Bad debt collections: From ugly duckling to white swan
The Collections 3.0™ approach, developed by Deloitte, outlines the approach, which encompasses both a quantitative and qualitative component, to identify areas of improvement within the collections and recoveries space, in an effort to assist in realigning the collection and recovery function.
The consumer lending environment in South Africa has become materially more competitive. Relatively new lenders are gaining a stronger foothold in the market and competition from non-traditional lenders’ such as retailers, is becoming more common place. There has been an upward trend in the growth of credit transactions over the past few years and this trend is likely to continue as the economy grows. The growth seen is substantial enough to require an effective collections strategy.
Lenders are increasingly looking to gain a competitive advantage through market leading risk-based collections strategies and operations. Those lenders that do embrace risk-based collections gain a significant ‘first mover’ advantage through enabling increased collections, better credit decisions, and reduced operating expenses.
Most financial service providers find that their collection efforts are inefficient relative to the experience of the global market, which indicates that efficiencies can be found across the entire collections lifecycle from pre-delinquency to write off and recoveries. If financial service providers with inefficient collections functions continue with their current collection strategy, collectable balances older than fifteen months will continue to provide minimal return. These financial service providers will also have difficulty in determining whether the cost of collection outweighs the return on these collectable balances.
In an effort to assist in realigning the collection and recovery function Deloitte has developed the Collections 3.0™ approach. This approach, which encompasses both a quantitative and qualitative component identifies areas of improvement within the collections and recoveries space.
Better understanding as to what drives recoveries not only allows management to increase the bottom line, but also provides a strategic mechanism to further entrench market share, achieve business growth and enhance shareholder returns. The outcomes of improving collections processes can have additional, frequently unexpected benefits such as deeper customer insights, which in turn enable better and more efficient collections strategies.
Due to the wide uptake of credit in South Africa, the collections function is increasingly becoming a key focus to any lending organisation. To grow out of the ugly duckling and embrace the swan, requires an understanding and a willingness to optimise collections strategy, governance systems and data.