Andrew Domino, Adam Thornber: Collections and recoveries - how to improve commercial performance - lessons from the us and uk market place

Collections and RecoveriesHow to Improve Commercial Performance, Lessons from the US and UK market place

Collections Europe SmithNovak Conference,

Prague

June 14, 2013

The Evolution of an Attendee

T

StartMid Conference Drinks

Now

Bridgeforce Limited • Founded in the United States in 2000, Bridgeforce has established itself as

internationally respected leaders in evaluating and managing all aspects of lending and payments

• We have been working in the Europe since 2001 and opened our London office in August, 2011

• We help many of the world’s most sophisticated lenders of consumer and small business assets to run their businesses more profitably

T

CoordinatedData and

RiskManagement

Recoveries and

Debt Sales

LossMitigation

andCollections

PortfolioManagement

Underwriting

Marketing and

Prospecting

Today’s Session

With reference to a series of case studies we will discuss:

•The commercial returns of creative forbearance

•How to use customer incentives effectively

•Which metrics to target and why

•What to do with mortgage shortfall recoveries

We will also talk about what’s on the horizon from our experiences in the UK and US market place

Case Study #1

Problem:

Aggressive litigant with limited forbearance solutions, poor Collections contact process and property sales function

This compounded the challenge of a high LTV portfolio and led to an average loss on repossessions of ~£40,000

No treatments for customers who had suffered a lifestyle event or loss of job

Client Top 10 UK mortgage lenderAssets >£50 billion

Collections Customers >50,000Loan Impairment >£1 billion per annum

Case Study #1

Approach and Solution:

Feedback solicited from collectors and customers determined that a

change of mind set and strategy was required to improve results:

•Launched new forbearance solution with interest reduced to a minimum

of 2% on secured lending and 0% on unsecured lending

•Clearly defined contact strategy during period of forbearance

•Established customer behavioural expectations to ensure the long term

affordability of their mortgage



Case Study #1

Results:

2,500 of 7,500 applicants took the product up with the following outcomes:



• <5% failed and were repossessed

• <5% remained in arrears

• ~30% renewed at preferential rate

• ~60% cured

Case Study #1

Benefits:

•Impairment saving per successful case >£30,000

•Customer indebtedness down by 33% and bureau score up by 15%

•~£50 million impairment benefit on an investment of ~£1 million

•Improved reputation with the Debt advice industry, regulator and press

•Empowered Collectors



Case Study #1



Case Study #2

Problem:

One size fits all approach to Collections ‘marketing’ activity, tone and content of communications dictated by age and delinquency status of debt

Low response rates and poor returns on investment for marketing spend

Client Top 5 US commercial bankAssets >$300 billion

Collections Customers >500,000Loan Impairment >$3 billion per annum

Case Study #2


Redefined the desired outcome of marketing activity to:

•Offer a specific solution, not a general consequence

•Drive high quality inbound conversations

Appointed a collections marketing manager

Segmented customer base and tailored communications to target

customers with explicit ‘offers’ via different contact methods

Used Champion Challenger methodology to constantly evolve strategy



Case Study #2Results:

Dramatically increased response rates: Up 400%

Inbound calls from customers regarding the specific offers sent, not to

simply ‘discuss their account’

Positive outcomes and conversion rates increased, leading to:

• 156:1 return on investment for Collections communications

• Average incremental benefit gained from each response of $113

• Increased right first time resolution

• Reduced repeat inbound telephony traffic

~$50 million benefit gained to date



Case Study #3

Problem:

Collections function where staff had 16 key performance indicators (KPI) to achieve and an operation which measured effort more than output


Collections Customers >70,000Loan Impairment >£500 million per annum

Case Study #3


Went back to basics to define a Collector’s core competency as:

•Making commercial, sustainable, compliant agreements with customers

•Identified 5 KPIs clearly linked to this desired outcome

Published Collector league table of these metrics linked to capability

management process

Targeted average value of arrangements and percentage of concessions

Linked Collector outcomes to tangible financial impacts for the Company



Case Study #3

Results:

•Concessionary arrangements down 65%

•Average arrangement value up 20%

•Kept rate up 10%

•Healthy competition between teams

•More timely capability management



Case Study #3

Case Study #4 – Mortgage Shortfall

Problem:

Rapidly growing mortgage shortfall book with single treatment and contact strategy, high average balance and no segmentation of debt.

This debt class was an unknown quantity and had not been collected on in any volume since the last UK property crash in the early 1990’s.

Client Top 10 UK mortgage LenderRecoveries Assets >£2 billion

Recoveries Customers >40,000Average Balance ~£50,000

Case Study #4



Mortgage Shortfall Recoveries: General Considerations

• Contact is difficult: ~90% of customers are never contacted after loss is crystallized

• Recovery rates are low: ~3% is a good portfolio return

• Larger debts require realistic repayment timescales: Potentially longer than the

original term

• Margin call: Efficient and effective management maximises returns. Don’t throw

good money after bad

• Mortgage shortfall is an unknown commodity: Relatively few purchasers mean

prices are typically low

• DCA Commissions are high: ~25%+ for first placement and ~40%+ for second

placement

Case Study #4



Monitor and Break In0-18 months

Golden Years18 – 48 months

Diminishing Returns48 months +

Let’s look at a typical recoveries cash curve

•The red line tracks the operational costs of recovery

•After 6 years of activity this operation has made a margin of only 6%

As you can see, the typical financial performance of a recoveries portfolio is not linear

In fact, it can be split into three main phases with different recommended objectives

Situation

Customer has suffered a financial trauma, the relationship between the customer and lender has changed with limited additional insight (address, phone number etc.)

Significant lag before customer’s ability to repay recovers and they reappear on the grid

Objectives

Preserve the value in the portfolio, limit expense, monitor external data sources

Complete NPV modelling and sell low value shortfalls into the unsecured debt sale market

Objectives

Build up a cash curve including low value high kept rate ATPs, balance cost to collect

Promote settlements with lazy payers, broken ATP cases or those with a reluctance to pay

Utilise spend selectively – if a customer can’t afford to service the debt, stop activity

Litigate on a commercial basis

Situation

Customers appear on grid, showing some level of financial recovery

Customer engagement and in-house activity leads to outcomes for segmentation

Decision point – continue in-house recovery or reduce costs by placing with a Debt Collection Agency

Situation

Stock and opportunity is reducing due to settlements and uncollectable debts

Objectives

Protect margins by scaling back activity, preserve income streams from cultivated arrangements and minimise costs through automation and outsourcing

Complete a backend debt sale to dispose of assets or placement for non-contactable cases, know when you should stop and when you have to stop (Statute of limitations)

Now let’s look at the results when we factor in these recommendations

•After 6 years of activity this operation made a margin of ~19%, equating to an

extra £475,000 in cash from this segment of their portfolio

What’s on the Horizon?

Challenges:

•Compliance and conduct risk – US regulators are showing their teeth

•Collections cost bases under scrutiny

•The rise of strategic defaulters – Jingle mail, stay/no pay, etc.

•Striking the balance between loss mitigation, customer retention and future

profitability

Opportunities:

•‘Individual’ contact strategies and multiple channels

•Technology advances in automated contact for low risk customers

•Mobile payment methods for financially stable customers

•Aligning complexity and risk to staff experience and cost

Questions?

SmithNovak Conference, Prague

June 14, 2013

22

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Bridgeforce welcomes the opportunity to partner with you and your team

Contact Information

Adam ThornberSenior Program Manager– Bridgeforce Ltd.+44.(0)[email protected]

Andrew DominoManaging Director – Bridgeforce Ltd. +44.(0)758.796.5715+44.(0)[email protected]

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Andrew Domino, Adam Thornber: Collections and recoveries - how to improve commercial performance - lessons from the us and uk market place