When I think about the next couple of years for the UK banking industry, this nightmare scenario comes to mind. A milkman is going door-to-door collecting empty bottles. As he peers ahead through the grey morning light, a horrible realisation dawns. He sees
that the street is endless and there are thousands upon thousands of empties to collect.
Why is this relevant? Just like the milkman who was about to be hit with an endless wave of bottles, the UK lending sector is facing a tsunami due to coronavirus. Many people are highly leveraged, and a reckoning is now due. Banks will have to start collecting
debts from potentially millions of customers who seemed like a low credit risk at the start of the year. However, those same customers are now struggling to pay bills. And that’s going to be a Herculean task for today’s collections teams.
Collections customer profiles are shifting
Many of the customers who now find themselves in arrears don’t fit the traditional profile of people who fall into a bank’s collections process. For example, they may have significant property equity or other assets. While they may have capital, it’s tied
up in longer-term investments.
For these types of cases, the current collections process used by most lenders makes no sense. The usual aggressive collections campaigns will only add to the customer’s stress levels and damage your future relationship with them. Moreover, they may start
to feel that they can't cope with the situation, declare bankruptcy and walk away from their debts altogether.
Foreclosing on too many customers at once isn’t a good option either. Most people's assets are tied to their homes, which presents a moral and PR disaster. Also, it’s not even a good commercial decision. Banks don’t want to suddenly have thousands of repossessed
properties on their books. If they flood the housing market, property prices go down and expected capital is lost.
Collections processes can’t scale
Traditional collections processes are extremely resource-intensive: You need large teams of people to call and discuss payment options. With a huge rise in the number of customers falling into arrears, existing collections teams won’t be able to cope.
If each bank and lender has to hire hundreds of additional collections agents, we'll find ourselves in a situation where everyone loses.
The benefits of collaboration
Is there a better alternative? What if banks realised that the best way to handle collections was to work together? Instead of each institution running its own collections process, there could be one central authority responsible for collecting all debts
from all customers.
This would not only massively reduce duplication of effort for the banks, but it would also be a far better experience for customers. Instead, customers could have one constructive conversation about how to manage, service and pay off their total consolidated
debt over time.
Besides, a longer-term approach would benefit more customers. The central authority could help them arrange better big-picture solutions with all their creditors (such as using some of their equity to pay off immediate debts in exchange for increasing the
term or size of their mortgage).
The Ministry of Collections
So who would take on responsibility for running this central authority? Such a significant shift in the UK’s financial system requires oversight by the central government. Gov.uk and HMRC already have the machinery in place to collect taxes from the entire
population. Therefore, gov.uk would be a good candidate to implement the debt collection mechanism too.
Collecting debts through PAYE (just like income tax) would provide a single method for building a more prudent, more financially responsible and less debt-addicted society in the future.