With our decades of experience working in collections and recoveries, we’ve become familiar with some trends over the years – for example, as we all know, creditors usually see delinquency increase after Christmas and utility repayments often struggle in the first quarter of the year due to increased heating bills.
As the Black Friday sale period approaches for another year, we’ve had our thinking caps on about whether this relatively new trend in the UK is having an impact on debt levels, and, by association, collections and related processes, especially this year where forecasts indicate the highest ever spend in 2019, with more than £9bn to be spent across Black Friday and surrounding sales.
History of Black Friday
Black Friday first hit the UK’s shores in 2010 when a certain retailer called Amazon brought this decades-old phenomenon over from America. Since then, it has become entrenched into our annual spending habits. Before Black Friday we had the Boxing Day sales – but never a sale before Christmas; who’d do that? Most of us will also remember the chaotic scenes at Walmart-owned Asda in 2013 with customers fighting over discounted goods – did they really need them or was it fuelled by pack mentality?
How will consumers behave this year?
Now we don’t just have Black Friday. We have the week leading up to Black Friday, and Cyber Monday. Black Friday is earlier this year than it has been in recent years, on 23 November. This is a few days before people generally get paid. Will this limit spending or encourage customers to look at other ways of supporting their Black Friday bonanza, ways that may seem handy in the short term but with longer term consequences if short interest free periods are exceeded? Such services are extremely convenient if used wisely and you stay in control but can add to a debt burden if you become over-committed and unable to settle.
Similarly, with tried and trusted credit and store cards (and note that the market is also seeing a dwindling number of interest free credit card deals, a reduction in the average interest free period and an increase in balance transfer fees). Commentators don’t expect spending to be limited at all though, and we are expected to spend more this year around the Black Friday period than ever before.
What impact will creditors see?
But what do Black Friday, Cyber Monday and the related extended period of sales mean to customers’ indebtedness and the impact on delinquent account volume? Statistics show that the majority of people spending during the Black Friday period are spending on themselves, whereas the run up to Christmas is spent spending on presents for others.
So, will Black Friday result in a peak of indebtedness due to unnecessary spending on items just because the price has dropped?
Delinquency percentages will increase but the majority of consumers do stay in control and keep payments up to date. However, what is not so clear is how many customers will over-extend during this period and whether over indebtedness will not materialise in a number of months, resulting in a proverbial debt time bomb.
Don’t forget about the impact of IFRS9
This is the also first Christmas period since IFRS9 was introduced – what will an un-forecasted, or incorrectly forecasted, increase in debt do to the lifetime provision models linked to stage 2 if customers risk profiles deteriorate?
I think there will be a lot of stress in some organisations in this regard once the Christmas celebrations are over and January hits with a vengeance. I’m aware of the significant investment in time and money most organisations put into IFRS9, and the exhaustive efforts of the modellers – fingers crossed this pays off for you. However, with a backdrop of record spending and at a time when unsecured borrowing is at levels unseen since the 2008 global financial crisis, and with other factors such as record numbers of “foundation” / “emerging credit” type lending, there are factors that perhaps historical looking models may not have picked up or been properly considered.
Creditors – be prepared!
Creditors should not underestimate the additional resources and tools required to help them cope with increased delinquent volumes over the next 2-3 months and to help meet the customer demand. Staffing forecasts should be linked to delinquency forecasts / IFRS 9 models which should take into account seasonal factors such as Christmas and Black Friday (and not just based on historical averages). Pre-delinquency triggers should be in place to proactively identify customers who may need help. A selection of channels should be in place in line with customer preferences to help meet demand.
Some of the more progressive organisations have been using machine learning and artificial intelligence to help train their various models and to enable better segmentation of the customer base and resulting channel strategy, by drawing in significantly more data upon which to analyse and make better predictions. It will be interesting to see how these organisations fare in terms of expected outcomes and predictability, in comparison to traditional companies who may still be making educated guesses based on roll rates.
What do you think the impact of seasonality and Black Friday will be on your collections operations? Have you put additional resources and processes in place to cope with this? We’d love to hear your thoughts!