The bank must establish a logical and clear collection and recovery policy that can be consistently implemented by its employees. To ensure that banks are consistent and fair to customers, the bank’s regulators usually define what is acceptable policy and how the bank can go about collections and recovery activity.
First, Know your Customer
The first step to prevent any delinquency is to have a suitable understanding of whom you are doing business with. In Retail Banking this means undertaking a comprehensive ‘know your customer’ exercise, coupled with a thorough credit analysis of the customer.
Effective ‘know your customer’ involves ensuring that the bank knows more about the customer than what is required to comply with regulatory requirements and is part of how the bank interacts and meets customer needs. It will make sure that it reviews past borrowing, which provides a track record of what products they hold, how they use their products, their value, and any historic credit and/or behavioural scores.
In Retail Banking, because of the volume of requests for borrowing, banks use risk models to decide whether they will grant credit, the sort of credit they will offer, and the amount and the terms and conditions that apply to the repayment of the borrowing.
This is the ‘snapshot of the customer’ that takes place at every step of the collections process and provides the information to determine the next step, but also, through analysis and review, whether the bank’s collection process is effective, or could be improved.
Modern collection and recovery should be highly automated using messaging until human intervention becomes necessary, or when the customer responds and contacts the bank to resolve the matter.
Process – Active Repayment Management
By this stage, the bank has assessed the customer, granted a line of credit, and established the repayment terms. No matter how efficient the scoring method and how conservative the rules set to each case, no bank is free from customers failing to repay debts on time.
There are many reasons for a payment failure, from simple cases of forgetfulness or payment system issues – to communication issues, or the customer’s financial deterioration, or even death.