Up until around five years ago, selling debt was all about managing the profit and loss statement. For instance, a bank enters the Q4 of a fiscal year realising they will not meet their target for the year and then look for assets that can be sold to make up for delta. Another bank enters Q4 and realises they are ending the year above expectations and decide to save something for the next year, so they refrain from selling.
Now, banks mostly focus on capital efficiency and effectiveness. Regulators argue that if banks are sitting on non-performing debts, they need to be 100% capitalised against that debt, so that the banks customer’s savings accounts and deposits are not at risk. For banks, this is a strong incentive to sell non-performing debt.
Over the last few years, interest rates have gone up, and with that, the cost of capital. This has two direct effects on non-performing loans:
1) the cost for the bank to hold capital against those assets go up;
2) investors in non-performing debt also face higher cost of capital which put a downward pressure on the prices paid for non-performing loans.
Something that before could be sold for 75% of principal, may now be worth only 50-60%. For banks with large stocks of non-performing loans, this will add up to significant loss in profit margins. Specialised debt buyers like Riverty can closely work with clients to bridge that gap through deferred payments or combining deferred payments with servicing and tailored debt restructuring.
To sum up, banks are currently forced into managing the balance sheet, with the market dynamics (primarily stemming from increased interest rates) working against them. This means that banks must be more constructive in their solutions to bridge the fall in prices.
A bank’s main purpose is to deploy capital and receive interest. In other words, originate new transactions and earn interest margins. However, once something stops generating interest, that asset becomes non-core. Banks care about how much money they can recoup from defaulted claims, but the process itself is largely irrelevant to the bank, as it doesn’t represent the core of their business model.
As a specialised debt restructure or collection company, we focus solely on defaulted assets. We invest all of our time to create a competitive advantage in an area where banks don’t (wish) excel. Thus, we’re highly dependent on maximising the value of the debt collection processes.
An advantage we hold over banks is that we have time on our hands. If the customer fails to pay their monthly instalment in 90 days, the bank writes it off. If we take the loan over on the purchase, we have 15 years or more to collect the outstanding balance. Obviously, we can handle things significantly better and differently when it comes to customers’ financial problems if we have 15 years to work with the customer, as opposed to only 90 days.
It's much more important for us to find a solution that works for the consumer. That's the only way we can profit in this business. So, in terms of customer experience, we’re keener on understanding the consumer's financial situation. Keener to find solutions that work, and making re-payment as easy, smooth and flexible as possible.
Regulations hit anyone who works with consumers, but they are particularly stringent for the collection industry as we're working with financially vulnerable people. We face additional audits, additional licensing and additional legislation which drives us to make things better: for clients, customers, industry and in the end for the financial system as a whole.
On top of regulation, almost every collection association (national and EU-wide) impose higher demands on professional conduct than regulators do. So, across our markets, there are agreed principles that everyone participating in this industry group must adhere to, which include a stringent set of rules on how to deal with financially vulnerable consumers. Thus, even though there is strong regulation, we, as an industry, have even higher standards to live up to.
Carl is the product lead for debt purchase at Riverty. He has 25 years of experience from credit risk management across Europe, the US, and Asia and, since 2009, Carl has worked exclusively in the debt investment sector.
Riverty, the fintech company of Bertelsmann, supports thousands of merchants and over 28 million consumers by processing more than 80 million transactions monthly. Offering flexible payments, debt collection, and smart accounting solutions, Riverty empowers businesses and consumers with cutting-edge financial services. With a dedicated team of over 4,000 employees across 11countries in Europe and North America, Riverty is a leader in delivering comprehensive financial solutions. www.riverty.com.
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