Life Happens: The Reality of Consumer Credit
Welcome behind the curtain of consumer lending - where the magic happens. Collections is not the most exciting part of our business, but it’s undoubtedly one of the most critical - and it’s a lot more complex than most people think.
Life happens - life is, for better or worse, a little unpredictable: relationships break down, people get sick, or lose their jobs - and sometimes they struggle to meet their financial commitments.
One of our roles in Marketplace Lending is to reduce the need for collections intervention wherever possible, and, in the few cases where it is necessary, manage that process in such a way that achieves the best outcome for everyone - the Borrower, the Lenders, and the Marketplace. In those few cases, it’s usually not that Borrowers aren’t “good for it”, or set out with malicious intent - but that life just happened.
Overall, it’s about aiming to create a diversified portfolio mix (just as we suggest Lenders do individually, we aim to do for the Marketplace as a whole) - of risk grades, regions, and the like. A diversified portfolio mix will better weather macro-economic factors and minimise the impact of local factors (like a factory closure or a natural disaster).
Who goes into arrears?
At every step of the application process we’re evaluating Borrowers to filter out those who are financially vulnerable or high risk (as any Responsible Lender should). Credit underwriting processes should, by design, always accept more low risk customers than high risk customers.
Don’t forget: Borrowers are people just like you, living complex lives with ups and downs. Life events can’t always be predicted (both for good, and for bad). Things like illness, relationship breakdowns, business failures and simple bad luck, they all contribute towards people being unable to make repayments.
The character and circumstances of some people means that they bounce back from these life events faster than others, and will repay even if they have to dig deep financially in order to do so. These people are more likely to have insurance, savings set aside for unexpected events, or get a new job with relative ease. But the opposite is also true, and some people will either be unable or unwilling to prioritise their repayments when the unexpected occurs. Everyone exists somewhere on this spectrum.
These two key factors do a lot to determine who goes into arrears, and how long they stay in them for. In order to adhere to the Responsible Lending Code, we need to recognise when Borrowers are experiencing unforeseen hardship, and give them the chance to overcome that life hurdle - usually this means offering an extension to their loan term (reducing the amount of each repayment but increasing the number of repayments), or postponing their repayments for a set period of time, or a combination of both.
Beyond this, our collections process and fantastic collections team are there to guide the customer towards the right behaviour (and their contractual obligation) if they tend towards the wrong end of the spectrum.
Testing, learning and constantly refining
As time goes on, we test and learn, constantly enhancing the underwriting process in order to better predict whether a potential Borrower will be at risk of going into arrears based on their character and the possibility of a life event.
Since launching, we’ve maintained delinquency at less than 3-4% consistently (you can see more detail in our marketplace statistics page), and continue to constantly monitor arrears prior to that point, always checking the effectiveness of our collections processes (within prescribed confines) when it comes to repairing accounts that don’t self-correct.
Diversify, diversify, diversify
The best collections team in the world can’t combat a poorly diversified portfolio. If you’re just starting out with your Lender account, or looking for ways to improve the performance of your existing one, check out our guide to diversification now.