14 minute read
Managing credit risk for improved cash flow in the digital age
by AICM
Nikki Dennis MICM Managing Partner/Co-Founder SalesCRED
We live in an increasingly complex and digital driven society. If you’re like most people, you spend on average 5.5 hours of your day looking at your phone screen. Think about that for a second; taking the average life span, that’s 17 years of your life spent on your phone! Yet despite this, digital receivables and collections technology is still very much underutilised within Australia, and in fact, around the world.
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At a time when we are facing emerging credit risk from the largest quarterly and annual increase in inflation we’ve seen in Australia since 2000. Not to mention rising fuel prices from the ongoing crisis in the Ukraine, labour shortages from the continuing pandemic fallout, and recent figures from the Australian Energy Regulator showing average debt for gas and electricity rose 12% in the past year alone – it is essential that as credit professionals, we review and keep abreast of new ways in which we can respond to, and better manage these risks.
Ask many credit professionals what they think digital communication is and they will usually say SMS and email. But that is at its most simplistic and missing the real advantage of advanced digital solutions. We now find ourselves on the brink of an explosion in digital capability across the credit industry that incorporates AI, machine learning and other popular platforms such as whatsapp, live chat bots, and conversational AI, to take communication with customers to the next level. Within the current credit risk climate, the timing couldn’t be better to explore how this new and emerging digital technology may be applied for more effective cash flow and collections management.
And for those who question, is the market ready for this? Let’s reflect on how ready for this we are!
Living in the digital age
From the minute we wake up most of us are on our phones turning off our alarms and checking our news feed or messages. Digital communication is everywhere. We use our phones to check the weather so we can dress appropriately, to get us to work quicker by dodging traffic hold ups. We are emailed with updates on our child’s day at school, get reminded when our dentist appointment is due, when our account is going to be debited with the latest phone bill, and when our evening curry is being delivered. No wonder we are on our devices for roughly 33% of our waking life.
How many of us receive regular letters now or answer phone calls from unknown numbers? If you’re like most people, the answer is very rarely or never. According to a recent study, 87% of people won’t answer the phone any more to numbers they don’t recognise and Australia post have reported over a 50% decline in letters being sent since 2008.
On the other hand, according to recent marketing statistics conducted by Swift Digital, the SMS open rate for Australia is 94%, 86.1% of recipients open SMS messages within 30 minutes of receipt and 54% of people claim significant frustration if they can’t send a business an SMS.
And yet, how many times as a customer have you received a bill or a reminder digitally that you can click on and pay seamlessly, without having to scramble to find a letter/invoice with an account number on or other details you may need to key in? Or, where you can quickly and easily propose a payment arrangement on or lodge and resolve a dispute without having to spend a lifetime on hold trying to speak to someone?
What if?
Instead of making monotonous outbound calls to distracted customers who would rather the option of settling their account in their own time – your staff can have more effective conversations with customers who have chosen to speak via phone and prefer to settle their account that way? Many digital solutions provide the option to speak with someone. The customer can have the opportunity to choose a preferred time to receive a call when it’s convenient for them to talk, or they can choose a warm transfer through to inbound staff. This is a much more cost effective and efficient use of resources and will make for a much better experience for your staff and for your customers, who are less likely to have to wait in long inbound queues to speak to someone.
Similarly, traditional letters sent by mail still have their place with older generations for example or for compliance purposes but are becoming less and less relevant as an effective way of communicating in today’s digital age. What if, instead of waiting potentially days for a letter to be posted, received, and actioned, using digital communication your customers can easily access invoices and correspondence via their device?
With smart digital solutions, payment can be actioned much sooner for credit teams at a fraction of the cost of sending hard copy letters and making phone calls.
The market is ready
Particularly relevant research conducted by Global Management Consultants, McKinsey and Company on 1000 customers, and reported in ‘The Customer Mandate to Digitize Collections strategies’, focuses in detail on the customer experience of credit delinquency. Here are their findings:
“Essentially, customers told us that their contact preferences and responses are guided by personal considerations that bear little relationship to the risk categories and contact protocols worked out by lenders. Most customers prefer to be contacted and act through digital channels, while a smaller segment remains more responsive to traditional contact methods. From these findings, we have concluded that issuers need to better understand their customers’ diverse preferences and then design a sensitive multichannel contact strategy to address them.”
Interestingly, the study found that most lenders still predominantly used traditional contact strategies based on customer balance, risk profile, and days delinquent. Those that did utilise digital strategies, did so predominantly on the low-risk accounts and largely abandoned this practice past the 30 days overdue mark, in favour of phone calls and letters.
However, a key takeaway from this research shown in the diagram below, was that customer
Contacting customers through preferred digital channels improves effectiveness most significantly in the 30-plus days past-due segment
preferences for digital channels remained pronounced throughout delinquency, most significantly in the 30+ day segment, and were not aligned to or affected by issuer-assigned risk profiles. These findings shine a very clear light on the path that creditors need to take to achieve more effective responses to credit risk factors and improved collections.
So, now we know our customers are ready to embrace digital communication in all stages of their credit delinquencies, let’s explore what these latest digital technologies are and how they can be applied to respond to credit risk more effectively.
How AI driven digital technology can be applied to respond to credit risk more effectively
Globally there is a continued surge of investment in AI research and applications. Research firm IDC estimates the worldwide AI market will exceed US$500 billion by 2024. There is a lot of talk currently about AI and machine learning in digital engagement but how can it be effectively applied to follow up on customer delinquencies?
At its most basic, AI is intelligence demonstrated by machines. Machine learning is a subset of AI that is concerned with how that intelligence is acquired. It analyses patterns in existing customer data and applies that learning to predict future decision outcomes. Outlined below are some ways in which AI and machine learning are incorporated within some of the leading digital engagement solutions to respond more effectively to credit risk.
1. Improved Customer Engagement through Digital Platforms
Improved customer engagement and communication at all stages of the credit process from billing right through to late-stage collections are paramount in addressing credit risk effectively. Early intervention is key in detecting and responding to cash flow issues and potential insolvency, payment difficulties, customer vulnerability, disputes, or simple evasion or avoidance, so that the appropriate measures can be taken to ensure prompt payment or provide the right assistance.
Current digital solutions incorporate popular platforms such as SMS, Email, What’s App and Online chatbots to communicate seamlessly with your customers. Messages can include QR links to advanced payment portals which allow customers to make frictionless re-payments through a variety of convenient channels and with flexible repayment options.
Such portals can also have inbuilt dispute management and hardship solutions to help customers at find a solution in their own time at their convenience, enabling a much-improved customer experience. Improved engagement at any stage of the delinquency process drives higher collection rates and reduces the risk of default.
2. Intelligent receivables management
Think of a standard automated collections workflow situation – currently different workflows may be typically set up for varying credit risk profiles based on factors such as dollar value, age of debt, industry type, geographical regions, and previous payment
history. As such, for businesses who currently automate workflows, there may be 5-10 different workflows set up for customers based on their credit risk profile with different messaging and methods of contact.
AI driven digital engagement technology takes your receivables management to the next level. It not only allows for automated workflows, tailored messaging, and segmentation, but analyses how a customer responds to these messages, in what timeframe, what platform they prefer to engage with you on (SMS, email, Whatsapp) and what time of day they engage. This ‘learning’ is then applied to determine the next communication, curating messaging, and timing to maximise re-payments. With machine learning there are potentially hundreds of different workflows that could play out dependent on how your customer prefers to engage with you, resulting in much more effective and intelligent driven outcomes.
3. Prioritising credit risk
AI and Machine Learning algorithms within digital solutions can identify customers with a higher risk profile and target tailored messaging to particularly vulnerable customers or businesses.
Champion challengers can be set up within these intelligent systems to scientifically track the outcome of this different messaging against standard content.
Results can then be analysed to determine whether this new strategy has increased customer engagement levels, improved response rates, improved payments, and increased arrangement or PTP’s.
4. Conversational AI
Conversational AI combines natural language processing (NLP) and speech analytics with online chatbots, interactive voice recognition systems, or live phone calls to analyse a customer’s language, tone, context, and sentiment. When used in a credit risk context this can help to pick up red flags that may indicate imminent or future risk of default.
This learning can be utilised during a live conversation where agents can be provided with suggestions on how to approach the call or online chat, or in reviewing recorded calls and online chat. Thereby providing feedback to agents and suggesting improvements for future communication.
5. Real time reporting dashboards
Advanced digital solutions incorporate live activity feeds and intuitive dashboards which capture all outcomes for different credit risk profiles and provide deep insights into campaign performance and re-payment tracking.
New digital technology means you can know when customers are clicking on messages, what times of day they prefer to engage with you, what platforms they prefer and how this ultimately drives improved collection rates. This enables much more informed decisions around credit risk profiles in the future.
Human element versus digital methods for responding to credit risk factors?
There is no doubt that digital communication has changed the world. But personally, I don’t buy into the human versus digital, one or the other debate. I don’t think digital engagement will replace human interaction and leave many in the credit profession without jobs. As with many things in life I believe the answer lies not in extremes but somewhere in between. Yes, roles will change but the use of AI will also create more jobs. The World Economic Forum estimates that by 2025, 85 million jobs may be displaced by a shift in the division of labor between humans and machines, but also importantly that 97 million new roles may emerge.
With current credit risk factors making it hard for customers to meet their financial obligations, there is more need than ever for effective empathy and problem solving to take place and in most cases that is done more effectively in a conversation with a real person. Assessment for hardship programs, customer advocacy and effective complaints resolution all rely heavily on human interaction for this reason.
Additionally, depending on the industry you’re in, your customers may have challenges communicating digitally. Certain mass market consumer portfolios for example can often include
high levels of customer illiteracy, elderly customers or those experiencing disabilities. This is another example of where skilled human intervention comes into its own talking people through their options and guiding them towards a better outcome.
Similarly, commercial portfolios will require skilled human review and portfolio management at all stages of the process to analyse data and assess risk of default due to cash flow issues and potential insolvency, with prompt referral to collection agencies and/or lawyers for further follow up and potential for legal action, bankruptcy proceedings and caveats.
The key lies in better understanding the respective strengths and limitation of humans and machines in a collection’s context so we can draw the maximum benefit from both emerging technologies and the skills of our staff. AI and machine learning can free up mundane, repetitive and data crunching tasks so humans can be used for higher value activities that require empathy, creativity and problem solving.
Questions to ask when exploring digital receivables solutions and companies to partner with
This is unchartered territory for many of us. Even though we live in a digital age, the credit industry is far from being digitalised.
Even with advanced credit risk and machine modelling available to help us assess credit risk, we are still not too familiar with how to respond to identified credit risks with AI driven receivables management technology. With that in mind, when exploring some of the current and emerging digital receivables technology companies to partner with on this exciting journey, how do you know what to look for and whether they are the right fit?
Here are some key questions to consider:
z Are they recognised as leaders within
Fintech or AI Digital Receivables Solutions?
Ground-breaking technology often attracts awards, accolades, client testimonials and case studies. What can they share with you in this regard?
z Do they measure the customer experience?
One of the key outcomes of more intelligent driven communication is improvement of the overall customer experience. Do they measure this and if so, what does that look like? Do they use the international standard of measuring customer experience ‘Net Promotor Score (NPS)’ and if so, can they share details of that with you?
z Do they understand the receivables industry in Australia? Many digital solutions companies either don’t originate from within Australia or don’t specialise within Credit. As such, they may not understand the nuances of our local credit industry and associated regulation and compliance. Can they demonstrate understanding of your challenges and pain points?
z Do they offer other value add receivables
solutions or partner with someone who does?
Some leading digital receivables companies also offer other outsourced engagement solutions such as overflow management for arrangement monitoring, hardship assessment and monitoring and live customer engagement campaigns. Maybe they can offer a seamless transition to 3rd party digital collections solutions as well?
z Can they clearly communicate how they use AI effectively? AI is a bit of a buzz word now, as such it can be thrown around a bit too easily. Many may attest to using it but make sure you understand how AI and machine learning is utilised within their solution.
How customisable is the payment portal? Advanced payment portals can be developed to streamline a range of inbound queries from incorporating FAQ sections, capturing common complaints or additional required information from customers. Flexibility in customising a portal to your requirements should be key in your decision to partner with someone. In summary, the introduction of AI driven digital technology is enabling much more informed and intelligent responses to identified credit risk factors. All of which will ultimately result in improved cash flow for Australian businesses.
On that note, for those who may still be struggling with the bigger concept of AI in credit or for those who think we’re not quite there yet, I’ll leave you with this thought from the Global Technology Consultancy, Thoughtworks:
“By 2023, businesses will… … understand that AI is not the art of trying to force value out of historical data, but actually the art of creating new data and insight by interacting with the world.”
– Jarno Kartela Global Head of AI Advisory
What an exciting time to be within credit!
Nikki Dennis MICM
Managing Partner/Co-Founder of SalesCRED (specialists in credit management solutions) T: 0437 652 562 E: nikki@salescred.com.au www.linkedin.com/in/nikki-dennis
