The Road Ahead for Credit Markets in Asia

We sat down for an interview with Flow’s Chief Operation Officer, Artem Rafaielian, Chief Sales & Strategy Officer, Arun Pai, and Head of AI, Tim Xu to reflect on how the pandemic has altered the workings of Flow, and how it affected the credit markets in Asia in 2020.

12th Dec 2020, Industry Insights

When COVID-19 became a global pandemic, record-breaking unemployment suddenly became a dominant theme across Asia and the world. International Labor Organization (ILO) data shows that by Q2 2020, close to 400 million full-time employees were out of jobs as companies reacted to the sudden stop in economic activity. Particularly, Asia-Pacific countries such as Vietnam, India, Singapore, and Indonesia encountered a significant growth in unemployment rates. According to the ILO figures, about 59% of full-time jobs disappeared in the Asia-Pacific region by Q2 2020, losses attributable to Covid-19.

The resulting financial distress forced many borrowers to renege on their debt obligations. What followed was a surge in Non-Performing Loans (NPLs) that continue to saddle financial institutions to date. The expected economic impact of the pandemic was so dire that as of April 2020, the S&P Global estimated non-performing assets (NPAs) and attendant credit losses in Asia-Pacific banks could touch $600 billion and $300 billion respectively in 2020. S&P Global saw India and Indonesia as more at risk, especially considering that the NPA ratios were already high pre-pandemic.

In light of the current economic conditions in Asia and the world at large, one finds it challenging to predict the future of credit markets. We sat down for an interview with Flow’s Chief Operation Officer, Artem Rafaielian, Chief Sales & Strategy Officer, Arun Pai, and Head of AI, Tim Xu. We reflected on how the pandemic has altered the workings of Flow, and how it affected the credit markets in Asia in 2020, especially when talking about collections.

Summary of the Credit Industry and Collections in 2020

Flow: This year has seen governments shut down economic activities in a bid to control the spread of coronavirus Covid-19. What have been the effects of lockdowns?

Arun: The pandemic took a massive human toll and the health safety of employees was in jeopardy. However, Flow overcame the challenges with every member of the Flow fraternity working hard to ensure the smooth functioning of the business during the pandemic. Departments furnished partners with details of the ever-changing situation in a proactive manner. Also, operators responded to the restrictions on movement by working from home.

Artem: The pandemic necessitated remote working and made collections difficult because borrowers could not leave their homes to access banks. Nonetheless, operators were able to communicate effectively with borrowers. They addressed the emotional aspects of their job by taking into account the borrowers’ condition when communicating concerning loans.

Operators were able to achieve the empathetic approach by personalizing messages according to the dire situations of each borrower type. Even then, the collector has had difficult moments when dealing with remote employees. The inability to supervise employees in person reduced their efficiency. Also, it was difficult to provide real-time feedback to employees and to keep them focused for better performance.

Flow: What processes were built to maintain consistency during the pandemic?

Tim: For starters, the pandemic affected operators differently, but the need to adopt new technologies and approaches dominated the industry. Collectors had to embrace empathetic approaches to walk the collection tightrope. For us, the technology part was straightforward. We leveraged our existing proprietary technologies and customized existing technologies such as Speech Recognition tools to track borrowers’ conversations concerning Covid-19. This way, we gained useful insights regarding the behavior of borrowers.

Arun: Achieving consistency in the thick of the pandemic was one of the tallest orders we have had to face in our business so far. The problem was compounded by the fact that we have teams in different countries and managing diversity in such a crisis was trying. Different countries implemented different Covid-19 control measures and it was difficult to develop standard and achievable control and evaluation metrics. Nevertheless, Flow developed a sandbox large enough to create a base level of checks and balances, which also left enough space for creativity and individual drive to thrive.

Flow: How did collection achieve empathy and humanity during the pandemic?

Arun: The Covid-19 pandemic is a unique crisis. It is affecting not only the employment status of borrowers but also their health. In this regard, it behooves collectors to subscribe to common sense – which means growing a heart even when the move could hurt your bottom-line. During this period, collectors have had to maintain a connection with borrowers, one that drew them closer to their plight. The most vivid manifestation of empathy and humanity has been collectors’ zeal in working out new payment plans with borrowers with an eye on a win-win scenario for all parties.

Artem: Agile thinking is one way that collectors humanized collection. In the case of Flow, we focused more on borrowers who could eventually repay and kept the connection warm and active until they are physically able to make the payments.

Besides, we had to abide by new government regulations due to the pandemic some of which include the moratorium that the Indian government imposed in June that injured many loan recovery businesses. Likewise, Indonesia mandated delaying of debt payments for six months since June 16.

Responding to the new demands during the pandemic also meant adjusting call scripts to adopt a more supportive posture in the face of the crisis. We had to show a more human side to borrowers because that is the only way we could maintain a connection with them.

Flow: How did operators engage borrowers during the pandemic?

Artem: For starters, most of the communication channels that we rely on during normal operations were displaced. Also, it became clear by the second month of the pandemic that the world was migrating to digital platforms.

Accordingly, we increased our digital communications capacity and beefed up our ability to handle digital transactions. Nevertheless, most of our communication channels were working fine despite the pandemic. We had no problem communicating with borrowers. We continued to engage borrowers through the different communication channels that are common in the region. We called borrowers when it was convenient for them while SMSs worked for others.

Flow: How can operators continue to create personalized experiences for borrowers?

Tim: Collection is tough, both on the operators and the borrowers. You cannot compare this exercise to a normal conversation over the phone. Every single borrower has a unique set of characteristics and their behavior is never the same. As such, operators cannot develop processes that work across the board with equal success.

What should debt collectors do? In our case, we developed the Feature Engineer – a proprietary tool – to capture behaviors of individuals over a preferred period. The collected data is useful in terms of providing crucial signals in our advanced analytics and predictive models. We use the signals to anticipate borrowers’ behaviors and to answer why such behaviors exist in the first place.

Artem: The better way is for collectors to link the business to borrowers’ experiences. How so? Various tools such as modeling prediction, artificial intelligence (AI), VTT, or building conversations in real-time help collectors to keep a finger on borrowers’ pulse. Ultimately, the approach helps to improve borrowers’ satisfaction.

Nevertheless, personalization is not only about tailoring services to an individual but also about getting to know the borrower and their lives’ conditions. This approach works better when collectors obtain detailed information about borrowers.

Flow: How will this recession impact Flow’s budget allocation for 2021?

Arun: Every crisis begets new processes as businesses struggle to swim against the tide of change. One of the areas that bear the brunt of such changes is the budget allocation for different departments. Usually, firms will concentrate funds in departments whose smooth functioning is critical to the survival of the business.

We have lofty goals aimed at achieving ethical credit management in Asia. Based on these ideals, the recession necessitated the strengthening of budget allocations to three departments going forward.

Technology is Flow’s most critical department, which I believe is central to the fine-tuning of our processes, crisis, or not. Debt collection is more efficient when you automate as much as possible. Automating processes creates millions of data points “increases recoveries while reducing costs.”

The other key department is Quality Assurance. Despite the pandemic, operators such as Flow are scaling up operations across countries. To remain within the confines of their mission statements, operators must beef up their Quality Assurance team to enforce compliance.

Thirdly, I believe that the Marketing department deserves a higher budget going forward. Debt collection is a traditional space with a lot of revered and time-honored practices. New entrants focused on a new paradigm shift face an uphill task especially in terms of getting their message out to borrowers. I am convinced that more marketing activities will help such entities to project their ideas to the market and all stakeholders.

Artem: The pandemic has increased demand for loan recovery services. Even then, we are in uncharted waters where one could easily drown if one is not careful enough. However, with the right tools, operators should navigate this patch with ease. For use, we have spent the entirety of the pandemic exploring tools and skills we need to meet the existing and future demand. One such tool is Practical AI – Flow’s proprietary technology – that increases the collection processes’ efficiency while QA makes reputation assurance better.

Flow: What consumer payment trends can we expect from this recession?

Tim: Social distancing has been a ubiquitous theme during this pandemic. To credit market, social distancing means less in-person interactions and more digital transactions.

As we reflect on consumer payment trends we can expect from the current recession, I believe that Online and Digital transactions will increase. The biggest driver of this trend is and will be convenience and flexibility, as has been demonstrated during periods of lockdown across Asia.

As a result, I expect the Digital Collection approach to proliferate. In this approach, Collectors simply send an SMS reminder to a borrower with an Online Payment link, hence leading to a better result and better user experience.

The benefits of Digital Collection do not end there. The technology that supports digital transactions provides numerous data points that could go a long way in helping operators to profile borrowers. The data – used in conjunction with AI technology – enables Predictive Personalization of collectors’ services.

The Digital Collection trend should pick up quickly in Asia-Pacific specifically because the region was already ahead in terms of mobile payment service adoption. According to a Statista survey in Q4 2018, 47% of respondents in Asia-Pacific said they used mobile payment services as opposed to 38% for Latin America, 31% for Europe, and 29% apiece for North America, and the Middle East and Africa.

Flow: What other trends do we foresee in the collection industry in 2021?

Artem: Besides increased adoption of the Digital Collections approach, Asia’s collection space is likely to experience hard shifts to new approaches in other sectors such as automation and self-servicing.

I see the collection space in 2021 as being full of new adventures for which we are prepping ourselves. Our organization will focus on debt purchase and sharpen its focus on its portfolios. Additionally, we are preparing a different approach to dealing with delinquent clients with building communication being top of the agenda.

Further, I am of the view that 2021 will see debt sales on a massive scale fueled by government regulations and directives. Governments across Asia are likely to extend the already instituted moratoriums depending on the behavior of the recession. If the recession deepens further, we might experience even more similar directives. If this scenario plays out, the industry might experience levels of delinquencies that lenders and even some collectors cannot manage. Although extensions of defaults might help to lessen the impact of massive delinquencies, this might not be enough.

Early this year, S&P Global predicted that Covid-19 would massively impact credit cost ratios. As a result, the percentage of NPLs would increase.

S&P Global’s analysis seems to have been a prescient warning as financial institutions continue to report rising NPLs presently. In Vietnam, the first nine months of the pandemic saw 14 out of 15 commercial banks report a 30% or more rise in NPLs.

Tim: Operationally, collectors will have an interesting year in 2021. With digital activities becoming the new normal, I believe the entire Collection industry will take a radical shift towards self-servicing. Self-servicing will be a big thing not just because of convenience but also because of cost-saving on the part of collectors and borrowers.

Contactless payments services should play a key role in the self-service revolution. You also have to recall that Asia is the world’s leader in mobile payment services. It means people are more receptive to radical and destructive technologies, as long as they make them better off.

The Road Ahead

Flow: Give us an idea of what debt collection agencies should expect going forward.

Artem: Going forward, the higher NPLs rate is likely to trigger massive debt sales in Asia as banks and other creditors look to cut losses. Financial institutions will rely on operators such as Flow to buy most of the debt.

As I explained earlier, regulators are unlikely to reduce their steadfastness concerning tolerance in the credit markets as long as the recession remains a concern. As such, many credit grantors will be unable to afford to hold huge debt portfolios because their balance sheets will not support it. Because regulators want creditors to take the loss for the NPLs, the next logical step is for the lenders to push the loans off their balance sheets.

Arun: I agree with Artem and, perhaps I should add that balance sheet stress will compel lenders to clean up bad debt. To avoid destroying their brand’s reputation, the lenders will sell the deleveraged loans to ethical players such as Flow.

As it happens during every recession, lenders will deleverage bad loans to third parties. Fortunately, debt collection agencies will be on hand to service the deleveraged debts. The debt collectors have an advantage in this department because, unlike banks and other lenders, they can recruit enough people quickly to service the loans. My view, in short, is that the debt collection agencies market is likely to see a massive expansion in 2021.

Tim: The Collection industry is shifting towards a new normal, one where crucial events and activities will be happening online and on digital platforms. In this regard, the industry must begin to adopt new behaviors if it must survive the trend.

Flow and other debt collection agencies will have no option but to automate certain aspects of their operations. Specifically, the Collection industry will experience more flexible payment arrangements, increased utilization of ChatBots for communication, and transactions through automated online channels.

Flow: How do you plan to use a different approach to collections in 2021?

Artem: The collection approach that an operator chooses largely depends on the type of debt portfolio. Further, factors such as communication channels, the kind of interactions between operators and borrowers, the type of service provided (self-servicing or not), and the need to understand borrowers more are crucial in the determination of an ideal collection approach.

Tim: I believe technology will assume a larger significance in the debt collection agency market going forward. An example of such a technology-heavy collection approach entails focusing on real-time analytics of borrowers’ behaviors. Timely analytics should enable debt collection agencies to provide real-time feedback and recommendation for their agents.

For instance, collectors can apply real-time Acoustic Measures to make agent-borrower conversation more effective. The Acoustic Measures help to detect and analyze borrowers’ and agents’ emotions in real-time. The information obtained helps collectors to provide better recommendations of lines of arguments to their agents.