Last week, I had the pleasure of chairing the Online Collections Technology Think Tank, sponsored by Credit Connect, something I always find enlightening.
Reflecting on the conversation there were a couple of trends that really stood out this time around.
A low growl
Firstly, the trend around arrears levels which, surprisingly, has not really seen a noticeable upsurge, on average at least. Certainly, certain demographic sectors—those with lower incomes or exhibiting other characteristics indicative of financial vulnerability—are feeling the strain. However, a substantial portion of the population still appears to remain remarkably resilient and successfully managing the financial pressure, at least for the moment.
Over the past couple of years, many of those who remained employed did manage to put away some savings. There’s a theory suggesting these savings are now serving as a buffer against these escalating prices… individuals with good credit scores can also adopt the same strategy, by taking on more debt, albeit at increased interest rates.
Using the standard business processes, that we have used and have worked for the last 30 years, it is easy to assume everything is fine… arrears levels look in line, right?
However, looking deeper, once these buffers are exhausted, or as rates continue to increase, the risk of over-indebtedness will increase, over time leading to increasing arrears levels… so are we living on borrowed time? Maybe…
The panel’s consensus was that barring any unexpected external shocks, any increase in arrears levels is still likely to be gradual. The good news is that there will be time to react… however, the bad news is there is still danger… the danger of averages that is.
Focusing solely on averages to measure performance, is convenient, easy, however also contains inherent risk. The risk is that averages can often mask underlying performance issues in a process.
For this reason, it is also important to monitor outliers and what is going on in the distribution tails. These arrears can often tell a different story and act as a critical early warning indicator for longer-term or hidden trends.
This might be exactly what we are looking at here with arrears levels, in that it may be the tail that tells the story (pardon the pun)… so something we need to monitor closely going forward.
The end of vulnerability?
A second notable trend pertained to the rapidly evolving definition of financial vulnerability. This term, employed for almost a decade now, has been instrumental in identifying customers who might be susceptible to financial detriment due to personal circumstances.
The label has galvanised an entire industry to take action, changing it beyond recognition, including driving widespread adoption digital, making employees feel better about their jobs and of course helping many customers… all without really a huge amount of negative financial impact.
Nevertheless, the term’s definition appears to be broadening. We have already had vulnerable, potentially vulnerable and now, with consumer duty are looking for characteristics of vulnerability. So, is the term becoming too broad and is the label becoming redundant?
Probably not, labels are still important and are still needed to trigger crucial discussions and investment. However the broadening to a wider spectrum of types of vulnerability is good news, it better reflects the diverse realities of our society.
We are undoubtedly witnessing a more fundamental underlying shift towards individualized customer treatment, a theme reinforced under the new consumer duty.
This shift underscores the necessity of ensuring all customers receive treatment that yields good outcomes. Our challenge now lies in customizing treatment to meet individual needs. Be it training agents, gathering data to present a 360 view of the customer, we are going to need new skills and data to enable tailored interactions going forward… We need to ask the right questions, provide the right treatment, at the right time. It is going to be a new front line of activity in the new world – post Consumer Duty at the end of July.
Lastly, over the weekend, all this discussion of inflation, spending, and debt sent me in a spiral of concern around the perils of hyperinflation.
Hyperinflation is typically defined as inflation above 50%, a rate which is eye-wateringly high even vs the 7-9% headline rate we have today.
Now I am not an economist, and I need to highlight that those that are, and in the know, are playing down any risk of this happening. They do not appear to be worried.
However, this being said, much like the quiet before a gathering storm, by joining the dots, my fear is that conditions appear to be building.
The internet is a wonderful thing and a quick search online yields several causes of hyperinflation.
- Excessive Money Supply – Governments printing or creating money unsupported by economic growth
- Demand-Pull Inflation – Where the supply is insufficient to meet consumer demand for goods and services, consumers still buy, so prices go up
And, looking back over the last few years, we seem to be aligning with a couple of these criteria already.
- Cheap money supply and quantitive easing
- Limited economic growth
- Supply chain issues, more recently due to COVID and more recently workforce shortages.
Wrap all this up with many folks, those with savings also appearing to be spending money, because…
- They can – look at the demand and pricing for holidays this year
- Wait and prices will only go up further
At a surface level, this appears a heady mix, emulating some of the forces and risks above.
… demand is also increasing putting more pressure on prices.
It may explain, in part, why despite raising interest rates to control inflation, it does not also seem to be working… is this the starting of a hyperinflationary cycle?
I certainly hope now and I will now take off my tin foil hat, trying not to return to the bunker for at least the rest of the week… I promise… however if there is even a remote risk of this we need to be pragmatic, have plans in place, and make sure we are aware enough to spot the signs early.
So all eyes are on the inflation rate for the next couple of cycles. Hopefully, it will flatten out, but something to watch closely.