What's the most effective way for retail banks to tackle NPLs?

Between 2015 and 2016, World Bank figures reveal that the average proportion of all loans that are non-performing (NPLs) rose over a half percent from 6.99% to 7.07%.

According to Gartner, the cost of servicing a delinquent loan is now 15 times higher than the cost of servicing a performing loan.

Pair this with a trend towards cutting operational costs, and you’re left with a situation where banks are being asked to collect more with fewer resources.

Many retail banks are choosing to outsource their collections to debt collection agencies, with one study from Atradius Collections finding that 34% of executives admitted it was “likely” for them to outsource their collections practices, but there is another way. Digital transformation has fundamentally shifted the way that banks deal with their debtors, and particularly in the case of NPLs, these changes have largely been for the better.

In years past banks would depend on feet-on-the-ground collection agents and call centres. Now, they can use AI chatbots and real-time live chats to check on their customers at every stage of their journey. They can give customers a greater degree of agency, by offering self-service options that make debt collection seem less intimidating and more approachable. From the banks’ own point of view, tech can distil every element of the debt collection process into one infinitely powerful and flexible software suite.

With so many options available to retail banks, what are the most effective? Before making a decision, it is important to grasp the pros and cons of each strategy.

Field collections

Pros: The traditional route. Debts fall into arrears, you send someone in to tackle the problem.

This has traditionally been a direct and effective tactic, though it is now less common in the western world (Europe and the US) due to societal and technological advances. However, in Southeast Asia, where debt collection is notoriously difficult, field collections are still common as there is less infrastructure to work from and it can be the only way for banks to make sure that debts are being reliably paid.

Technology has also changed the logistics behind field collection in recent years. Field collection apps can streamline the collection experience by giving field-service staff all of the tools they need to plan their routes. They can use the app to plan a 'smart route' based on the likelihood of collection, the distance between customers, and more.

Cons: Field collections are costly, requiring plenty of resources to employ, train and send out collectors. It can also be seen as an intimidating option, particularly in some APAC countries, where it has been common practice for loan providers to hire thugs to pound on doors and scare debtors into paying up.

In Vietnam, for example, a 2014 survey by the Vietnam Chamber of Commerce and Industry (VCCI) found that 90% of enterprises employed gangsters to enforce debt collection. Whilst these practices have since largely been circumvented by tighter regulation, the stigma remains. Indonesia has a similar problem: less than a decade ago, one employee of Citibank was arrested for murdering a customer. Even in the more economically stable Singapore, field agents have been known to utilize threatening tactics. With this kind of negative press doing the rounds, it's no wonder the reputation for field collectors in APAC might be suffering - but in many countries, it's still the only logical option.

Call centres, chatbots, and live chat

Pros: As technology has improved in recent years, the vast majority of major retail banks have released customer service chatbots to meet consumer demand.

Chatbots are cost-effective for banks. They don't require a salary and they don’t look for other jobs - given that the average turnover rate at call centres currently sits at between 25% and 35%, this is a major pro. Additionally, they provide instant resolution for simple customer requests.

Why are customers so keen? Debt recovery can be an embarrassing situation for customers, particularly NPL customers who might be experiencing great personal turmoil. Using a chatbot mitigates the embarrassment somewhat by allowing customers to manage their debts without having to discuss them with another human being. Live chat and call centres are also still options for situations too complicated to be solved by an AI.

Cons: There is something innately impersonal about using a chatbot, as you are literally talking to a computer. Also, with IBM predicting that 85% of customer interactions will be handled by AI by 2020, there's the chance that people will start to get a little tired of automated messaging. Live chat too can feel a little distant, and many customers might simply not be able to trust someone they can't speak to or look in the eye when they are discussing such delicate matters as debt recovery.

While chatbots have evolved in recent years, there are many tasks that they are still unable to complete without a guiding human hand - around 70% of tasks, in fact - so they are generally still seen as just a first line of defence.

Speaking of defence: according to Simon Bain, the cybersecurity expert, and CEO of BOHH Labs, some chatbots are not entirely secure and can create open passages for cybercriminals. He explains: “While there are clear advantages to integrating chatbot technology as a new communication tool if companies aren’t made aware of the potential security risks, confidential data will be accessible by any determined hacker. Additionally, attackers may be able to repurpose chatbots to harvest sensitive data from unsuspecting customers.”

Customer self-service

Pros: Whilst debt collection might have developed an anachronistic reputation when it comes to elegantly designed customer self-service options, it is starting to catch up.

Customer-focused apps are starting to infiltrate the industry. Modern self-service debt collection tools can drastically improve collection results. They offer customers a way to manage their own debts via a holistic infrastructure of smartphone/tablet apps and computer software. These platforms act as a proxy for the traditional field collection agent, only they are available 24/7 from anywhere in the world. They also offer a neutral, less stressful, and more convenient payment method that gives some agency back to the customer.

Customer self-service also provides major potential financial benefits to the banks. Research by Accenture, for example, has found that implementing self-service options could save businesses between $1 and $3 million USD per year.

Cons: While a customer-centric approach to debt collection is certainly desirable for many banks, its success will be determined by whether or not its customers actually use it to its full potential. The fact is, some countries and segments simply won’t adopt such a solution: it’s not what they’re used to.

This is particularly true with older debtors who are largely unwilling to change with the times. 60% of baby boomers might have a smartphone. but the majority “are still reticent to use mobile banking.”

Also, when you leave it up to your customers to take care of their own debts, they can have very little incentive to pay. The key is for banks to only introduce self-service options in suitable markets where it will be openly adopted: otherwise, you’re just throwing money away.

Early risk detection and pre-delinquent actions

Pros: By spotting delinquent loan patterns early and taking measures to spot potential problems before they get out of hand, banks could save significant time and money. The idea is to intervene with accounts before they exceed their limits or start missing payments, preventing them from becoming NPLs.

Various metrics can be used to measure pre-delinquency. The customer might have decreased their percentage of payments over a period of months, they might have gone over their limit or there might be a sudden use of a card after a long period of inactivity. When you spot these pre-delinquent accounts, the first port of call is a payment reminder via a customer call. If this doesn't work, then is time to start considering more complicated options, such as account closures, limit decreases, and credit education.

Cons: It can be difficult to find the right balance and know exactly when to instigate these measures.

If you identify a risk too early, you run the risk of being too aggressive with a customer that might not even realise they are credit-stressed. If you identify it too late, meanwhile, customers will already be heading towards delinquency.

So, finding that sweet spot is key, but it can be challenging to ascertain exactly when to pounce. Once you've acknowledged a pre-delinquent account, however, knowing how to contact each customer and what tone to use with them can be tricky. You want to prevent them from falling into delinquency, but you also don't want to damage the relationship.

Specialized software systems

Pros: A specialized debt collection financial suite will handle all of the above and plenty more besides.

From one platform, banks are able to manage credit risks throughout the entire lifecycle of an account; from disbursement to write-off or sale. By keeping track of every detail of an account, these systems allow banks to identify and treat risks early, perform efficient collections, manage legal proceedings and recoveries and gain detailed insights into portfolio evolution, collections strategies, and resource efficiency. There are even simulation tools that allow you to test the waters with different strategies before implementing them.

The best thing about a dedicated financial suite, however, is how flexible it can be if utilized correctly. These systems are scalable and adaptable for banks of all sizes and, if you choose a system with a global reach, will comply with all local regulations.

Cons: There are few drawbacks to mention here. It could be argued that a “master of one trade” might be preferred to a ‘jack of all trades approach. There are also the obvious drawbacks of having to train your staff to use the software. However, these suites are designed to make debt collection easier, not more complicated, so they are often remarkably simple to learn.

The most effective way

Ultimately, the solution you choose to handle your NPLs (or prevent your pre-delinquent accounts from becoming NPLs) will depend on the culture, the debt landscape and the infrastructure of the country you're operating in, the number of customers on your books, and what strategies make sense to your business and your brand.

There are drawbacks and benefits to all options, but in the vast majority of situations, a specialized software solution offers the best balance. It offers an element of customer-centricity, greater flexibility for the banks themselves, and a platform that will continue to evolve in line with industry developments.