Make no mistake, there's a cash crunch a-coming. While governments around the world have done their best to provide relief to both businesses and people the extent to which they can continue providing unfettered assistance is limited.
In the UK for example, we have seen the government go from pretty much funding its citizens and businesses through a variety of schemes to a situation where business has to at least partially fund furloughed workers. In addition selective extended restrictions are playing havoc in some regions where some cities are operating on a stop-start basis. That adds cost at a time when it's nigh on impossible to think of raising prices.
To get a sense of what this looks like, data published by Xero provides a picture of how the pandemic has impacted business activity - see below:
For another view, consider this graph from the Sidetrade unpaid invoice tracker:
It's easy to see there is a strong correlation between changes in activity and changes in the ability of firms to settle their payables, regardless of the assistance offered by governments. Xero claim that 60-70% of the economy is driven by small small business and you might be tempted to think it only natural that small businesses would likely feel the impact of the COVID-19 pandemic faster than larger firms. But that only paints a partial picture.
In the wider economy, large and global companies also depend on smaller businesses. In the past, when large companies talked about managing their global supply chains, I tended to trot out the problem of dealing with those essential and specialist firms at the bottom of the food chain. Those small firms have (almost) always struggled with technology and while it is true to say that the internet has enabled entirely new business models, the fact remains that small businesses are especially vulnerable to shocks. At a prosaic and local level for example, only one of an already dwindling number of butcher stalls survived in one of our local markets.
There have been and will continue to be winners, but these appear to be outliers. As many of us brace for the COVID-19 second wave pandemic, it is only a matter of time before the clock runs down on cash resources. Can technology help? Maybe. Xero has a clutch of tools to help firms pivot towards online selling where the risks are (technically) lower. That's great as far as it goes. Vendors of all stripes are pushing analytics and predictive capabilities to help assess current and future risks. But those only go so far.
We're in a game of Rollerball
When you're faced with sudden and ongoing rule changes it can feel like you're part of a team playing Rollerball. You don't know what the rules will be like in a few weeks let alone months ahead and you don't know who's going to get killed along the way. If you haven't seen the original 1975 film then I encourage you to do so. You might find parallels to what we see today.
As with so many things in recent times, I argue that all the software and business model change in the world cannot protect you from sudden shocks. No amount of predictive capability is going to help when, just as you're about to finalize a sale, an essential component ends up stuck at sea, or in a cargo terminal or seized. Neither can you guard against sudden demands on your cash when your suppliers need help.
Collections front and center
At the risk of sounding like the prophet of doom, I argue that now is the time to be conserving cash above all things. But what happens if you have a portfolio of customers who are at risk of default? That's a problem the financial services and large energy utilities firms know only too well.
In banking the average default rate has historically hovered around 3-3.5%. That's seen as business as usual. Banks face other challenges. The emergence of so-called 'challenger banks' poses its own set of problems, not least an absolute requirement to become way more efficient than in the past. We know that cost efficiency is a priority among large scale initiatives underway at several global banks. Energy utilities face similar challenges as the emergence of clean energy takes hold while at the same time office use declines in the face of the pandemic. But it is the potential for default rates to soar that interests me because this almost always has a domino effect. At a time when our economies are fragile at best, this take on special importance.
As I've thought about this, I came across re:ceeve, a technology firm that pitches itself as bringing an 'end to collections.' CEO Paul Jozefak explained to me that collections is a largely unchanged process that goes something like this:
- An institution has a portfolio of customers that is 120 days due. Customers have not responded to requests for settlement and under the bank's normal terms, it hands those debts over to a collections agency.
- The collections agency buys those debts for 10 cents on the dollar or thereabouts. At this stage, the bank has washed its hands of the debt and the customer.
- The collections agency proceeds to collect those debts.
- The collections business is highly lucrative with a fast return.
- The customer relationship the institution once had is gone - probably forever.
It's important to understand that while the collections agencies do a great job in getting paid, they have absolutely no interest in the customer. Once a debt has been passed over in this way, that customer is lost.
I asked why this occurs.
There's been little new thinking about collections in many years or, for that matter, thinking about why a debtor might be a late payer. The banks and collections agencies operate out of what is really a single playbook with calls and letters being the usual order of the day. Millennials and GenZ customers have a different expectation and getting things done online is how they expect to interact. What's more, there isn't, for instance, a scoring system to assess why a debtor may be deemed bad at any point in time. Bucketing every 'bad' customer as the same means there are lost opportunities.
But in a pandemic, surely you'll see significant numbers of customers that will behave in similar fashion? Not necessarily. According to Jozefak, the data they are collecting suggests there are plenty of instances where customers are willing to pay down debt if they are given the chance to do so in an orderly fashion and are approached in a different manner.
Circumstances are individual. We believe that with a good understanding of how the customer behaves you can start to think about many solutions.
The McKinsey study said:
Essentially, customers told us that their contact preferences and responses are guided by personal considerations that bear little relationship to the risk categories and contact protocols worked out by lenders. Most customers prefer to be contacted and act through digital channels, while a smaller segment remains more responsive to traditional contact methods. From these findings, we have concluded that issuers need to better understand their customers’ diverse preferences and then design a sensitive multichannel contact strategy to address them.
Taken a step further re:receeve believes that in approaching collections from a fresh perspective, institutions can not only reduce their risk but they can also improve the customer experience.
A customer who is under financial pressure doesn't want collectors calling them incessantly. It produces the wrong response. We think that by giving customers a sense of control through carefully guiding them through self-service alternatives that there is a much better chance of success for both parties. We like to say that collections should be a dialog and not an imposition of terms. That's fundamentally different from how collections often proceed today.
This is an interesting idea. In the technology provider space we have heard that vendors are offering terms rather than simply cutting customers off from services. That's one way to consider how the cash crunch can be better managed. Whether that and approaches suggested by re:ceeve work in the long haul is another matter. Some firms I've spoken with are bracing themselves for a full 20 percent fallout as some customers simply hit a brick wall. But if lenders and other creditors are at least prepared to take a more human approach, albeit informed by technology, it is not unreasonable to expect better outcomes in 2021 and beyond.