For eight of the last ten years Debt Collection has seen very little investment. This is not the case now. The existing profit centres are generating less income than and have been downsized. Now credit recovery is seen by many as such a key component of the business process that recovery teams are receiving unprecedented levels of investment. The availability of external debt recovery products is much larger than it was. At the same time, businesses in the regulated sector are facing compliance issues from the FSA. What can we learn from their changes in culture.
Those businesses with lending as their core activities already need to know and comply with the principles of ‘Treating Customers Fairly’ (‘TCF’). They will know that an automated debt recovery system is unlikely to fit all customers. Where processes are compliant, where a customer is identified to be in financial difficulty, appropriate communication is made with them to discuss the solutions available. The reasons for non-payment can be many and varied as are the solutions.
Is TCF a burden or a tool?
In an upturn in the economic cycle TCF can be seen by many to be a burden as rates of recovery are higher using the traditional tools available. Credit Control and Debt Recovery systems will generally ensure a good return on the lower levels of debt with minimal wastage. In a downturn debtors are more likely to be in a distressed financial situation. TCF requires the lender to indentify the debtor’s financial situation and to consider the options available to the customer even if those options do not form part of the lender’s product range. The credit professionals dealing with customer relationships must exhibit similar skills and attitudes to those of the frontline sales team, ensuring that both parties reach a satisfactory solution.
Upper management should be using this information to inform their business and recovery strategies to ensure that the efforts are not wasted. The availability of this information is critical to the management of the debtor profile while also giving the business the opportunity to retain hard-won customers.
It is no surprise that large numbers of businesses do not know their debtors or debtor profile and any credit control action taken is tends to be counterproductive. Quite often a debtor is a slow payer rather than obstructive. While the first impression after initial contact may be that the debtor is obstructive in fact significant numbers of debtors really do not know enough about their financial position to be immediately or assistance. Should you move to debt recovery as the first option the uninformed debtor will balance the pressure that the recovery process places on them against the stigma attached to formal insolvency procedures. In the majority of cases the pressure will be too great and insolvency will be guaranteed. As a result they will miss out on the options available to them and by proceeding to an insolvency event reduce the level of returns available to all of their creditors. While insolvency may be unavoidable where it can be avoided it should. Creditors should not create this situation by their actions.
TCF requires and enables you to obtain information about your customer. It is only by understanding your customer that you can balance your subsequent decisions and actions between being effective, timely and fair. Moreover implementing compliant procedures ensures that customers consider all of their options before having to take the drastic action of entering formal insolvency procedures.
TCF for all?
It is deliberate that the above paragraphs have not been restricted to FSA regulated organisations. TCF must be seen as a tool for all credit professionals whether internal, external or in the legal professions. Knowing your debtor is key to both retaining a long–term relationship and a greater recovery rate. Whether you are operating in or outside the regulated sector, creating a recovery process that follows the principles of TCF is essential to the continued existence of your business. Rather than a ‘necessary evil’ TCF is a business imperative.
Director and Head of Arrears Management
22 May 2009