Pre-Arrears in Collections and Recoveries

At the time of writing this, the Financial Conduct Authority (FCA) is well underway with stage 3 (site visits) of their early stage arrears thematic review. While not specifically stated on their web page about this review, in an article in Credit Today in July 2015, the FCA made reference to including pre-arrears activity; specifically, that this review will look at early arrears, which the regulator defines as also "covering the identification of customers in "probable financial difficulties at a pre-arrears stage".

"Pre-arrears", "pre-emptive" and "pre-delinquency" are all different phrases for the same concept, which has been around for a number of years. Traditionally, financial services organisations would target potentially troublesome accounts before they entered arrears in an effort to reduce early stage roll rates - the emphasis being that the activity would be of main benefit to the organisation rather than the customer. Contact attempts were often ham-fisted because the customer was not in arrears; credit cards got shut down because weak data predicted an (often) non-existent future problem and operational costs went up, so activities got scaled down.

Fast forward into the age of the customer and it's surprising, in the main, how the approach to pre-arrears is largely unchanged. Most organisations recognise they need to do something in this space and do have a pre-arrears process (not strategy) but are still on the fence about whether it is customer services responsibility or collections. Should it be proactive or reactive? Should we use existing headcount or create new? And, most importantly, what data-driven insight shall we use to identify a problem?

My over-riding view is that many organisations are working harder in this space, but not smarter. My observations include:

• Organisations using only their own internal data which obviously does not provide a well-rounded view of the customer;
• Multi-product organisations having different pre-arrears triggers for different products (account, not customer, focussed);
• Pre-arrears activity underpinned by weak, spreadsheet driven processes rather than being formalised into a bespoke strategy managed by a decision engine, like a regular collections strategy;
• Policy issues because organisations forbearance policies do not include pre-arrears (i.e "I understand Mr Customer, but I can't do anything until you're in arrears");
• Inconsistent policies in the same organisation (i.e. retail vs cards) with different teams of collectors involved.
• Collection strategies have come on leaps and bounds in recent years with better data, analytics and technology making a huge impact. All of the same can be used in the pre-arrears space, so why are some organisations taking so long to overhaul their approach?