5 minute read
Current economic conditions customer behaviour and mitigating risk
by AICM
Daniel Greenhoff MICM COO Recoveriescorp
At the end of last year, it was thought Australia’s economy would be hitting a sweet spot around now. However, the current instability says otherwise.
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At the crux of this fragility are many factors. These include strong economic expansion, inflation increases, reduced stimulus, debt program resumption, soaring energy and food prices, Russia’s invasion of Ukraine, a low unemployment rate, and a demand for higher wages.
To help you identify specific credit risks in the midst of this, we have identified several monetary factors currently impacting consumer incomes and expenses and ultimately affecting their behaviour and ability to repay debt.
Impact to incomes
Right now, unemployment is down to 4 per cent, with many predicting a further drop in Q4. Between January and February, the number of hours people worked also increased by 8.9 per cent in seasonally adjusted terms.
The national Wage Price Index (WPI) rose by 0.7 per cent in Q4 21, with the annual rate now at 2.3 per cent. Meanwhile, the March 2022 flood disaster relief and support packages banks and the government provided led to pockets of money coming in. In theory, these factors should be having a positive impact on income and affordability and boost debt repayments. However, the other side of the affordability coin is causing uncertainty.
Impacts to expenditure
Median weekly advertised rental rates increased 4.7 per cent over the three months to December 2021 – the largest of any period over the past five years.
Household spending increased in seven categories in 2021 – the largest in recreation and culture (+11.3%), food (+9.7%), and clothing and footwear (+9.6%). The Consumer Price Index (CPI) also rose 2.1% this quarter and 5.1% over the 12 months to the March 2022 quarter. With the Eastern Europe conflict further driving up prices, inflation will continue to steadily increase next quarter and outpace wage growth.
The resulting credit risk
Given the economic instability, customer sentiment and confidence are being affected, leading to credit risk.
We are seeing a consistent downward trend in Arrangements and Promise to Pay in Full values as consumers are hesitant to commit to larger amounts.
In April 2021, the average payment value of Arrangements was $170, while Promise to Pay in Full were around $1,400. Jump forward to March 2022, and these have dropped to $160 and $1,100, respectively – with further drops expected.
While payment arrangements have remained consistent in banking and utilities, transport, telecoms, and insurance has seen a notable increase given the rising CPI.
Promise to Pay in Full kept rates have remained low during Q3 quarter given the rising costs but appear to be trending upwards heading into the next quarter. Meanwhile, while Arrangements were beginning to recover after the December period, they noticeably dropped in March due to external factors.
This drop in Arrangements comes alongside a rise in hardship referrals and in costs of living and uncertainty. Customers either do not have the funds or are concerned about the future and want to retain as many funds as possible.
The rise in hardship referrals is also due to the external economic factors we are seeing, including inflation increases, rising rental rates, energy disconnection resumption, and soaring prices.
We know that currently, only one per cent of the population is accessing corporate hardship loans. Unfortunately, those not applying risk falling further into hardship and have a bigger chance of long-term hardship.
How to mitigate the risk
With these conditions and trends in mind, what can you do to reduce the risk for your business and your customers?
Firstly, many customers will settle their accounts if they are contacted early which has seen an increase in organisations choosing to partner with collection specialists in a first party capacity who have both the resources and technology to achieve this.
Therefore, make sure you introduce earlier collection programs and engagement as early as 1-7 days past due date, especially with high-risk customers. This action can lead to a significant lift in repayment. It can even improve relationships, as customers appreciate you reaching out to remind them.
To support customers earlier in their credit lifecycle, a strong digital engagement strategy is essential. Giving customers the opportunity to self-serve and contact their provider 24/7 via online portals has never been more important.
In fact, our research shows that portal arrangements are up this quarter as customers continue to tap into self-serve options, with the exception of government.
Generally arrangements via portals rose from 60 to close to over 300. Insurance increased from 60 to 100, while telco and utilities arrangements grew from 200 to over 300.
Not only is self-serve convenient, but it can also be a way for those suffering from mental health struggles, or embarrassed about their situation, to deal with their debt as it avoids the need for direct human contact.
The most effective channels we are seeing driving customers to self-serve across our industries (banking and finance, government, insurance, utilities and telco) are SMS, letters with QR codes, and interactive voice response. So focus on these.
Secondly, you could consider introducing incentives for customers to drive repayments. For example, you could offer a 5 or 10% discount for early payment, or pay this month and don’t pay next month (2 for 1 mentality).
While this may seem like an outlay, the costs associated with this are usually recouped by not having to chase payment.
Summary
We anticipate 2022 will be financially stressful for customers and SMEs as the economic conditions above roll on and bushfire and flood seasons approach. Customers will need increased financial support and customer service, and if you don’t get ahead with engagement campaigns, your nonrepayment risk will be higher.
Daniel Greenhoff MICM
