Friday, 13 January 2017

2017 Predictions: What does the year ahead hold for the debt industry? TDX Group experts give their view on the themes and developments we can expect to see in the coming months.

Rising inflation squeezes disposable income

The devaluation of the pound and the fact that the new Government has signalled the end of austerity in the UK, means we should expect to see inflation creeping up in 2017. It is our view that inflation will be in the 2% to 3% range by the end of 2017 and whilst this is not high by historical standards, it does represent a significant movement when compared to the last five years.

Typically inflation impacts different consumers in different ways and won’t be evenly distributed. People living with financial difficulties or problem debt are more likely to be subject to a higher personal inflation rate than those not in debt; driven by lower incomes, higher housing costs and the rising cost of everyday expenditure like food, heating and travel.

Interest rates remain stable

If inflation does exceed 2% then eyes will quickly turn to the Monetary Policy Committee, within the Bank of England, to see whether they will react and raise interest rates. During the acrimony of the Brexit vote, some of the walls around the independence of the Bank of England began to look a little less solid and the potential for direct political involvement seemed possible.

However, it now appears that political involvement in setting the Bank of England base rate will remain indirect and it is likely to remain unchanged during 2017. This will continue to provide relief for those most indebted individuals who are especially susceptible to small movements in the base rate.

Limited real wage growth

Growth in the living wage is expected to continue towards the Government’s stated aim of £9 per hour but outside of this gradual increase, we would expect to see very little growth in UK median wage rates during 2017. The challenges thrown up by Brexit and rising import costs are likely to see UK firms focusing on cost reductions in order to remain competitive in the domestic market.

The exchange rate drop may well provide a boost for exporting firms, but whether this translates to wage growth will depend on the long-term view around the correct value of sterling. With inflation expected to grow, we anticipate that real wages will remain at current levels or marginally erode over the year. From a debt perspective, this will impact real disposable income and may well see certain groups of individuals struggling with more delinquent accounts.

Consumer spending and borrowing will begin to flatten

Against the backdrop of these macroeconomic factors and coupled with falling consumer confidence, we expect to see a decline in overall consumer spending in 2017. A “hunker down” mentality will remain in force throughout the UK and this will also have a knock-on effect for borrowing. Whilst consumer credit has been growing since the 2008 financial crisis, it is our expectation that this will begin to flatten in 2017.

Consumers with good affordability (particularly homeowners with equity) will have access to a wide range of cheap credit, but are less likely to take-on any new unsecured credit in the next 12 months and will remain focussed on paying down existing commitments. Whereas, households with lower affordability are more likely to use expensive credit products to get through the month and it is likely that where this population has access to credit they will continue to borrow.

More people struggling with bankruptcy and insolvency

There has been a significant shift in the insolvency market in 2016 and we expect this to continue into 2017. Individual Voluntary Arrangement (IVA) volumes which have been falling in recent years have suddenly started to grow as the demographic of those people utilising IVAs as a debt relief tool has changed. The average value of an IVA (in terms of total debts held) has significantly reduced and is now around 50%* of its peak average value. This decline reflects the demographic change as does the mix of creditors involved in IVA which now contains a much larger proportion of short- term, high-interest lenders.

IFRS 9 preparation and implementation for January 2018

In 2017, financial institutions will complete their preparations for the introduction of IFRS 9 (new rules on how banks and other companies that lend money should account for credit losses). This will have a fundamental impact on how lenders view their balances sheets and will trigger a range of alternative decisions around products offered, product pricing, collections and recoveries.

Under IFRS 9, financial institutions will be required to significantly raise their provisions relating to up-to-date accounts and whilst this will be the area where we see the greatest change, the knock-on effect will be most strongly felt in the non-performing loans market where creditors are expected to accelerate sale and clear non-performing loan warehouses to manage the overall provision number.

Regulatory oversight maintains momentum

We can expect regulatory oversight to continue at the rapid pace seen since the inception of the Financial Conduct Authority in 2013. The focus on fair customer treatment (specifically the most vulnerable) which is increasingly embedded across the financial services industry, will continue and this will create opportunities for those most well equipped to use data to really understand their customers’ circumstances. Evermore there will be a desire to ensure visibility of the end-to-end customer journey and continued oversight throughout the entire lifecycle.

We also expect that the changes which TDX Group has already started to introduce around Debt Collection Agency (DCA) commission structures and how we are aligning these with fair consumer outcomes will develop rapidly in 2017, as all parties realise that incentivising only on cash collected does not optimise wider outcomes for customers.

Greater demand for customer choice and creditor flexibility

This year will be interesting in relation to customer behaviour and how creditors respond to the new expectations that customers have on them. Given the continued macroeconomic turbulence expected in 2017, we are likely to see an increasing number of “new” customers entering into collections and recoveries; customers recently dubbed JAMs (Just About Managing) by the Government, who are unused to dealing with arrears and will expect a different type of engagement from their creditors. Most likely they will also want to deal with their creditors across multiple touchpoints, potentially for the same query.

Only those creditors who are fully joined up across a number communications channels (eg social media, live web chats and traditional customer service centres) will be able to effectively engage with these individuals. This capability coupled with a less dogmatic and more flexible approach to collections and recoveries will separate the best and worst performing creditors.

In summary…

…as we go into 2017, the level of economic uncertainty is probably greater than at any time since the financial crisis almost a decade ago. On 20 January 2017, Donald Trump will take office in the US in what promises to be nothing if not unpredictable. Once in office, whether he will continue his proposed policy of America First and fiscal stimulus is still unclear, but if he does it is likely to have economic consequences around the world.

Here in the UK, we have to navigate the fall-out from Brexit whilst not forgetting that the EU remains largely unstable off the back of the UK vote and ongoing budgetary and banking crises. All-in-all creating further uncertainty around the key macroeconomic indicators. In 2017, it will be these larger impact items (rather than micro industry wide triggers) that will deliver the real change across collections and recoveries, and the key focus will be to maintain flexibility around strategy and suppliers whilst also building capacity to deal with an overall increase in delinquency and default.

2017 Predictions compiled in conjunction with:

Stuart Bungay, Group Product and Marketing Director
Richard Haymes, Head of Financial Difficulties
Carlos Osorio, Director of UK Debt Recovery
Pete Parsons, Director of Third Party Government Relationships

*SOURCE: Figures based on TDX Group data from The Insolvency Exchange, December 2016.

Thursday, 24 November 2016

Partner power: The way to truly optimise your debt recovery

Most large creditors, be it in financial services, energy or the public sector, use external Debt Collection Agencies (DCAs) or Business Process Outsourcers (BPOs) to collect on overdue accounts. There is nothing new about that, but what is interesting is the many different approaches and reasons a Creditor chooses to add a flexible partner into the process and how this decision can vary significantly by organisation.

Some creditors opt for third party support from as early as day one of delinquency for certain product types, whereas others have lengthy periods of internal collection activity up to day 120 and beyond, before deciding to place debt out to an external party.

Why the different approaches?

For many organisations it’s a question of resource, based on the internal capacity of the collections team or that resources may be required elsewhere. For other businesses it’s a question of risk and personally managing that customer relationship for as long as possible, in order to add value and retain control.

What are the benefits of using a partner?

When used correctly there can be significant financial benefits associated with partnering for collections, including increased levels of recovery and reduced operational expenditure. However, organisations must take care to select a partner who provides the right level of control, has the correct oversight frameworks in place to ensure that the best outcomes are being delivered for the end customer, and that risks are minimised for their business.

Technological advancements mean we live in an age where data is readily available and this data allows businesses to better understand their customer base. The unique way in which our organisation is structured, using Equifax data and TDX Group delivery capabilities, means that we know more about the relationships creditors already have with their customers and have a holistic view of their financial circumstances, so we can offer a more positive customer experience and can also provide better returns for creditors.

How does data help?

By applying analytics this data is turned into true customer insight – driving more purposeful segmentation, identifying groups of customers which can be fast-tracked to DCAs and excluding unsuitable accounts to help reduce cost and risk within your organisation.

And because we work across a wide range of industries, we can spot themes emerging and use our knowledge to devise specialist treatment paths targeted at specialist segments and drive the best performance in recoveries. For example, our data can help creditors to identify customers who are in financial difficulties, enabling them to tailor their strategy to improve the customer experience, such as signposting the person to a debt charity for appropriate advice and support. We believe that treating customers fairly not only delivers better outcomes, but can also improve performance as the customers who are unable to pay and therefore not suitable for collections activity, can be removed from that process minimising cost and removing potential brand risk.

Better insight enables companies to treat each customer in the most appropriate manner, which in turn drives increased collections, with lower risk, at lower cost and achieves an enhanced experience for customers.

So, what does the future hold?

As an industry, we need to move away from linear and rigid collections processes which define our recoveries model based on timeframe alone, into a world where a more agile approach is taken at a point where the latest information is used to drive the best-next-action.

Debt collection activity remains an important part of the consumer lending ecosystem and by partnering with the right data and technology provider, creditors can improve recovery rates whilst also retaining oversight and ensuring that the best interests of customers remain front of mind.

Matt Wallis is Solution Designer at TDX Group

Thursday, 10 November 2016

Collaboration and communication: the key to crystallising customer needs

Having managed products in a range of industries from media to finance, there is one thing which I’m always asked: “How can we launch the next big industry changing product?” Which means I’m continuously on the lookout for the next game changing, industry leading innovation which will impress our customers and partners. Product managers are always under pressure to be innovative, it’s part of the job description, but the risk is that innovating for innovation’s sake often results in products that may please the developer because they use the latest technologies and the sales team because they have something new and shiny to present to potential customers, but it won’t do what all products should strive to do – solve a problem for a customer. This should lie at the heart of everything we do.

On a recent training course we were asked what we would do in the following scenario. In one hand we had one orange and in the other hand we had two demanding customers both asking for the orange immediately. This was the only orange in the world, so what could we do in this situation to satisfy both customers? My colleagues and I came up with a whole whiteboard full of options for how we could best use the orange. We could cut it in half and get them to share. We could use the seeds from the orange to grow more oranges. We could even eat the orange ourselves and pretend there was no orange to begin with! However, none of these options would result in a satisfactory outcome for the customers. In the end the answer was simple. What we needed to do was ask the customers what they wanted the orange for. This would have resulted in the first customer saying they wanted the peel of an orange to make candied orange peels and the second customer saying they wanted the juice of an orange to add to a cake recipe. In this scenario knowing the problem that these customers were trying to solve would have resulted in the single orange satisfying both of their needs. Simple!

Product management should be all about problem solving and really getting under the skin of what the needs and frustrations of our customers are (regardless of whether those customers are internal or external). All too often customers ask for a specific solution, and in order to please them we build the requested solution only to find that it doesn’t quite do what the customer really needed. Customers are experts in their business line and we are experts in ours. The best products therefore should be created collaboratively with the customer detailing the problems they are trying to solve, providing us with the full context and our teams proposing creative solutions based on industry knowledge and the right technologies and systems.

Regardless of how well we think we know our clients’ needs or because we have worked in the industry for years, nothing beats “voice of the customer”. At TDX Group, we use voice of the customer ourselves and recent developments to our TIX (The Insolvency Exchange) platform are based on feedback from clients and this has delivered improved functionality for all TIX users.

The simplest way to understand what a customer needs is by asking the right questions. This isn’t necessarily: What do you want? It can be: What is the problem you are trying to solve? How are going to use the product? Who is the end user? What are the impacts of rollout and implementation likely to be?

The key then is not just taking the customers word for it. Findings should be backed up with data so that a real benefits case can be created, with tangible metrics that can be used as measures of success, whether that’s cost saving, time saving, reduced complaint levels or improved liquidation rates.

The customer should also be taken on the product development journey by delivering the product or functionality in prioritised increments so that releases are de-risked, benefits are delivered faster and the customer can provide a continuous feedback loop.

It’s this collaboration and being really clear on what problems the product will solve which will really drive innovation and enable organisations to meet the right goals. When a customer asks what a product can do, it is the value proposition that they care about not the product features, and if we are innovating the right product for our customers’ needs we should be able to demonstrate that value proposition in an instant.

Shivani Mistry is Head of Platform Management at TDX Group

Wednesday, 2 November 2016

Asset Sale: Honing in on non-performing loans

The global asset sale market continues to grow, and within that TDX Group is already an established player in valuation and brokerage services in the unsecured market within the UK, and both the secured and unsecured markets in Spain. As a business we’re expanding this reach into a more globally focussed and structured asset sale function spanning the wider Equifax network and territories.

At a global level one of the greatest challenges, and opportunities, in this space is how to deal with Non-Performing Loans (NPL). In Europe alone, the largest banks hold approximately €1.1 trillion* of NPLs according to recent KPMG analysis.

The NPL problem is now a global one, and what to do about it is challenging Governments across the developed world. In some key countries such as the UK, Ireland and Spain they created organisations dubbed “bad banks” (UKAR, NAMA and SAREB) to manage the problem, whilst Greece and Brazil have changed entire legislative systems to allow the sale of NPLs.

The major difficulty in most countries is the experience and market structure needed to be able to execute NPL sales in a successful manner. NPLs are somewhat of an anomaly in that market conditions are different in all geographies, but that there are also some core similarities which need to be understood locally in order to succeed. At TDX Group, we’ve been operating in this space for 12 years, and have successfully executed more than one thousand transactions with a value of over $20 billion, and this experience will stand us in good stead as we now focus our efforts on a global scale.

How developed is Italy?

With the UK and Spanish markets having already developed, the race is on to find the next market which has the volume and infrastructure to support new growth. Italy has dominated the headlines recently but this market has found it difficult to develop a successful servicing model. Now that the Atlante II fund has been created (the second attempt by the Italian Government to try and bring some liquidity to the market) will this allow the market to establish some of the parameters to function or just add to the issues in an already fragmented market?

The Economist ran with a headline of “Bargain Hunt” in August which suggests that this market may need some support. One of the key areas discussed at a recent summit hosted by Banca IFIS in Venice was that of the Italian legal system and it was claimed that solely by reforming this you can add single digit percentage points to the Italian gross domestic product.

One of the essentials when working with funds and servicers is ensuring that the collections curves are genuinely achievable and the challenge with any new market is the ability to create balance between expected value from the seller and realistic returns from the buyer. The challenge in Italy will be weighing up state backed entities and their returns versus true returns for an investor.

Into Europe or an American adventure?

There has been a lot of talk about other developing markets in Europe and while there are undoubted opportunities to be had in Central and Eastern Europe a number of the markets do not have the large scale volume needed to replicate the UK or Spain. At TDX Group, we’ve taken on projects in Poland and Russia this year and looked at transaction in Greece; where the new regulatory framework for NPLs and the creation of Law 4354/2015 has enabled financial services organisations to consider wider disposal of certain assets.

Finally, another developing market for consideration around NPLs is South America, where we are already actively managing projects in Brazil, Peru, Mexico and Chile. The breadth of opportunity that exists here is very significant as the basic market for NPLs already exists, so bringing in skills and expertise from more developed markets can make a huge difference. In addition, some of the main purchasers are already active in South America (such as PRA and Encore) and we’d expect their presence along with the investment funds to accelerate the expected market growth.

The asset sale market is evolving and we are likely to see a number of exciting developments over the next 12 months – so watch this space.

Nick Ollard is Director of Global Asset Sale Services at TDX Group

Friday, 28 October 2016

Debt Market Integrator: Why Her Majesty’s Government decided to act on burgeoning overdue debt

Debt is always going to be an emotive and sensitive issue as many different types of people and businesses fall into debt for different reasons. The biggest area of debt in the UK is money owed to Central Government, which is estimated to exceed £25 billion (of which £5 billion to £7 billion is over 90 days old), and originates from many sources including unpaid fees, taxes, fines and loans, benefits or tax credit overpayments, and unrecovered costs from court cases.

In 2010, the UK Government announced its commitment to addressing this problem and improving debt management by setting up a Fraud, Error and Debt taskforce. The unit set out its vision and roadmap by publishing an interim report in February 2012. This was followed by a National Audit Office and Public Accounts Committee review in 2014, which confirmed that there was no integrated approach for managing debt across Government, and that too much overdue debt was being allowed to “age” leading to value erosion.

To remedy this, a public tendering process was held and a joint venture was formed between Government and TDX Group in 2015. The company, named Indesser, provides Government and the wider UK public sector with a single point of access to a wide range of debt management and collection services.

Government can now access services as a single customer, presenting a significant change from 2012 when the Government had over thirty separate contracts for managing debt. In addition, Indesser is set up as a streamlined process, with the fair treatment of individuals in debt at the heart of what it does.  Ensuring that individuals are removed from the stress of having multiple debt collection agencies and parts of Government, approaching them in different ways.

Since going live in mid-2015, Indesser is widely acknowledged to be exceeding expectations and has provided the Exchequer with greater returns than forecast in the original business case. Indesser aims to grow its UK Government services and footprint in the coming months and to use its experience and expertise to help Government’s outside of the UK to address similar challenges. A vision which is strongly supported by the Cabinet Office and the Indesser customer departments.

Sunil Shahaney is Director of Government and Public Sector at TDX Group

Wednesday, 26 October 2016

The dawn of a new era for debt

As the economic outlook for the UK continues to change based on the result of the EU referendum and greater global uncertainty, we can expect to see a whole new wave of consumers entering the arrears space over the next 12-24 months. These people will have little or no experience of adverse credit, but may find themselves increasingly squeezed by low real wage growth and rising prices, so could fall into debt for the first time.

Following the UK Brexit vote the Bank of England has reduced interest rates, but a 0.25% shift will make very little difference to the behaviour of most high street savers or borrowers. However, this cut is likely to further exacerbate the downward pressure on sterling which will ultimately make all imported goods in the UK materially more expensive and further squeeze consumers.

Over the last few years, consumers have benefited significantly from low interest rates which have ensured affordable mortgage repayments. However, rising import prices are likely to have a material impact on the Consumer Price Index and could ultimately force the Bank of England to reverse its recent interest rate cut and begin increasing rates to maintain inflation targets. This is likely to lead to some difficult choices for the Bank of England over the next 12 months, between measures aimed at stimulating the economy and measures aimed at cutting inflation. We could even see 1970s style stagflation emerging once again!

What does this mean for consumers…

Low growth and rising rates is a perfect storm for the UK’s consumer-focused economy. This combination will further squeeze disposable income for most and will disproportionately impact the middle classes; a group that (in the main) have not previously encountered debt problems and have managed to keep multiple obligations up to date. As real disposable income falls, some of this group will be forced to make hard choices for the first time, regarding which payments to maintain and which to temporarily halt.

…and for creditors?

The situation presents a unique problem in how to manage good, loyal customers who historically have no payment issues but may now fall into short to mid-term debt problems. Creditors will need to use all available data to really engage with these customers and most importantly adopt a longer term “through the cycle” approach to any current debt issues. Creditors who look to follow normal processes to recover debt may well find these customers reluctant to engage and ultimately unwilling to return in future when their debt issues have ended. This is a classic short term recovery versus long term value problem, which only the most progressive creditors will be able to solve.

Stuart Bungay is Group Product and Marketing Director at TDX Group

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