Managing

customers with
credit problems
M a y 2 0 0 9
Contents
03 Executive summary

04 Introduction

06 Overview of collections process management

08 Managing the customer account pre-delinquency

10 Managing delinquency

16 Managing non performing loans

18 Management of bad debt

20 Performance management of collections

22 Branch Vs centralised strategies

24 Conclusions
 M a n a g i n g c u s t o m e r s w i t h c r e d i t p r o b l e m s

Executive summary
s a result of the economic downturn, banks are experiencing

A an increasing number of non performing loans. As the potential

loss from these loans increases, management must focus on
optimising the overall collections process.
- This Finalta/Efma briefing is based on research with 42 banks
across Europe to understand practices and performance in
managing debt for credit card, mortgage and small business
customers.
- Banks frequently monitor customer accounts for early warning
signals, and many contact customers showing signs of financial
strain. Few, however, take proactive steps to provide financial
advice to these customers.
- Of the banks surveyed, those with a fully centralised process were,
on average, more effective at collecting debt. This process however
neglects the potential role of branch staff in the early stages of
delinquency
- Banks must also address the balance of customer service and bank
reputation against low cost, effective, debt recovery. The majority
of banks use KPIs to monitor the value of loan recovered. Few
however monitor customer service alongside this.

3
Introduction
This briefing is the product of a joint Finalta / Efma survey, published
at a critical time for our clients and members. The effects of the
financial crisis are emerging throughout Europe, and the economic
outlook is poor. Most EU countries are expecting little or negative
growth in 2009.
This economic downturn has had significant implications for
businesses and their employees. As a consequence, many personal
and business customers are experiencing financial difficulty. One
country has seen close to a 300% increase in the percentage of
delinquent loans over the last year.
Banks will come under increasing pressure as economic problems
persist, with staff focused heavily on loan quality and asset retention.
Doing so effectively is emerging as the principal challenge for many
banks. Banks must balance minimisation of losses and maintenance
of capital requirements, against the cost of collections and the
damage to customer relations and the bank reputation.
This briefing addresses how banks across Europe approach this
challenge. It is based on a survey with 42 banks from western Europe
and central and eastern Europe (CEE). Finalta also conducted follow
up interviews with several leading banks. Respondents answered
questions based on one of three loan products:
• Small business unsecured loans (less than €100,000);
• Mortgages; or
• Credit cards.
The briefing will examine the importance of minimising loan
delinquency, specifically:
• Monitoring customer accounts to identify and act upon those
showing signs of financial difficulty, before delinquency.

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It will then go on to address the management of delinquent loans,

from returning accounts to order to writing off debt. This includes:
• Processes and techniques to manage delinquent accounts in the
early and late stages of debt;
• Strategies to return the account to order;
• Support to branch and back office staff to fulfil their role in
collections;
• Communications between teams to improve collections efficacy;
and
• Reputational risks of selling debt.
Performance management of collections has become a high priority
for many banks. The briefing will also look at which KPIs banks
currently use in order to manage process and staff performance. It
will also look at the role of different units in managing the customer
experience throughout the collections process.
Lastly, the briefing will examine benchmark data emerging from the
research. Trends will be assessed to suggest best practices for efficient
and effective debt collection.

5
Overview of collections
process management
The collections process is complex. Furthermore, banks follow different
strategies, and at times different stages, of the collections process. For
the purposes of this briefing, Finalta has segmented the collections
process into four broad categories, as indicated in Figure 1. These are:
• Pre-delinquency: when the customer account displays warning signs
that it may become delinquent;
• Delinquency: early or minor underpayment / late payment;
• Non Performing Loan: when the account has been delinquent
sufficiently long enough to be recognised as a ‘problem account’. For
the purpose of this briefing, Finalta refers to non-performing loans as
those registered with a collections unit; and
• Bad Debt: the debt is written off. At this point some banks choose to
sell debt to external agencies, while others manage debt recovery
through internal teams.
These stages will be examined sequentially in the sections that follow.
Where results vary markedly between regions, or products, this will
be noted.

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 M a n a g i n g c u s t o m e r s w i t h c r e d i t p r o b l e m s

Four stages of loan recovery

Pre-delinquency Delinquency Non performing Bad debt

loan

● Stress signs ● Customer has ● Account is ● Debt is written

on customer missed a payment registered with off / sold
account but no or payment is late a collections team
delinquency
● Use of balance / ● Branch and/or ● Largely managed
transaction data back office by back office,
some branch

Figure 1
to monitor involved to return
customer account to order involvement to
account return account
to order
Source: Finalta

7
Managing the customer
account pre-delinquency
Before the customer has defaulted on their loan, there are often early
warning signs that the customer may experience financial difficulty. It
is critical that banks are aware of the opportunity to help the customer
manage loans. Proactive contact with and assistance to the customer
at this stage could help mitigate future loan delinquency.
82% of the banks surveyed by Finalta monitor or occasionally monitor
customers’ accounts for signs of financial stress. Good MIS systems
will help indicate accounts which may be at risk and can be supported
by credit bureau data. Such monitoring can be conducted as
frequently as on a daily basis, depending on the risk status of the
account. Business accounts may also be subject to site visits, where
the relationship manager (RM) can make a judgement on the level of
monitoring needed. Warning signals for small business accounts could
include decreasing turnover, or receipt of payment from fewer sources
(indicating a shortfall in client base). Other products, such as credit
cards and personal loans can be monitored through transaction and
payment data. For credit cards, for example, customers displaying
warning signs may have reached their limit on the card and make only
the minimum repayment each month. Banks may find it difficult to
identify early warning signals for mortgage customers, however.
Action upon these early warning signals can be critical to mitigating
delinquency on the customer account. 74% of banks indicated that
they would react to this information to prevent loan delinquency.
For many banks with small business customers, the RM is responsible
for acting upon early warning signals by contacting the customer. This
could be to discuss loan restructuring, reducing an overdraft or
enforcing covenants. Bank A provides its RMs with information on a
regular basis to allow them do this. Banks should have a process in
place to manage and monitor RMs contact of ‘at risk’ customers. This
is often achieved through an email information request from central
units to the RM. Once the RM completes the information in the CRM
or responds to the back office, the bank will know that he/she has
completed the task.

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For other customers, a letter is often sent to begin a dialogue and

prevent loan delinquency. 41% of the banks surveyed would use the
letter to invite the customer to contact the bank if they are concerned
about keeping up repayments. In some cases, the bank would reduce
the customer’s credit limit and advise them of the same through a
letter. However, only 21% of banks surveyed would offer to extend
financial advice to the customer.
Finalta has seen several examples of financial advice campaigns within
banks, usually directed towards personal customers. Such campaigns
can be relatively low cost to implement, for example budgeting tools
or financial management advice can be provided on the website. Best
practice banks provide a comprehensive service to customers both
online and in the branch. Bank B, for example, has trained branch
staff to offer support to customers with financial management
concerns. This role is unrelated to sales and is designed to build trust
and help mitigate problem accounts. A dedicated advertising
campaign has also been established to promote the service to
customers, emphasising that the financial advice is free and impartial.
The bank has also developed extensive branch literature to
complement the online tools that it provides. Branch staff can use
these as a discussion tool during the meeting, and customers can
take the information with them when they leave the branch. Although
most banks currently offering this service do so reactively, Finalta has
seen a trend to start contacting customers proactively to offer financial
advice. Customers are usually happy to receive this proactive offer of
assistance. One bank surveyed its customers and found a general
receptiveness to unprompted contact from the bank if warning signs
were identified.
Monitoring and intervention at this early stage may be effective for
some customer accounts, however, for many customers, the
progression into delinquency is unavoidable. How banks manage these
accounts is addressed in the next section.

9
Managing delinquency
Due to the market conditions, many banks have seen their estimated loss given default
increase. Consequently, action must be taken to manage loan delinquency efficiently and
effectively to minimise this loss.
Banks have different time or value triggers for action on a delinquent account. In some
cases, the bank will not react if the account is only over its limit by €100, or one or two
days delayed. Often this will depend on the bank’s shadow limit for a particular product
or customer. However, almost half of the banks surveyed will contact the customer
immediately after a payment has been missed.

Making contact with the customer

The banks surveyed use varying methods to contact the customer once the initial
delinquency had been registered. In western Europe, 52% of banks rely on back office
units to lead the contact with the customer. This could be through a combination of
automated mailings to the customer, call centre action or through a dedicated collections
team. In CEE, however, the tendency is to rely on the branch to contact the customer. In
this case, the branch manager or relationship manager would lead the process. Only 32%
of CEE banks indicated that the customer account is handled independently of the branch.
However, Finalta believes that this may change rapidly as banks build up collections teams.

Returning the account to order

When a customer is contacted at this stage, banks may provide options to return the
account to order. The most commonly offered solution is to ask the customer to make a
payment at their branch (Figure 2).

Q: What options do you provide to customers

when they have first missed a payment?
100%
86%
80%
62%
Percentage 60%
of respondents
40% 35%
27% 24%
20% 19%
8%
0%
Pay in Commit Freeze Pay in Reduce Pay Remove
Figure 2

the to pay payment / install- payment over interest

branch on an interest ments amount the from
agreed for a phone payment
date period
Source: Finalta / EFMA Collections Survey, 37 banks

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Directing the customer to the branch generates a good opportunity to talk with him/her.
If the customer is unable to make an immediate payment, a face to face meeting will
make it easier for branch staff to determine solutions with the customer. From these
discussions, the bank may be able to recommend an alternative product which will be
more manageable for the customer. Bank C for example, will offer an ‘exit’ product to the
customer, such as moving an overdraft to a medium term loan. A meeting is also a good
way to build the relationship with the customer, increasing loyalty and, ultimately, willingness
to pay.
62% of banks would also allow the customer to commit to paying on an agreed date. This
was more common for small business and mortgage customers. Only 35% would allow
customers to freeze interest or repayments at this stage, and 27% would offer payment
by instalments. Although the customer is being contacted often by outbound calls, the
option to pay over the phone is uncommon. Capturing a low value payment at this stage
while the customer is on the phone would be an ideal opportunity for the bank, particularly
for credit card customers.
Other ways to return the account to order could include extension of the mortgage term
creating lower repayments. In many CEE countries, customers have taken out mortgages
or loans in foreign currencies. The sharp decline in the value of their own currency means
these repayments are much more difficult to make. Restructuring to a local currency could
make it more affordable to the customer. The disadvantage of this is that banks may then
incur losses on this currency exchange.
Often banks can refer to a customer’s credit history and relationship with the bank to
establish possible reasons for the missed payment. Generally, customers fall into one of
three categories:
• They have forgotten to pay, and will pay soon or immediately after a reminder letter;
• They cannot pay as they currently do not have funds to do so; or
• They are unlikely to pay.
92% of banks will review the options extended to the customer according to the credit
history and relationship that they have with them.
Based on this analysis, banks can estimate the risk associated with each customer and
the appropriate actions that should be taken. Particularly for customers that cannot pay,
returning the account to order may require restructuring to accommodate temporary cash
flow problems. Knowledgeable and solution oriented staff can be critical to helping the
bank to achieve this. For customers that will not pay, or for those customers where explored
loan restructuring has not worked, banks must take more focused action.

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Managing non
performing loans
When the customer’s debt is recognised as a problem account, it is often
passed to a dedicated collections team to manage on a full time basis.

Management of the account

The transfer of non performing loans to a collections team may be a
fairly rapid process, or may take up to three months. This transition may
depend on the bank’s credit policy, the degree of centralisation and the
product. In most mortgage cases, accounts will have been passed to a
collections team by the end of the first month of delinquency. For credit
card customers, it is often a lot later, sometimes up to 3 months or
more. For small business customers, the speed at which the account is
registered with collections varies across banks. This is unsurprising as
relationship managers often remain involved for longer periods to try and
return the account to order. Bank D for example, will grant the
relationship manager an opportunity to work with the customer before
the account is passed to collections. If the RM thinks the account can
be returned to order, they are given one month to demonstrate progress
before the central unit takes over.
For many banks, the collections unit is a dedicated in-house team,
however in some instances banks outsource the function. Bank E
outsources part of its collections function after the loan has exceeded
a defined period of delinquency. Although still undertaken in the bank’s
name, the collections capabilities of this unit is perceived as being more
effective for problem accounts. One of the reasons for this is that the
unit has access to information sources that are unavailable to the bank.
An example is a database to help locate addresses and telephone details
of customers that the bank has been unable to contact. In other cases,
the collections process is outsourced to individuals who work
independently. Bank F for example, felt that its RMs did not have the
capacity to take on the additional work of collections. Rather than
compromising RM sales time with small business customers, the bank
assigns non performing loans to outsourced individuals that work on
commission, and who report into the RM. They will take on up to 150
non-performing customers each and are responsible for managing the
collections process of these accounts.

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In general, relationship managers and branch managers decrease

their active involvement in the credit management process at this
stage. However, 72% of banks will keep the branch informed through
some means. This could be through regular updates provided to the
branch, or through updates to the CRM or other relevant data platform
to which the branch has access. In some cases, branches have
access to a dedicated phone line to the collections unit which they
can use to obtain updates on accounts.
Keeping the branch informed of the progress of non performing loans
is important for a number of reasons:
• The customer is unlikely to see a distinction between branch staff
and back office functions. Indeed, the customer may still prefer to
use the branch channel to interact with the bank. If branch staff
are unable to talk with the customer about their loan product, it
could be a lost opportunity to return the account to order, particularly
if the customer has come to discuss possible solutions to credit
problems.
• Linked to this, banks should not lose sight of the customer
experience during the collections process. Branch staff that are
willing and able to help will demonstrate to the customer that the
bank values their business. Maintaining customer experience and
building a relationship could help ensure that the customer
prioritises the repayment to the bank. This is important if the
customer has additional debts to pay with other organisations.
• Keeping branch staff informed will help to manage the
appropriateness of sales calls. The CRM system should ensure that
staff are aware of customers that are in financial difficulty. This will
help staff to judge which products are appropriate to offer to the
customer. In addition, the risk of making a sales call to a customer
that is also being contacted by the collections unit will make staff
reluctant to conduct proactive sales calls at all. If the CRM data is
linked to collections activities, staff will have more confidence to
make these sales calls.

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Management of customer contact
Once the customer account is registered with the collections unit,
outbound calls are a common way to reach the customer.
59% of banks define the frequency of calls made to customers at
different stages of the collections process, i.e. 3 calls a week. This
frequency can be influenced by, amongst others, product type, risk
category for product and customer and the value of arrears. Other
banks use an automated dialler system whereby the customer is
called as frequently as the telephone cycle returns to him/her. The
danger with this practice is that customers may receive outbound calls
too frequently. In one case, Bank G was contacting customers multiple
times a day due to its automated dialling system. Furthermore, the
software used was unable to always connect the customer to a call
agent. This resulted in customers being cut off, despite not having
initiated the call themselves. Finalta’s survey showed that only 6% of
banks will contact customers on a daily basis, while 39% would
contact customers 3 times a week, and 55% would contact customers
once a week or less (see Figure 3).

Q: How frequently will a customer be contacted

through outbound telephone calls once their debt is
with the collections team?
Once a day
6%

Once a week or less

55%
3 times a week
39%
Figure 3

Source: Finalta / EFMA Collections Survey, 33 banks

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Many banks indicate that inbound customer calls are important.

Customer initiated contact with the bank often demonstrates a
willingness to determine solutions to debt problems. Effective
engagement of this customer contact is an opportunity to start a
dialogue to this end. However, of the banks surveyed by Finalta, only
26% prioritised incoming calls to the collection unit. Respondents for
credit cards were more likely to do this than for mortgage or small
business banking.

Supporting call agents to manage customers

During an economic downturn banks are likely to find that more high
value customers suffer financial difficulties than previously. This is
significant as a poor customer experience through the collections
process could deter the customer from maintaining a relationship with
the bank. This is particularly pertinent where small business customers
are also high value affluent clients. How these customers are
managed is therefore critical to maintenance of an otherwise lucrative
relationship. Communication between units and complete CRM data
is essential.
Bank H has implemented a programme to professionalise the
collections unit and ensure that customers receive good service, even
during difficult interactions. The bank has increased training, including
empathy training, for collections staff. In addition, it revised scripting
to help staff to manage difficult conversations. Monitoring customer
service through call recordings, or complaints analysis, will help banks
to supervise staff conduct.

15
Training and experience of staff is critical to achieving performance in
collections. Friendly and persuasive agents are often the most successful
at obtaining payment or promises to pay. In addition to remaining tactful
(although still assertive), staff should be able to explain things clearly to
customers. This could include an overview of how the customer’s debt
is calculated, or how possible restructuring may work. Negotiation skills
are key, as is the ability to remain calm even if the customer begins to
get angry. Banks can undertake simple training modules to help staff
develop these core skills in collections and ensure a professional, yet
effective, service is delivered.
Scripting for staff will also help guide negotiations, with prompts of
effective ways to interact with the customer. Two thirds of banks surveyed
would provide scripting to staff. This practice can assist less confident
staff and ensure the right tone is applied. This is especially important if
staff are new to the role. Banks should be careful to avoid repetitive
scripting, however, particularly if the customer is called more than once
a week.
Staff can find it difficult to move from one call to another if customers
are at a different stage of loan delinquency. It can therefore be useful
for agents to review the customer case history before a call is connected.
This will help prepare staff for the type of conversation that will be
needed. However, a balance should be found to ensure that productivity
is not negatively affected by lengthy preparation times. If used, this
review time should be carefully managed and monitored to ensure staff
maintain reasonable call frequency. Ensuring that call centre staff deal
with customers at the same stage of delinquency could be an effective
way to help prepare for each call, though it may also be useful to assign
staff to particular cases to retain familiarity.

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Returning the account to order

At this stage of the process, the options to return the account to order
that are provided to the customer vary from initial delinquency stages
(Figure 4). Banks are more likely to offer payment by instalments, or
to reduce the repayment amount. It is marginally less likely that they
will encourage the customer to commit to a payment on an agreed
date or to remove the interest amount from the payment.

Repayment options provided to customers at different

stages of delinquency
Percentage
of respondents
Delinquency stage
100% Non performing loan stage
85% 86%
80%
59% 62%
60%
41%
40% 32% 35% 32%
27% 24%
20% 18% 19%
8%
3%
0%
Pay in Commit Pay in Freeze Reduce Pay Remove
the to pay install- payment / payment over interest
Figure 4

branch on an ments interest amount the from

agreed for a phone payment
date period
Source: Finalta / EFMA Collections Survey, 33 banks

It is increasingly important that banks help customers to find a

resolution to their debt. In the current economic conditions, it is much
harder to sell bad debt on. In addition, the value of any collateral
secured against the loan is declining and the ability for customers to
take on further lending is limited.
If the customer account is not returned to order at this stage, however,
the bank will need to address the loss and write off the debt.

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Management of bad debt
Banks write off debt at different stages after the initial
delinquency. Some banks will fully write off the debt
after the first or second quarter of delinquency. Others,
however, will write off debt as much as two years after
the initial missed payment. This decision of how
quickly to write off debt may be influenced by the risk
rating for a particular industry or product group. Bank
J for example does not have a standard approach, how
the debt is managed depends on both the customer
and the product. Small businesses that work in real
estate may have a higher risk rating to those working
in other, more stable industries. The probability that a
loan in a higher risk product will be rehabilitated is
smaller than for a ‘safer’ industry. Similarly, customers
with a buy-to-let mortgage may be deemed more at
risk of non-recovery than those customers whose
mortgage is for their principal home.

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45% of banks surveyed would sell debt to an external

agency at this stage. In other cases, banks
commission agencies to assist them in the debt
recovery and any legal proceedings required. How this
debt recovery agency is chosen is important from a
reputation perspective. For the customer, legal
ownership of the debt by a new body will not
necessarily remove the perceived link to the bank.
Choosing an agency based on customer service or
industry ratings is therefore important. Whilst the
majority of banks that sell debt choose an agency
based on reputation as well as price, some banks do
not. In one country it is known for customers to be
followed by debt collection agency staff, wearing
brightly coloured clothing identifying them as debt
collectors. The idea is to shame customers that will
not pay into resolving their debt issues. However, the
impact on the bank reputation is damaging.

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Performance management
of collections
Managing and improving performance of loan recovery is particularly
significant as banks are committing more resources to collections. Bank
K, for example, expects to increase the percentage of time branch sales
staff spend on collections to 50%. With such large commitments of
resources, it is critical that banks ensure productivity is achieved. In
addition to judging the efficacy of the collections process, KPIs and
targets will motivate staff to meet required performance criteria. This
can apply to branch staff as well as staff in central collections units.

Metrics to measure performance

Of the banks surveyed by Finalta, the top three KPIs used to manage
collections performance relate to the value recovered and the volume
of accounts brought back to order (Figure 5). 70% use the percentage
of loan value recovered as an indicator of collections performance. Banks
are also measuring how effectively staff interact with customers. 10%
of banks monitor the number of promises to pay as a key performance
indicator. Using this target, bank L found that staff would try to obtain a
commitment to pay in order to meet their targets. However not all
commitments result in payment. A more effective measure of process
performance is how many of the promises to pay obtained by an advisor
are kept. This is measured well by the number of kept promises, or the
ratio of promises to pay to kept promises. 20% of banks use the latter.

Q: For the collections unit, which KPIs are

used to monitor performance?
Percentage
of respondents
80%
70%
70%
60%
50% 47%
40%
30%
23%
20% 20%
17% 17%
10% 10%
7% 7%
3%
0%
% % Value Ratio Time No. of No. of Customer Volume No.
value accounts per FTE promise spent kept promise service complaints automated
Figure 5

recovered back to per day to pay/ with promise to pay measures received contacts
order kept customer with
promise customer
Source: Finalta / EFMA Collections Survey, 30 banks

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Performance management of staff

Performance monitoring is, for many banks, focused on financial performance. Bank M,
for example, currently has commission based targets for its collections unit. Agreements
with outsourced agents are also based on commission. Bank N links a substantial amount
of staff pay in collections to performance targets on a monthly basis. The use of larger
sums as incentives is important to motivate performance in an often challenging job.
Bank N also finds that substantial performance bonuses are an effective way to attract
customer service agents into collections. The customer management skills that these
agents bring is often useful in the collections process. Another bank is using incentives
to encourage RMs to identify early warning signals on business accounts.

Management of customer experience

A balance should be found between financial performance targets and customer care.
Relatively few banks measure customer service or complaints data. One bank has a
much lower call answering speed in collections. Only 70% of inbound customer calls
are answered within 20 seconds, compared to 85% in other units. As indicated earlier,
the customer experience of collections can be critical to loan recovery and to future
customer retention. One bank measures the number of customers coming back to the
portfolio as an indicator of customer care and performance. Calls can also be recorded
in order to monitor customer service. Best practice banks also use operational measures
in their process management to track the customer experience.

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Branch Vs centralised
strategies
Finalta carries out benchmarking and best practice analysis in key
banking practices. The survey results provide initial insight into
collections strategies and which processes can lead to high
performance.
Finalta asked banks which units are responsible for managing each
stage of the collections process (Figure 6). The stages of ‘Initial
Delinquency’ and ‘Major Delinquency’ are defined as a small delay in
payment and a material delay in payment respectively. ‘non performing
loan’ is the stage at which the debt is usually registered with
collections. The level of branch involvement generally decreases at
each stage of delinquency. However, CEE banks tend to keep the
branch involved for longer than western European banks. Small
business products are also more likely to retain branch involvement
during the early and mid stages of debt collection.
Finalta also asked banks to indicate the percentage of loans recovered
at each stage of the collections process. Banks were categorised into
those whose collections process is fully centralised (i.e. no branch

Units that lead the collections process

at each stage of delinquency / debt
100%

80%
43% 49% 45%
Percentage 60% 71%
of respondents
40% 33%
41%
20% 55%
29%
24%
10%
0%
Initial Major Non Debt
delinquency delinquency performing written off
loan
Stage of debt collection
Figure 6

Branch led Branch and back office led Centralised

Managed internally External debt collection agency

Source: Finalta / EFMA Collections Survey, 42 banks

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involvement at any stage) and those where some

branch involvement is retained (at least in the initial
stages of debt recovery). Figure 7 shows the
average debt recovered at each stage for these two
processes. The graph indicates that at the Initial
Delinquency stage, banks with back office led
collections units only marginally outperform those
banks that retain branch involvement during all or
part of the process. However, as the stage of debt
develops, centrally led processes recover on average
a higher percentage of the debt before it is written
off than those banks that kept the branch involved.
Nonetheless, branch involvement appears effective
at the initial delinquency stages. This indicates that
where appropriate, branch staff can be important
to returning an account to order, particularly where
a relationship manager is involved. Often, the RM
would have the product and customer knowledge
to discuss restructuring options with the customer.

Average debt recovered at each stage

of the collections process
60%

50%

40%

Percentage 30%
debt recovered
20%

10%

0%
Initial Major Non performing Debt
delinquency delinquency loan written off
Figure 7

Stage of debt collection

Fully centralised process Process includes some branch involvement

Source: Finalta / EFMA Collections Survey, 31 banks

23
Conclusions
The financial crisis has created pressure for many banks, which is likely to increase as the
economic climate worsens. As instances of non-performing loans rise, the collections
process for delinquent accounts is now the subject of heightened management attention.
Highlighted by this research, there are key questions that will need to be addressed.
How banks choose to monitor accounts for early warning signs will be a critical element
in the process. Effective use of monitoring will allow the bank to begin dialogue with
customers and develop strategies to minimise loan delinquency. Introducing or reinforcing
monitoring strategies will therefore protect the bank from unnecessary risk of loss. This is
particularly pertinent as the market value of collaterals declines for secured loans and the
amount of loss given default rises.
Many banks have a centralised approach to managing collections, some even from the
stage of initial delinquency. This approach has its merits in efficiency and benefits from a
full time team who work with customers to recover or restructure accounts. However,
particularly for business customers, branch involvement at the early stages of loan
delinquency can also be effective to bring accounts back to order. Familiarity with products
enables relationship managers to provide a solution oriented service to customers, with
constructive restructuring packages that are accompanied by careful monitoring.
Banks must address the trade off between effectiveness, i.e. the percentage of loans
recovered / accounts brought back to order, and the efficiency, i.e. cost, of collections.
The most effective process within collections may be to assign a case worker to each
customer, although this may not be the most efficient process. Critically, banks should
identify the potential for recovery from each customer early. Well judged customer
segmentation should be used to determine the frequency of contact with the customer
and the type of solutions offered. This will help to optimise both efficiency and effectiveness
within collections.

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Banks should also consider carefully the relative costs and benefits of managing the
customer experience throughout the collections process. The profile of a customer with
a non-performing loan is changing. A profitable affluent customer may also be a small
business customer in financial difficulties. Similarly, a high earning customer may lose
his/her job and struggle to pay their mortgage. The essential question is if the long-term
retention of the customer, and bank reputation, is more critical than the short-term
recovery of the loan.
In conclusion, banks must define their overall approach to collections, ensuring that it
manages the pipeline of non performing loans. This includes those loans that have not
yet become delinquent. Areas of weakness in the process should be identified and a
strategy developed to address these. Banks must benchmark performance at different
stages of the process. This will identify where appropriate trade-offs can be made
between efficiency, effectiveness and the customer experience.

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Finalta is an independent advisory company that specialises in providing benchmarking
and best practice services to financial institutions. We are currently working with a
number of European banks to help them improve Branch Productivity, Service Quality
and Collections Management.
The European Financial Management and Marketing Association (Efma), is the leading
association of banks, insurance companies and financial institutions throughout Europe.
On a non-for-profit basis, Efma promotes innovation and best practices in retail finance
by fostering debate and discussion among peers supported by a robust array of
information services and numerous opportunities for direct encounters. Efma was formed
in 1971 and gathers today more than 2,450 different brands in financial services
worldwide, including 80% of the largest European banking groups.
The data provided in this briefing is drawn from bespoke research and Finalta’s ongoing
service quality and sales productivity programmes.

Finalta
1, Little Argyll Street
London
W1F 7BQ
Tel: +44 207 851 9100
Fax: +44 207 851 9101
www.finalta.eu.com

Efma
16, rue d'Aguesseau
75008 Paris
France
Tel: +33 1 47 42 52 72
Fax: +33 1 47 42 56 76
www.efma.com

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Copyright © 2009 Efma. All rights reserved

This report not be reproduced or redistributed,
in whole or in part, without the written permission of Efma.
Efma accepts no liability whatsoever for the actions of third parties in this respect.
Managing customers with credit problems
May 2009