Any way you look at it, the last few years have been crazy for asset-based lenders. Nearly three years ago, the national emergency associated with COVID-19 dramatically slowed economic activity and deal flow. Then, as federal funds helped fuel the post-pandemic recovery, supply chain disruptions sent asset values and overall inflation soaring. As demand increased, deal flow recovered and excess liquidity helped ensure that default rates remained low. Long story short – what began as the worst of times quickly became the best of times.
More recently, though, the liquidity that helped drive demand and support loan performance has been absorbed. As supply chains have recovered and interest rate hikes have begun to cool demand and deal flow, a new reality is taking hold. For many lenders, default rates are now approaching or even exceeding pre-pandemic levels. At the same time, regulatory compliance and reputation management have never been more complicated or more costly.
Adding to the vertigo lenders might be feeling from the roller coaster ride they’ve been on is a phenomenon that has always existed but is now more powerful than ever – the socially connected borrower. Aggrieved customers can do more harm to a lender’s brand and reputation than at any time in history. The kinds of harmful stories that used to be confined to the teller’s circle of acquaintances can quickly reach hundreds, thousands or tens of thousands. Even in the most justifiable of circumstances, the risks are real.
Given these circumstances, asset-based lenders need to ensure that they are employing the most rigorous, ethical, and empathetic collection and recovery practices. Anything less, and they face increased risk of every kind: financial, regulatory, and reputational – all of which can lead to serious and sometimes lasting financial repercussions.
Set against this backdrop, many asset-based lenders are finding that they are ill-equipped to deal with an increase in at-risk balances held by socially connected borrowers. After nearly two years of historically high performance and low defaults, their collection “muscles” have deteriorated. In many instances, their collections personnel are unskilled and uninvested in the customer relationship. And because the function is exclusively reactive, there is no capacity for recognizing and addressing at-risk balances before they become a problem.
Over 25 years of partnering with asset-based lenders and equipment finance companies, we’ve developed a collections and recovery playbook designed to optimize a lender’s portfolio performance and dramatically reduce its risk. In the playbook, we have identified 6-key elements of a high-performing collections function.
- Character: The right people
- Culture: A corporate ethos driven by ethical and regulatory compliance
- Curiosity: Digging deeper to find innovative ways to address risk earlier
- Capability: The tools great people need to do their best work
- Compassion: Human interactions in an increasingly impersonal world
- Commitment: Collections as a strategic partner
Breaking these five elements down in context, it’s possible for a lender to assess their collections capability and to identify areas where they may want to focus on operational improvement or consider the possibility of outsourcing to a firm that specializes in collections and recovery.
Character – The Right People
This, of course, seems obvious. What job doesn’t require “the right people?” But in collections, it’s important to recognize that these are skill positions. In our experience, collections are not a suitable task for unskilled and/or poorly equipped professionals. Optimally, personnel who are charged with managing personal interactions with borrowers should have years of direct experience working with customers in a wide variety of circumstances. Those who are new to the discipline should be under the direct oversight of seasoned professionals who have successfully navigated relationships between lenders and borrowers.
Culture – Driven by Ethical and Regulatory Compliance
In our experience, there are two ways to think about Compliance: Something you do or who you are. The most successful collection operations make compliance a part of their DNA. Collections professionals who are obsessed with compliance are motivated to look beneath the surface of compliance to address not only the letter of the rules but the spirit of them too. Reputations are built on one-on-one relationships. Lenders need to know their collections teams are adept at managing productive, compliant relationships.
Curiosity – Digging deeper to find innovative ways to address risk earlier
The most successful collections operations have an innate curiosity. Often, at-risk balances indicate something deeper or broader affecting the customer, the lender, or both. A single collections or recovery assignment might signal a trend affecting multiple lenders, or a steepening of a borrower’s risk profile. Eventually, this kind of curiosity leads to a kind of sixth sense, giving collections operations the ability to identify problems before they become difficult to manage. Similarly, curiosity is a critical component of empathy, which is addressed below.
Capability – The tools great people need to do their best work
When lenders are confident the professionals they have tasked with managing collections have the talent, skill, ethics, and desire to perform in their roles, they need to be sure they have the resources they’ll need to excel. That means training to ensure they’re familiar with the latest skip-tracing techniques. It also means they’ve been empowered with the technology to access the business intelligence they need to identify emerging collections trends by industry, region, or asset type.
Compassion – Human interactions in a too-impersonal world
In a socially connected, social-media-powered world, perhaps no attribute matters more when working with borrowers to resolve their obligations. The collections industry suffers from the misapprehension that all collections professionals care about is the balance due. But the best collectors know the balance due is owed by a person – someone who very likely never expected to be in the circumstances they’re in and who is just as eager to find a way to resolution as their lender. These interactions are fraught with potential for reputation and brand risk. Lenders must be certain their collectors have the talent to treat every case as a person, not just a number.
Commitment – Collections as a strategic partner
Not long ago, collections and recovery were considered one-offs by many lenders. As a result, customer interactions sometimes fell short of the lender’s ordinarily high standard of service and care. In a socially connected world, any customer-facing function that does not meet the lender’s brand’s standards presents a risk. But when the people serving in these functions share the same objectives and standards, that risk is reduced and the financial outcomes are enhanced.
Collections, Recovery, and the Lender’s Brand
When all six of these key elements or attributes are present, collections operations routinely achieve industry-beating performance. In our direct experience, defaults can be reduced by as much as 80% or more, and the need for asset recovery reduced by 40%. Perhaps even more important is the ability these specialized skills and capabilities bring to help avoid trouble altogether.
Skilled collections operations can identify portfolio risks by leveraging data, strong field representation, operating know-how, and informed professional instinct to act on portfolio threats lurking in nearly every lender portfolio. And, by solving potential problems before they ever occur also avoid the social-media-enabled reputational damage that can exacerbate the harm that collections can sometimes lead to.
We firmly believe that collections and recovery can and should be an extension of the lender’s brand and reputation, with the same attention to customer care and attention to detail. By doing so, collections operations, either in-house or outsourced, can become an important strategic asset. As our economy cools, and with more threatening clouds ahead, investments in strategic collections and portfolio optimization make good business sense.
About Brian Noble
Brian Noble is the co-founder and CEO of Asset Compliant Solutions (ACS). Celebrating its 25th year, ACS is one of the Equipment Finance industry’s leading portfolio optimization, collections, and recovery company.