One of the many challenges for retail banks at the moment, is managing (and recovering) the vast amount of personal debt accumulated over the years (the “credit boom” as it will be fondly remembered). As I sat on the train the other day (thankfully not trapped in a tunnel like one of our previous esteemed contributors), I overheard a conversation that, whilst naïve (and downright fraudulent) made me step back and consider once again – how smart are our banks in the one thing they’re supposed to be good at – collecting money? This fellow commuter was boasting to his friend that he had a fool proof method for avoiding the repayment of much of the debt he had accumulated. To simplify the story (and protect the innocent because he, believe it or not, was wearing a name badge) I will apply some editorial license around the variables in play. He had £100,000 of debt spread across 10 financial institutions who had foolishly (it would seem) lent him money over the years in unsecured debt. He reckoned he could interact with each of them sufficiently enough (including paying a certain percentage of the minimum payment per month) to prolong the next stage – hand off to the third party debt recovery company (say 6 months). At the point at which they appeared to be getting wise to that process, he would bring a debt management company onboard. (This is the new breed of middle men, who appear to be taking advantage of recent Gordon Brown “protect the innocent from the greedy banks” type legislation). He claimed the debt managers were boasting an ability to freeze all of his interest and charges ad infinitum in exchange for as little as £50 per month (for a small fee) as long as he could demonstrate an (in)ability to repay the total debt. Somewhere along the line, when all of the debts (interest frozen) were handed to third party recovery agents, he reckoned that, because they had in turn bought the debts of the banks (as a block of debt) at a reduced rate, they would be incentivised to take a deal with him. Basically, his plan was to cut out the debt management company and offer to pay 50% of the original debt direct to the third party recovery agents (presumably before the bailiffs came round). In his mind, the process would take so long that he would have saved enough money to pay £50,000 of the original debt back vs. the long term repayment of somewhere near £300,000 (the original debt with compound interest repaid at minimum amounts per month) Wow – that’s cheeky I thought! Now I know that seems complicated but actually we know enough about the process to realise it’s sadly not a million miles away from the truth. Let’s look at each of the stages to see where the banks’ poor understanding of the customer creates the problem and the potential “write off”. Stage One – David hadn’t thought of doing a runner and the banks were happy to lend
Ok, so we all get that poor understanding of the customer’s situation and a more than generous attitude towards lending, gave this punter his money in the first place. Providing smarter decision modelling to underwrite a priori risk is already in the banks’ minds and they are spending lots of money doing that (with Capgemini I hope).
Stage 2 – David has already decided to do a runner but the banks don’t know yet But what about the debts they already have? A smarter decision model and scenario planning capability would be able to intuitively segment customers into “David Doing a Runner” and “Connie Conscientious” to spot behavioural and demographic traits that could outsmart the commuter in mind. Banks would just be better informed generally and could just be generally smarter. Stage 3 – David is already running, the banks are smart but haven’t decided what to do yet But even if banks and this customer both know the end game (David is Doing a Runner), could they create operational processes that accelerate to the end game to avoid cost (all the unnecessary call centre interventions and letters to David telling him he’s not being a good citizen and has missed a payment) and hand him straight off to Billy Bailiff to recover the expensive TV so that his cunning wheeze is foiled. Or do we tell David that we’re happy accepting his minimum payment that is less than the interest and he can do that for as long as he likes? If that doesn’t work, do we then sell his debt (in the block of debt) off cheaper than the other debts to the recovery agents, hence requiring the recovery agents to have smarter decision modelling to investigate the blocks of debt they are buying. And then they themselves deploy smarter operational procedures so that David Runner is not offered the 50% “deal” and told, you know what we quite fancy your TV and Hi Fi instead. Stage 4 – David is Doing a Runner, but it’s all still too risky or immoral to do anything about it It is only when I started to apply all of the “moral” logic (we hope consistent with legislative guidelines) that should be applied to these processes so that poor Conscientious Connie doesn’t get perceived as another Dodgy David (and have her family heirlooms carted off in the back of a van), that I realised we had stopped at Boston Manor, I had a headache….. Stage 5 – Lee needs to do a Runner ……. and I needed to get off. The bottom line is that the answer is, as ever, somewhere in-between; banks know that there are lots of Davids and plenty of Connies and many shades in between. They know they have to trade off the cost of process improvement, technology investment and smart decision making capability against the practical outcome of just writing off some bad decisions. They also know they can put prices up (or down) to redress past decisions. As for David Doing a Runner, I couldn’t help concluding that he may have a “cunning plan” but he still needed to live with himself! . Capgemini offer a service which delivers a unique hypothesis driven approach to identify and eliminate the root causes of Fraud and Error .