telephone, were the predominant features. And I remember introducing SMS messaging and automated voice interaction as a couple of tools in around about the mid-2000. So we started to explore different ways that technology could drive communication with customers, and bring the net cost down. So particularly when you've got contracts that are incentivized around net returns to the end customer, obviously you want to collect as much as possible at a lower cost as possible. So that optimal point of return is what's really critical.
I then joined Experian, probably about 14 or 15 years ago now, where I did a lot of consulting across the globe, I was responsible for supporting clients in assessing their credit risk activities and fundamentally, what could they do to be more effective and efficient with their accounts as they started to show signs of financial stress and enter into delinquency. So there's a lot of work, looking at how we identify and use analytics Decision Analytics to spot the problems before they become significant within a business. So pre-delinquency and processes around those pre-delinquent risks when you identify them. And then working with businesses to establish how best to use data, and insight driven from that data to segment entry cost and more effectively. And then within the collections workflow space, how do you actually use the data and insight that you've got to differentiate the types of channels, the types of messaging, the intensity, the frequency at which you would interact or or pursue a customer?
And also then customers affordability at a point in time? Or what are the trends in terms of the customer's affordability, whether it be a business or an individual? How do you bring that into your reckoning and decisioning, in order to set up a payment plan, that's not only evidencing that you're taking into account, a business or customers ability to pay, but also to put in place a payment plan, or some sort of forbearance option that's going to be sustainable and bring that account back to some sort of order at a later point in time. And the key there is to make sure that the perception for the end customer - 'if you understand me, I feel like you're working with me to come up with a solution that's going to help'. There are always going to be instances where customers are resilient to any kind of contact or you know, they've made a decision for whatever reason that they just want to take the goods or services or the loan or whatever, and really try to get away with not paying for it so you still have to recognise that there is that set of customers within any portfolio that you may need to be really focused on in terms of the collections, treatments and activities you apply, including taking legal action, and making sure that you can recover any assets of there are assets.
But then in other industries, water is a good example actually, where the use of collections activities is really geared around trying to catch the customer at the right time with the right message, offering them a way to start to repay that allows you to get some some sort of movement in terms of repayment or recovery of any outstanding standing monies. And the reason I mentioned the water industry is because way back when the ability to disconnect customers for non-payment was stopped. There was a view in the industry at the time that there would be a significant increase in losses, because customers would just be able to continue without paying, and there would be no sanction. So the industry had to get quite smart around how you do things in on mass when there is non payment. And there is absolutely no long-term consequences in terms of being able to continue to take supply of water. So it's those kind of challenges over the years that have, in my view, helped innovate, whether you use data and systems and intelligence to better interact and differentiate the treatments you can apply to customers.
I left Experian about 14 or 15 months ago, I joined Qualco where I'm responsible now for the global sales of our technology solutions. And since I've been here we've had the COVID-19 pandemic. In fact, I've literally been in this role throughout the pandemic, that in itself created new challenges across the globe. But I could probably distil it down into a few things that have happened within the credit risk phase and probably more specifically in the collection space. So the ability to enable your business users to access systems from anywhere (because a lot of people starting to work from home) and historically, these systems hadn't been made available to end users in their home environment. So that was something that had to take place. Clearly, there's a lot of governance that sits around how people operate collections operations, how how agents interact with customers, and there's a lot of oversight there. So again, there had to be controls that were appropriate, but manageable in an environment where you've now got people working from home, and speaking to customers on a daily basis, the technology, the peripheral technology, around the collection systems needed to be able to distribute into those people's homes, all those agents homes to do their work as well. What I found really fascinating is, there had already been a shift to digital and using digital interaction points. So we see it a lot in the acquisition space, we've seen a lot in the management space, I would say that, historically, the collection space have been very slow to follow up - but what we're really seeing now is a more significant shift to allowing customers to interact through digital portals, and to set up payment plans to be able to access information about their accounts so that they can make an informed decisions. And a lot of that's enabled through API technology, and ensuring that the data that's being presented to the customer is in close to real time so that the end customer can actually set up a payment plan that's driven by the rules that you may want within your collections operation, but actually just being presented to the end customer in a digital format so that they can make that decision themselves. And, and what that's allowed organisations to do is to interact with those customers 24/ 7. You get a lot of people that will go in and make a payment arrangement or payment plan, we can communicate with them through any outbound conversational message, SMS, things like web chat, and actually then use that to drive the interaction with the customer, there still has to be all the necessary security around that, and all the necessary compliance around identifying that you asked speaking to the correct end customer, but then ultimately helping them by understanding their circumstances. And using all the information that's available to interact with that customer in a way that ensures that they will set up a payment plan or forbearance option that is both affordable for them unsustainable in the long run. And I think we have spent a lot of time recently, particularly because of COVID-19, looking at the infrastructure between data, applying analytics, and we're applying machine learning through our data driven decision engine, to then differentiate how treatments are applied in the operational systems. And the real key for me is that ecosystem should be fully integrated. And it should be a continuous loop so that you continually are learning from the outcomes that you get from the actions that you apply to those customers, whichever segment they fall into whatever treatment you apply, understanding what's been successful, what hasn't been successful, introducing champion-challengers wherever you can, to test new options, but also to ensure that the quality of the data that you're pulling in to help with those decisions is at the highest standard.
And we've already started to see the introduction of open data and open banking data, particularly in helping with some of those affordability assessments. So if a customer consents to sharing that data, and you can pull it into a digital journey, and you can create a full income and expenditure assessment, actually, you're giving the customer all the tools that they need to make an informed decision about what they can and can't afford to pay. But that also then translates back into the business where the business can use all of that information, where appropriate, to ensure that the plans that are set up in the back-end system are maintained. And if for any reason, there's a breakdown in the technology, so if maybe the customer's internet connection goes down partway through completing an income expenditure form, the technology is so good today that we would expect all of that data to have been pushed into the back-end system through API's. And it persists in the back-end system so they can restart that journey through a telephone call, or next time they reconnect the internet because we already have the information in the back-end system - so journeys are continuous and customers aren't finding themselves being frustrated by having to re-enter information. We've also created true omni-channel capabilities. So having a single screen where the agents can see all of the interactions that have taken place with your customer, whether they be through digital through telephone, through SMS, whatever, whatever the methodology of communication has been, whether they've completed an income expense before, but having that that data stored and available in a single screen, so as and when you do have an interaction with the customer, you're able to refer to everything that's taking place up until that point, I can see that you started a journey with us completing your income expenditure form through this channel. I'll continue that journey with you right now. So that's really powerful, and for me, is something that differentiates a collections operation that's really effective from one that perhaps is still using some of the methodologies that go back a number of years.
Brendan Le Grange 15:43
Well, for I think a long time collections has been trying to move away from operations, and it's been a slow progression, but it sounds like this has just kicked that bit over that might have taken another 10 years to do. It sped that up. And it sounds like in two key ways.
Well, more than a decade ago now, I was doing some work with a bank in Africa and we were training our collection staff using a sales training company, and talking about how actually, if you can help someone in collections, it's the perfect time to build good strong relationships, because this is somebody who's in some trouble. Financially, something's gone wrong. And if we can help them solve their problems, you know, that's a really positive step to take. So let's stop thinking about collections as being punishment - so the angry knock at the door. This is a chance to work together. But still, realistically, maybe 5%, maybe 10% of your customers ever go to collections. And when they do, most of them are scared and upset. And what I think COVID has done - because so many people took payment freezes, went on to furlough, even in those early months, maybe they didn't actually end up needing it, but there was so much publicity about, you know. 'just phone your bank, ask for a few months of payment freeze, see if you can re-assign your balances...' There was so much talk of that, that I hope that has show consumers in general that, okay, collections isn't the scary thing. 'cause none of us have interacted with it other than in a movie seeing, you know, the big guys or baseball bats knocking on the door. And no matter how much has happened over the last decade to change that mindset within lenders, the consumer doesn't know about it until they come face to face. So hopefully that showed more people that early on, maybe instead of going to minimum payment on all your credit cards and taking out another debt to hope for the best, maybe I can phone my lender and see if I can work something out with them.
The second point sounds like operationally as well, you know, the customers really have a choice here. So it felt more like a government office - like, yeah, we could make it more customer friendly. Yeah, our user screens aren't great. But you know, there's other things to do and customers aren't going to complain, they're in collections. And it sounds like the work you're doing now in terms of... actually the same sort of work we would do anywhere else in the bank, let's make this user friendly, let's actually give consumers the ability to set these up. And it probably was a scary thing to do. And it was probably difficult for a collections manager in many lenders to say I want the investment in a collection system to make it more user-friendly, to allow my agents to work at home, to allow my customers to log-in and self-manage a payment profile. This was a good time to invest. It's always going to be stressful anytime you're going collections, but I think the more we can give that friendly face, that friendly experience. Hopefully it can allow consumers to interact better. And yeah, you're tracking all of this, you're measuring it all anyway, so we can hear how it's working, but to me it sounds like you're going to get a lot of collections out of this because you're not going to have customers running from you. You're not gonna have customers running from themselves until it's too late. Hopefully we can get people in while it's recoverable. Because we know that, you know, high-interest debt, if somebody tries for six months to a year to hide the trouble, they might just end up in a place you can't get back from. So to me, it sounds like a lot of positives have come out. March 2019, if we had said, like, what's this gonna do to collections? It would have just been horror stories. But it sounds like actually, the 18 months of COVID has maybe helped the collections agency - not that I want to sweep under the carpet that there's going to be some customer problems to work through for a long time, but it does sound like it's given that little kick.
Terry Franklin 19:41
Yeah, I think there's a lot of regulatory influence on all of that as well. So obviously, taking into account affordability is a really significant factor. But I think at the moment, there's a lot of understanding of financial hardship, being compassionate, being empathetic with customers, spending the time to understand their personal circumstances as best you possibly can, so that you're catering for their personal needs. Now, the smart companies are using data and analytics to really help identify who those groups of customers are. And also using data and digital tools to interact with those customers to make the journeys as low friction as possible, but also to stop that... because there's a stigma attached with debt and I think it's helping people to understand that you're not alone, we're here to help, and we can help you get out of that situation.
To not have to make or let somebody feel that they're going to ring up somebody that they've never spoken to before and try to explain why they're in that situation - that's not a nice place for anybody to be. And I think the power of the digital tools, the fact that they're, you know, they don't have to justify why they're doing what they're doing, as long as they can use a tool that allows them to set up a plan that is then affordable and maintainable. And that's all accepted within the digital platform, it just means that it's a lot easier for those customers to use those types of tools. And I do genuinely think of all the things that have happened, that's probably the most significant.
I did some tests years ago with clients where we introduced digital, and it was something like 1% of bad debt reduced just because we found people were using a digital platform who had never interacted with the businesses before, they obviously were prepared to do something about it, they just didn't want to do something about it. And I suspect a lot of that has to do with that personal discomfort of having to justify why you are in a situation you're in. And I think the more businesses recognise the circumstances of their customers, and the more that they use that to interact with those customers in an appropriate way. And the more effective they'll be. You need to get the balance right between, okay, you can't continue to overspend and you can't continue to do X, Y, and Z. But this is a manageable, manageable arrangement you've got in place, and therefore, we're happy to use that.
And I think the other thing that we've had to look at, and is really key to the technology side, is conduct risk. So how do you ensure that your staff are following through those processes and procedures that you know, are really gonna make a difference to the end customer. So having things like four eyes, review of any process that takes place, containing or parameterizing, what may or may not be offered to different customers based on the data that drives the treatment path, ensuring that the user access to provide a certain service or a certain interaction with the customer is aligned with the skills of that individual. So there's a lot of things that you can do. But not all technology works in the same way. And I think the businesses that have been really effective are the ones that have used technology where it absolutely helps manage that risk. And it absolutely helps provide the right interaction to those end customers. And I have one kind of key mantra that I always say, to our teams when we're talking about solutions for clients.
And that is, you really want all of your intelligence and decisions to be executed through one central point. So there's a lot of things that are out in the market, where you've got a small brain that does something in one area, and another small brain that does something else in another area, I do think it's fundamental to have a single control over all of the processes that you want applies all of the treatments that get that get action on your portfolio, so that you do have a consistent feedback loop and you do then continue to improve.
Brendan Le Grange 23:48
And I think again, that's where collections has always been, perhaps overlooked for it being really difficult. And maybe I'm using myself as an example, and maybe I'm just a bad example of it but when I was doing the modelling side of credit risk, we would be asked, can we build a collection scorecard? And we might go and get some data. So it's okay, yeah, because the normal scorecard, once people have gone delinquent, everybody just looks bad so let's build the new scorecard on propensity to pay. And we would take some of the normal kind of credit data and we could build a scorecard for early collections. And it would be quite predictive in month one. And the operations manager would say something like, what do I do if I don't get a right party contact? Which, I don't know, I don't know how to model that data. I don't know how to look at time and how long is a phone call? When are we making contact? Should we phone business hours non-business hours? Should I make a promise to pay of a certain time or not? You know, which letter should I send when? And it was just so far beyond traditional credit data that it would just say, I don't know, I'll tell you who is high, medium and low risk and then we can kind of expert guess from there. Whereas now, the people that are building models are a lot more familiar, I think, with different data. And the operation process is, I think, producing a lot more data that's easy to use instead of just sheets of paper on who made a phone call, and to be modelled using technologies that are actually able to monitor that, to come to collections, to proper risk-based collections that isn't just high, medium and low risk at 30 days delinquent. And that's perhaps why I think even more so than fraud, why collections was this sort of island of operation: it was always very difficult. And it sounds like the technologies you're bringing now are the sort they can actually change that.
Terry Franklin 25:40
There's a couple of things. So just if I look at the technology that we offer at Qualco, we've got a performing loan management. So it's, it's it allows businesses to restructure and refinance. A number of our clients are investors, and they buy portfolios, and they'll be a non-performing loan portfolio, but they may have a performing element within them. So the ability to refinance and restructure is really key. Then we have our collections and recovery system, which effectively is the workflow workhorse that does all of the segmentation and applies to treatment. But the bit of glue in the middle is our data driven decision engine. And this is to your point is being able to take outcomes from those systems, and feed them into a single data warehouse to augment that data with external data or any other data that our clients have or have access to, and then use that to create new variables - so, how often does something happen in a short space of time, so we look at things on a daily basis or weekly basis, a monthly basis. Different behaviours change at different frequencies, depending on what it is - if you're looking at channel propensity, that might be very different to credit risk propensity to consume that data. And then we look at how rapidly things are changing. And we use machine learning to build predictive models, the power of machine learning is it can look at all of those data characteristics, and it can build those models without having to use an army of analysts. And it will provide a scorecard that says, if you use these characteristics, whether they're unique characteristics or that things have been created, through time sequencing, then you will get a predictive scorecard that will allow you to segment or split your portfolio in whatever number of different ways.
And I think that the other point I was just gonna make is in in these times, post COVID, particularly with the furlough schemes that the moratorium that have been put in place, and they vary from country to country, what's really interesting is who's coming out of COVID-19, in a better or worse shape, and is that financial circumstances changing rapidly, because now they don't have the forbearance scheme, or they're no longer got the tax relief, or you know, that they don't have the holidays that they've been... payment holidays they've been taking. We're seeing behaviours that have never been seen before and it's the ability to pick those changes up in behaviours very quickly. So that you can say, right, we now need to put in place a new treatment or a new strategy or something to deal with this segment of the base, because we've never seen this segment of the base in collections before. And yet, here they are. So it's things like that. I think that particularly because of COVID-19, particularly because of people in sectors being affected that may historically not have been affected.
And whatever happened in the credit crunch, this is a very different financial impact. And it impacts different organisations in different ways and at different people in different ways. So it's spotting those trends quickly, and then being able to change and adapt how you treat them. And that's where the integration of the data driven decision engine with either your low management forbearance tools or your collections, workflow, treatment becomes powerful, because that's a real time feedback loop. And to use that then to drive a differentiated interaction with the customer.
Brendan Le Grange 28:54
Yeah, and when I speak to people in collections in the UK, a lot of economics is actually around "I want to make sure I don't upset the regulator, I want to make sure I'm not over collecting on a vulnerable population. I don't mind roll rates so much I'll actually let my roll rates get worse, to make sure that I've meet the regulations". And that was a mindset I hadn't worked with before. Because the UK regulator is very big on the customer protection side. If you're just building a model, if you just got your scorecard builder up from the team of analysts to build a scorecard, how do I make a bad definition based on on that? So it's interesting to hear these.
And this COVID has been really strange and that a lot of people have not had the opportunity to overspend and end up in collections, where other people that wouldn't normally be in collections are because the industry they happen to be in, for 18 months they've not been operating - then I think maybe there'll be a silver lining in that, that this sort of new data that's come in, this new mindset it'll hopefully reinvigorate collections. You know, this is a way that we can work with consumers who all have unique situations and we can we can model more variety, and we can treat more varieties in collections, while still obviously being an area where you have to make sure you're recovering that money. If your collections is slipping, future debt will get impacted. I've done some work with collections teams, and it's quite important for them to have a reputation in the market. So either because they're the bank and people pay back banks, or they've got a reputation of never giving-up versus somebody else who's like, ah, they're easy to default on. And when you think, well, I've got to pay one of three people - I want us to be the one. In the past, that was done by being the most aggressive. But now it does feel more like there's - you talked about some of that empathy and compassion - if we can build an experience, that's a good experience that works with the consumer, in a format that works for them, no embarrassing phone calls, they can do it themselves. It's an interesting way to flip that.
And maybe, you know, you alluded to can't pay vs. won't pay that age old dynamic, I'd imagine you're going to get more people that are willing to pay and are willing to work on the agreements, because the experience was good. Yeah, they'll pay you. If somebody just phones up and starts yelling at them that they're overdue. There's quite a lot of consumer education these days, it's a lot of consumer protection, they could just know when to say well, I don't feel like paying you know, I've had enough of these harassing phone calls. I'm going to speak to the Ombudsman.
Terry Franklin 31:23
Just one last thing. There's quite a bit going on in terms of non-performing loan sales across Europe, as a consequence of the pandemic banks are clearing the decks in preparation for what may come. So I'm seeing more movement generally in the NPL space, there is various portfolios across different regions that are selling. And I think that in itself brings a real focus around the ability to manage those types of portfolios. One of them is securitize, we can get a mixture of securitized and unsecuritized, and some will contain commercial portfolios and consumer portfolios. So I think what that's doing as well is bringing another focus to the value of those assets. And how do you get maximum liquidation of those assets. And the only way to do that is to ensure that you've got, you know, strong sustainable payment arrangements. And there's still a lot of regulatory oversight. So work out strategies and the effectiveness of those work, our strategies are really important. And again, if you don't take into account things like actually understanding the circumstances of the customer, it becomes very difficult to get a real successful outcome. So I do think the value of these portfolios is also driven by the quality of the solutions that you put in place.
Brendan Le Grange 32:43
Yeah, and I think the fact that you have these industries that are purchasing the portfolio's afterwards and managing to collect on them is kind of evidence that with a better approach, many collections can be made. Now of course, there are reasons a lender might want to outsource some of that and not want to deal with the delinquency and late-stage delinquency, but I think if you do it better, you can collect much more than you are today.
Thank you, Terry, for your time. It was great catching up schedule. And thank you for joining us. This has been How to Lend Money to Strangers, the podcast about lending strategies around the world and across the credit lifecycle. In next week's show, I'll be speaking to Oscar Koster of bigdatascoring.com, we talk about how to use alternative data and machine learning to build scorecards in developing markets. Please join me next Thursday for that…
I think the last time I saw you was was in a restaurant in Helsinki with a nautical theme and you were you're explaining all the different ships and that's when I found out you're you're sort of started starting the working life as a ship's navigator. That's certainly what stands out most in my mind, but I must have been a decade ago.