As lockdown measures imposed to stop the spread of COVID-19 recede, many of the government programs that were put in place to stop an economic meltdown are also coming to an end.
Over the past year there have been government actions at an unprecedented level to support businesses and consumers. These have taken the form of loan guarantees, income replacement and uplift in benefit and tax credits. As a result, there has been a huge increase in debt for both businesses and consumers. At the same time, many of those impacted by job losses and business closures have been forced by necessity to take payment holidays. Now those businesses and consumers face a double blow with those payment holidays coming to an end at the same time as furlough schemes finish.
The question for lenders is – how can they best prepare themselves for the coming debt tsunami and multitude of customers needing support?
Tsunamis start small and far out to sea. Although high income households who have been able to work from home have paid down debt as their opportunities to spend have been curtailed, lower income households have faced worsening conditions. The Resolution Foundation estimates the number of people claiming Universal Credit (UC) has doubled since the start of pandemic, with four in ten of these in work.
Even before Covid-19, UK household debt was 31% higher than at the peak of the 2008 financial crisis, with 9m people estimated to often borrow to buy food or pay bills. It is clear the financially vulnerable will be hit hardest when the furlough scheme and UC and working tax credit uplifts are removed.
Meanwhile, lenders granted 4.75m payment holidays across mortgages, credit cards, and personal loans in 2020 - and these debts will soon be payable.
The Institute of Fiscal Studies (IFS) argues that “problem debt” is a persistent issue for households on lower incomes, and escaping this situation often relies on income rising strongly. However, while a slow recovery in joblessness is expected, the IFS has warned that a new set of households risk getting stuck in difficult financial circumstances that may have consequences for years to come.
Nor is the issue limited to consumer credit. EY ITEM Club estimates that, by the end of 2021, businesses will have borrowed a “colossal” £60bn since the start of the pandemic, a rise of £17bn from 2019. The swell in business lending has been particularly marked for small and medium-sized enterprises (SMEs), where lending was more than 30 times higher than in 2019, according to the Bank of England.
This wave of debt is gaining force. The EY ITEM Club predicts expects write-off rates on consumer credit to rise to 2.5% in 2021 – a near-decade high, up from 1.3% last year and compared to 1.9% in 2013 in the wake of the banking crisis. At the same time, mortgage write-offs are expected to quadruple to 0.04% and stay at this level through 2022. Meanwhile EY also expects business loan losses will rise by 67% from 0.3% in 2020 to 0.5% this year.
What does this mean for banks and lenders? Efficient debt recovery will be key to reducing credit risk while ensuring costs are kept low and amounts collected are maximised. However, this must be done whilst supporting the FCA’s Treating Customers Fairly initiative and showing sensitivity to the customer’s situation. This is an opportunity to engage with customers who are experiencing hardship and for the banks and lenders to lead the way in identifying solutions that solve the customers' problems in a humane way.
Lightico works with global banking customers to streamline their operations while making it easier for their customers to repay their balances or make arrangements to do so.
Working with Santander Brazil, Lightico was able to deliver a 100% compliant refinancing/collections journey for the bank’s customers by transforming a convoluted process with multiple stages into a much simpler one.
Eliminating the need for paper and enabling e-signatures, the project to digitise the finance collection journey meant it went down from an average of six days to just 14 minutes. The speedier transaction meant there was a 20% increase in conversion rates, while also freeing up bank staff to handle more customers. Also, by handling the customer in an efficient, sensitive and painless way, Santander has managed to secure positive feedback from its customers, achieving an NPS of 97 for the journey.
The process of handling customer debt can be an emotionally charged one, but ensuring that it is easier, clear to understand and convenient was a game changer for Santander Brazil. For example, the majority of the bank’s customers preferred using their mobile device for banking. Lightico's CX technology was responsive to this and improved the experience for both the lender’s agents and its customers.
Banks may be facing a tsunami of debt, but those lenders that are better placed to support customers who fall behind on payments and can create debt collections journeys that are as efficient and effective as possible, will be able to reach safety on higher ground.
