Monday, 8 August 2016

Bank of England interest rate cuts: A TDX Group view

On 4 August, the Bank of England cut interest rates for the first time since 2009, from 0.5% to a record low of 0.25% and also announced the biggest cut to its growth forecasts since it began making them in 1983. These measures designed to stimulate the economy come off the back of uncertainty caused by the EU referendum result and downward pointing economic markers, like the Purchasing Managers’ Index (PMI). Most importantly, these cuts in interest rates will affect banks, savers, pensioners, the housing market, and ultimately touch every individual in the UK and further afield.

So, who will be the winners and losers as a result of this cut?
An interest rate cut is one lever the Bank of England can pull to attempt to rouse the UK economy, but the situation clearly creates winners and losers depending on an individual or a household’s financial circumstances. Mortgage-holders will see some benefit so long as they aren’t on a fixed rate. Savers and pension-holders will see a decline in their earnings as rates drop. Whilst most loan-holders and credit card debtors won’t see any changes as those rates tend to be fixed.

A turbulent economy creates uncertainty and an increase in the risk associated with it. So, if that is the case, it is likely that debt will become more of a focus for lenders and more to the point the servicing of that debt.

If all goes to plan the stimulus will fuel a consumer-led economy and signs of a healthier economic climate should become apparent. There are risks though. In the long term the low interest rates may tempt homebuyers to stretch themselves to buy, storing up an issue if rates rise again in the future.

The immediate risk is the falling Sterling rate and the impact that will have on the prices of goods and imports. There is likely to be more immediate hardship that will come from the inevitable price increases which will flow through to the consumer and impact their spending.

What does this mean for creditors?
It’s still a little too early to say. Both challenges and opportunities exist within an ever changing economy and how these are likely to play out depends on who you listen to or which article you read.

The underlying decline in Sterling will make goods imported into the UK more expensive ultimately driving up prices for consumers. This creates a risk around reduced disposable income to meet credit payment obligations and a longer term risk around the impact on mortgage repayments from interest rate rises to combat those growing prices.

The impact of increasing debt levels due to customers being unable to pay them down, the increasing levels of hardship and vulnerable customers and the increase in arrears will mean creditors really will have to get to know their customers and their behaviour in more detail.

They’ll have to look at their contact strategies, customer communications and perhaps take a longer term view to rehabilitation and repayment. A one size fits all approach will not be effective in a situation where many creditors are competing for the same debtor pound for repayments.

How can TDX Group help during this turbulent time?
Creditors need to get a head start on their competitors by better understanding their debt portfolio, the behavioural characteristics of individual customers and how best to compliantly collect on arrears. If you’re a creditor who would like to discuss the impact these changes could have on your collections and recoveries strategy please get in touch at my LinkedIn address below.

Richard Anderson is Head of Advisory at TDX Group

Monday, 25 July 2016

Stay vigilant! The best way to help consumers during uncertain economic times.

A few weeks on from the UK’s biggest political decision and the rate of change hasn’t slowed down for a second. We’ve witnessed everything from a Prime Ministerial change, an opposition leadership contest and changing of the guard in front bench politics. 

What does this mean for our economy longer-term? Well, it’s probably too early to say and the outcome of all this change will unfold over the next few years. One thing is for sure, it’s likely to present us with both challenges and opportunities.

So now I’m beginning to think a little closer to home, about the impact these changes could have on people living with financial difficulties and a few things stand out for me.

Firstly, the Governor of the Bank of England, Mark Carney, recently hinted that fresh stimulus measures are need to re-invigorate the economy, including potentially cutting interest rates1.  This clearly has pros and cons.  For people with variable rate mortgages this will be positive news and provide some additional relief.  For consumers managing their financial difficulties through a debt solution like a Debt Management Plan (DMP) or an Individual Voluntary Arrangements (IVAs) – our data shows that 40% of people in IVAs have mortgages – it will help with sustainability and could enable them to increase their repayments. However, for those people living on income from pensions or savings their finances will be squeezed and they may be more likely to struggle.

Secondly, the pound has dropped against the US dollar which is likely to drive up inflation over time. For people living with or at risk of financial difficulties this may result in a higher cost of living and put them at greater risk of unmanageable debts. A recent survey by YouGov2 showed that ‘a third of middle-class people would have to borrow money to pay an unexpected bill of £500’. For people already managing their financial difficulties through a debt solution, could lead to an increase in broken arrangements.

However, this may be balanced by the news that the Treasury has abandoned targets to restore government finances to a surplus3 by 2020, as a result of the requirement for additional borrowing to ensure economic contraction, which could slow the rate of contraction of the welfare state and balance some of the impacts of inflation.

The Money Advice Service published research in March which highlighted that ‘one in six people in the UK is over-indebted, but less than one in five of them seek debt advice4’ and BBA retail banking statistics show that unsecured borrowing is growing at a rate5 of 6%, coupled with low wage growth and the contraction of the welfare state – all of which begin to place an even greater burden on consumers.

Research by debt charity, StepChange6, shows that 50% of people with debt problems tend to wait at least a year before seeking advice, so the most effective way to support consumers during these uncertain times is to look out for early warning signs. Creditors should act quickly to most effectively target their support at the people with the greatest need and put treatment paths in place which both reduce the chance of financial difficulties and provide repayment solutions which can be effectively managed.

So, what should creditors do to support their customers?

1. Use internal and external data to identify customers who are in or at risk of financial difficulties. Whilst your customer may be managing their credit commitment with you effectively, they may be struggling with others. Without reviewing external data the first thing you will see is a customer disengage and move swiftly through the collections and recoveries process.

2. Develop strategies for these customers by proactively engaging them to offer additional support. Taking action early gives your customers more options and simple action now can avoid longer-term problem debt which normally results in recoveries action. If creditors don’t engage and support their customers it is more likely that they will seek debt advice, including accessing personal insolvency solutions, this can often be the right solution for customers but at this point creditors only have limited control.

Richard Haymes is Head of Financial Difficulties at TDX Group

1. Pound falls as Bank of England hints at fresh stimulus measures, 30th June 2016
2. Third of middle classes too short of cash to pay a £500 bill, 7th June 2016
3. Osbourne abandons 2020 budget surplus target, 1st July 2016
4. Press release: One in six adults struggling with debt worries, 10th March 2016
5. May 2016 figures for high street banks, 24th June 2016
6. Waiting for debt advice

Thursday, 21 July 2016

Let’s talk contact not placements

One of the items of debt collection data that needs to be reported to the FCA on GABRIEL is ‘stage of debt placement’ – in other words, how many times a debt has been placed for collection with debt collection agencies (it’s commonly known as recycling). Once a creditor has exhausted in-house attempts to recover money owed on an account, they will often place it with debt collection agencies. Typically a three-placement strategy is deployed meaning if the first agency is unsuccessful at gaining payment, the account will pass to a further two agencies, usually at ~90 or ~180 day intervals.

In capturing this data, the FCA is seeking to understand the risk associated with debt placement, which we wholeheartedly support. However, the reporting of this data is far from straightforward because the way data flows between creditor and agencies is not as complete as it should be (and this goes for the whole customer lifecycle – not just between in-house collections and out-source recoveries – but that’s a topic for another blog!).

Organisations, such as ours, have been seeking ways to capture all customer journey information in one place. At TDX Group, we’re in a good position to achieve this because of our long-term relationship with our panel of agencies and our creditor clients – but what about the rest of the industry? Achieving consistency of data capture and reporting across the board feels like a mountain to climb and it’s one our industry body, the CSA, is working hard at.

So, in the meantime, how about we all choose to think and act differently? Ultimately, a placement represents contact with someone who is in debt, but it’s not the full picture as each agency will make a number of contact attempts within a placement. Knowing your customers’ circumstances and their behaviour opens a world of opportunities to resolve the situation as quickly (efficiently) and fairly as possible.

For example, if you knew someone was very unlikely to pay you (perhaps because they lacked the means), then it benefits all to contact them just the once to verify their situation. This way, you don’t increase their anxiety by repeatedly asking them to make a payment they simply cannot make, and you save the cost of spending £3-£4 on a series of fruitless letters, calls, texts etc.

If you additionally knew that the reason for non-payment was temporary (for example, some sort of financial shock such as losing a job), but they were likely to recover in a few months, then you will create a better customer experience and get better results by holding that account with the agency who made the initial, successful contact – and returning to them in six months’ time to check-in on their circumstances.

The same approach can be applied upstream from recoveries as well. At TDX Group, if we have a client who places accounts to us for recovery and they liquidate quickly and easily, we know they should never have been passed to us in the first place, so we work with our client to identify what the problem was in their in-house collections process.

Now, don’t get me wrong; at TDX Group we’re obsessed with data – and we’re determined to make a difference by ensuring all the data we can capture, is captured in one place – but our drive behind doing this is that we want to know what to do before we take any action. We don’t want to put any account through unnecessary contact attempts, or placements if we shouldn’t or don’t have to. The only reason for placing an account with a different agency should be a discovery about the individual’s circumstances which means it is both valid and reasonable to ask another agency – perhaps a specialist – to try to contact them. Another example would be engaging a specialist trace agency if contact details are not accurate or known.

So, let’s talk more about how and why we’re making contact and what we learn as a result. This is what will drive the biggest shift in fair outcomes and improved performance.

By Richard Anderson, Head of Advisory, TDX Group

Wednesday, 18 May 2016

Working at TDX Group: the science of process improvement

It’s 2016 and surely everything that will be invented has been (apart from teleportation and time travel)? We know how to do everything the best way and with the best methods and tools and everything is just a re-hash of an old method – Spotify for example, just a do it yourself radio station!

So why worry about trying to improve things? Why try to find a faster, cheaper, better way of doing our jobs? Surely it’s just better to get on with the work, answering queries, chasing clients, producing our products and providing client services. Change just messes things up, slows things down and confuses people and no changes ever stick longer than a week, or a month at most, then people just get bored and go back to the way things were … Sound familiar?

It’s natural to fear change, to upset the routine and rhythm of daily life – you probably don’t have time in the working day to implement a change and why should you? It’s not your job to help improve things; your job is to get stuff done and out the door so SLAs are met, targets are hit and services delivered.

It is easy to get stuck into this way of thinking and to focus on the short and immediate term but if this really was the case then why invent MP3 players when the Walkman was perfectly fine; why go to the Moon when the Earth is doing an excellent job at providing an atmosphere; and how are sport stars constantly breaking records?

Process improvement is the answer and it doesn’t matter how big or small a change can be to improve things. Marginal gains are just as important as huge ones and often add up to a bigger overall improvements. The British Cycling team is probably the most prominent example of this and Sir Dave Brailsford’s belief is that changing many things by 1% would add up to a significant increase when you put them together: Marginal gains underpin Team GB's dominance.

But how do we translate this from the world of sport into the world of TDX Group? Firstly we look at every process and ask why we are doing the thing we are doing; does it add value to anyone? Could we do it a better, faster, cheaper way?  Then we need to look at how often we perform the process or task; is it daily, weekly, monthly etc? If there is no value in this then we suggest an amendment to ultimately deliver a faster, better more efficient process for our customers.

Process improvement is already here and has been for centuries – it (along with necessity) is the mother of all invention and is the reason why companies grow and at TDX Group we are continually improving everything we do and embedding a LEAN culture of process review to improve the services we provide.

Paul Sibley, Head of IT Process Improvement

Tony Palminteri, Lean Process Improvement Specialist

Wednesday, 11 May 2016

How do you report on your customers post sale? Whose best interest are you considering?

Reporting to credit reference agencies (CRAs) on your customers’ accounts post sale has been one debated by the industry for a number of years. The process of how this is done is often based on what is deemed the easiest and quickest solution, meaning there is no one standard approach. We believe this inconsistency is unfair. It feels as if this is one of the last hangovers from the days where highest price and speed of transaction (ask no questions) were industry standard practice.

The inconsistent approaches adopted can mean consumers find that what is recorded on their credit report is dependent on who is selling the debt and who is buying it. In a world where customer treatment and fair outcomes are at the heart of everything we do, is it right that the sale of an account may show up differently on one consumer’s credit report compared to another, depending on which companies are involved in the process? The impact of this is that their ability to manage their financial affairs will vary.

There are currently three accepted methods in the industry on how a credit record can be transferred from a seller’s to a buyer’s CRA portfolio. They are:
  1. Delete and re-add – this is where a seller will delete the entire credit history and then the buyer will re-add the account, with no history in their monthly CRA submission
  2. Full Transfer – this is where the complete credit history is transferred by the CRA from the seller’s to the buyer’s portfolio
  3. Flag and re-add – this is where a flag is marked on the sellers record indicating the account has been sold and a new record is opened by the buyer
It is common practice to see all three of these methods being regularly used throughout a single year of transactions. Steering Committee on Reciprocity (SCOR), the industry data sharing oversight body, has issued guidance putting the responsibility on to the sellers and buyers to agree a process. However, at TDX Group, because we act in the centre of the industry, working with buyers and sellers on transactions, we have seen issues with all of the methods and none of them have proven to be fool proof. Some examples of problems include: duplicate records being live for a consumer; no records being available; or the flag not being marked before the new record is uploaded – all of which have a different impact on the consumer.

At this stage we are not calling for one method over another, although we do believe it is time to stop option 1 (delete and re-add). This is the method we often see employed because it is the most straightforward process, and yet the impact on the consumer hasn’t been fully assessed. If you asked creditors how they would treat a customer who had an account on their history which started with a default – what do you think the answer would be?

What we are calling for is the industry go through a considered review and ensure that all parties thoroughly understand the impacts; not only the impact on a customer’s credit record at point of sale, but also for the following years thereafter.

The outcome we are all striving for is one of consistency – that is what we ask of our regulator and we believe it only fair that we strive for the same outcome in our processes. In 2016, with the majority of our industry having achieved or nearly achieved FCA authorisation, it seems totally at odds that consumers could be disadvantaged depending on which Debt sale process they find themselves in.

Nick Ollard, Head of Debt Sale, TDX Group

Wednesday, 30 March 2016

Global outlook: Debt trends in the international arena

In the 12 years since the TDX Group business was formed, we have grown from being a start-up around a kitchen table to part of the global Equifax group with offices around the world. Today, TDX Group operates in Europe, Central and South America, Asia and Australia, and we have ambitions to further develop our expertise and international presence over the coming years. The International team spend a lot of time out on the road (and in the air) exploring new opportunities globally and here are some of the key market trends we’ve observed.

Debt sale and purchase
In debt sale and purchase we expect to see continued expansion into Europe from the large UK debt purchasers, which now includes both Encore and PRA. The continued contraction of the US debt sale market is forcing these large purchasers to explore new markets to acquire portfolios. Initially that was the UK, but with constrained volumes being sold and significant competition, European and emerging markets are looking increasingly attractive. As a result, I expect to see a significant growth in acquisitions amongst these players across Europe; but especially in the Netherlands, Eastern Europe and Italy. Within the Eastern European and Italian markets, it is the big US funds and institutional investors who have purchased first due to the size of the portfolios. We are now starting to see the more traditional Debt Purchasers enter the market and begin to purchase smaller portfolios or segments.

Further afield, the continued economic downturn in Brazil is changing the recoveries dynamic in that country opening up opportunities for experienced buyers to enter the market. In Brazil, especially, market entry strategy will be key to accessing what is normally a difficult market to develop. In Australia there are currently over 20 active purchasers, so we’d expect to see some consolidation in this area and the global purchasers beginning to make acquisitions in this territory.

Recoveries and debt collection
From a recoveries and debt collection agency perspective, the clear differential between the UK/US and the rest of the world is becoming increasingly apparent. The focus on governance and fair consumer treatment, whilst present in most global markets, is not the focal point for activity outside of the UK/US. That said, there are creditors and collection agencies in global markets watching the regulatory driven change closely to understand how the focus on fair consumer treatment can improve overall performance as well as offering better solutions for their customers.

High level themes over the last 12 months:
• Debt Collection Agencies (DCAs) are being retained by creditors’ procurement teams looking for low cost, not maximised net liquidation. As a result creditors are tending to underpay agencies and then get disappointed with results.
• Defaulted/disconnected debts are treated as homogenous blocks. As a result, creditors all too frequently randomly allocate accounts to DCAs.
• DCAs are beginning to embrace digital strategies (largely driven by the first bullet).
• DCAs are increasingly using external data to improve contact rates.
• Creditors are still not utilising all their internal data in recoveries to inform agency strategy.
• DCAs need to better understand their specific specialism and use it to their advantage.

The future in this space will be dominated by the creditors appetite to invest in agency performance (from a commission cost and time perspective) versus simply selling the debts to third parties who are prepared to invest to access the performance reward. The more agency commissions are driven down, the further performance will decline which will ultimately make sale an increasingly attractive (although perhaps not value maximising) option for creditors.

Stuart Bungay is Managing Director of International Expansion at TDX Group.

Wednesday, 2 March 2016

How rewarding DCAs differently could help us achieve the best outcomes for customers

At TDX Group our vision is to “make the debt industry work better for everyone” and when we say “everyone”, we mean it.  In the Third Party Commercial team this means that remuneration, rewards and incentives should be aligned with achieving a resolution for the consumer and the client, but that’s not where it ends. We want commercials that reward our agencies for the excellent work that they do too!

Personally, I don’t believe the current commercial model entirely supports that vision, mainly because the outcome measured by the payment by results mechanism is biased towards cash collected.  This is standard across the collections industry but the tide is changing.  Not only are we seeing an increase in outcomes that are right and fair, and don’t necessarily result in payment – such as identifying vulnerability – but these also lead to increased workload for which agencies are not directly rewarded, which is why change is needed.

Clients and agencies alike are interested in measuring other outcomes and agree that there needs to be commercials in place to support this.  However, alternative commercial models seem complex and risky, so how do we move from a commission-only model to one which ensures that the consumer has a resolution to their debt problem, rewards agencies for achieving fair outcomes, and provides the client with the remuneration for services/goods provided?

I think the answer lies in getting smarter upstream with data, and that’s where TDX Group comes in. We are currently working on new style segmentation using Equifax data which will enable us to identify segments of debt where the right outcome may not be collecting cash.  This is where we will select the right commercials based on the work involved and the outcome desired.  But what about where the objective is still to secure payment in a fair manner?

This is where payment by results still works, but we need to take the emphasis off cash as the only result which is rewarded.  The “result” can be a multitude of positive outcomes which lead to a resolution of the debt.  I think this is where a scorecard approach to commercials works particularly well.  The payment element is aligned to ensure that agencies are incentivised for providing fair outcomes and better consumer treatment.  I also like that we are able to define what a good outcome looks like, and reward this appropriately.

At TDX Group, we’re working on a commercial scorecard which ensures that consumers get a resolution to their debt in a fair way, and even when that doesn’t mean paying the debt, agencies are rewarded for the part they play in the resolution.  All it means is that the process of resolving debt becomes fairer for all and TDX Group can continue our journey to “make the debt industry work better for everyone”.

Charlotte Mather is Head of Third Party Commercial at TDX Group