Challenging times ahead for finance companies
I remember someone telling me a few years ago that in every issue of MG Business, there were at least a couple of dozen new company registrations with the word "finance" or "loans" in the company name. New finance businesses have sprung up like mushrooms, and existing businesses have expanded. Consumer lending has been a goldmine but all good things come to an end. I think the consumer finance industry is in for tough times.
The voracity of New Zealand consumers for credit is well known. Delayed gratification is no fun. We want things now, so we buy them on credit. The Reserve Bank and financial commentators have all been telling us for years that we borrow too much. This is potentially a problem for everyone with a home mortgage but unless the economy suffers a major disaster I don’t think we’ll see a flood of mortgagee sales. If things turn to custard for home owners, most will hang in till the market improves.
It’s a more obvious problem for bottom-end borrowers whose biggest asset is a used car. These are people on low incomes who’ve borrowed for cars and big screen TVs and trips overseas for family funerals - things that can’t be sold for anything like their original value. They tend to have little spare disposable income. If a $100 payment is missed, they generally can’t catch up next week; at best they catch up at $10 a week over the next 10 weeks.
If the car is ultimately repossessed it sells for perhaps half what it originally cost. The borrower ends up owing $5000 or $10,000 on the contract and has no car. So if the economy heads south, it’s bad news for those with no reserves. It’s also bad news for the finance companies who lent them the money. I believe the growth in lenders has finally outpaced the growth in consumer borrowers, or at least the growth in good risk consumer borrowers. The economy is still booming along but the smart lenders are pulling back, doing fewer consumer loans. I first heard a consumer lender say they were trying to do less consumer lending and more commercial lending about two years ago. Now I hear it regularly.
So I think the consumer lenders, especially those in the so-called "third tier" (lending to the highest risk customers) are in for a tough time. I think more and more finance companies are going to find that that they’ve lent too much money to poor risks and that their overdue debt is out of control. At that point the standard solution is to get rid of the credit manager who let it get to that state and bring in a new one. If you’re looking for a challenge like this over the next few years, I think consumer finance is the place to be.
The situation the new credit manager faces is typically that:
- there are so many overdue accounts that the credit staff generally don’t have time to call their debtors until they are well overdue;
- by the time credit staff call a debtor, he or she has probably missed several payments;
- the number of new overdue debts easily exceeds the number being brought back up to date.
The solution to this is not easy. It certainly involves a lot of hard work but that’s not enough on its own. Generally it turns out that there are a variety of problems to deal with - poor systems, the wrong people in the collection roles, too few staff, low morale, insufficient training, flawed collection processes, bad lending decisions, poor performance measurement, etc, etc. It’s a war that you need to fight on a number of fronts. Some people thrive on the challenge and come out triumphant. Others fail.
From a distance it’s generally hard to tell whether they have really "failed" or whether they were given a task which was simply not achievable by anyone without superhuman or magical powers. But either way, whether it’s because the task was too great or the person wasn’t up to it, I think finance companies are going to find that there are not a lot of credit/collection managers with the range of skills required.
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In the few words I have left in this article, here are some thoughts on one tool that I’ve used in this sort of crisis situation. It’s an amnesty offer. It can be generated quickly and offered to customers en masse by letter. A recent example of this was an offer from the Australian Tax Office which last year wrote to 500,000 Australian taxpayers and promised to stop charging interest on their tax debts if they committed to a direct-debit repayment schedule over six months.
I think I first used an amnesty letter in 1989 on the most seriously overdue portion of a ledger (about 5000 debtors, as I recall) which had had no action on it for seven months. Debtors are often scared to talk to creditors. If you can give them what appears to be a "let-off" providing they take action within a set period, many will respond. It can tip the scales from "I should do something about that" to "I’ll call them now". In this case it led to a very worthwhile influx of payments which reduced the size of the mountain of debt and raised morale for the team that was supposed to collect it.
As I recall, my amnesty offer from way back then wasn’t giving much away because we hadn’t actually done anything! There were no penalties to remit or fees to credit. Creditors need to be careful not to mislead their debtors in a way which might be a breach of the Fair Trading Act. For finance companies which have been charging penalty interest and various fees there are plenty of opportunities to offer debtors some real monetary benefit as a reward for the correct, albeit belatedly correct, behaviour.
Peter Hattaway - peter@hattaways.com - is a director of Hattaways, specialists in credit management training and consulting - www.hattaways.com