Collections and recoveries: Prevention is better than cure
Collections and recoveries may be about to rise, but savvy peer-to-peer lending platforms have been innovating in this area for years…
Its hard to think about collections and recoveries without conjuring up images of bailiffs at the door, and repo vans on the curb. But in peer-to-peer lending circles this is an outmoded idea. In reality, alternative lenders have been working for years on perfecting the recoveries process in the most ethical, effective way. And the figures speak for themselves.
Despite years of pandemic-led volatility and an ongoing cost of living crisis, P2P lending platforms have managed to keep their default rates relatively low. This is largely due to their use of new credit checking technologies and processes which have effectively reduced the risk of default from the very beginning of the borrower journey.
But that doesn’t mean that collections and recoveries are not happening in the P2P universe.
While P2P lending platforms aim to collect money in a socially conscious way, recovery procedures are usually the final options. After all, prevention is better than cure.
During the pandemic, Folk2Folk grew its credit risk team instead of its collection division for this very reason.
“We want to help businesses but won’t take on anything that doesn’t meet our strict criteria so we’re not lowering our standards,” a Folk2Folk spokesperson said.
“Who knows what will happen, but we are just are very vigilant and are constantly looking for any early warning signs of difficulty. We are as tight as we can be on the credit side of the business.”
Read more: How to check how ‘safe’ your P2P lending platform is
Filip Karadaghi, co-founder of LandlordInvest, says the P2P platform only works with established property professionals and only underwrites loans where it is comfortable with the risk.
Open banking can help platforms carry out this underwriting.
New P2P consumer lending platform Plend focuses on using the data-sharing initiative to better assess the affordability of potential borrowers seeking the platform’s unsecured loans.
“The big thing for us is the underwriting,” says Rob Pasco, co-founder and chief executive of Plend.
“The ability to gradually review the bank statements of new borrowers is absolutely vital. We take income stability as a vital indicator. Credit history can be irrelevant, it’s about what you’re paying today.”
Assetz Capital chief executive Stuart Law says the P2P lending platform prefers to issue fewer loans of a larger size, which allows it to micro-manage each one and watch out for any signs of problems.
“We are hyper cautious and monitor our loans very actively,” he explains.
But of course, defaults happen. It is then that P2P platforms have to step in to decide whether to proceed with a recovery action.
You can tell a lot about a company by how it treats the people who owe them money. Most P2P platforms do their best to recover investor funds in a socially conscious way, by working closely with the borrower rather than taking an aggressive approach.
In fact, P2P platforms have pioneered new ways of dealing with non-performing loans, offering forbearance and payment plans long before the Covid-19 pandemic made borrower flexibility the norm.
At the start of the pandemic, when the City regulator started issuing guidance on the subject to lenders, P2P platforms were very quick to contact borrowers and offer payment holidays to support them and then communicate this to their investors.
This is not just the most ethical route, but according to platforms, the most efficient.
“Working with the borrower typically produces the best outcome for everyone,” says Law.
“It’s better to work with them than be aggressive.”
Read more: How to do your due diligence on a P2P platform
Neil Faulkner, managing director of P2P ratings and research firm 4th Way, believes that most platforms genuinely care about their borrowers, even when they get into difficulties.
“One or two platforms have a reputation for being extremely aggressive, but I believe that the vast majority of platforms work well with borrowers and try to do everything they can to recover debts in an ethical way,” he says. Nicola Horlick, chief executive of Money&Co, describes being ethical as a “very” important part of the recovery process.
“You have to treat people properly if you are going to recover money lent,” she says.
Rishi Zaveri, chief executive of Lendwise, says that his platform has fixed interest rates and engages with borrowers that are overdue on their repayments.
“We follow all the rules and are mindful that any customer who falls into arrears doesn’t want to be in that situation,” he says.
“So, it’s one where we want to engage, understand and find an outcome that solves the problem for all parties concerned.”
If working with the borrower does not work, by and large platforms are then forced to move to the next stage of appointing a solicitor or receiver. The threat of court action only comes as a last final step if all else has failed.
Read more: Should P2P investors worry about Bank of England base rate rises?
Instead of doing collections in-house, some platforms use debt collection firms that specialise in this line of work and will conduct the process ethically and efficiently.
Alex Hilton-Baird, managing director of Hilton-Baird Collection Services, which works with P2P platforms, says that his firm’s focus is on telephone-led recoveries, building a rapport with borrowers and being firm but fair and transparent.
“We believe this approach drives the best results for all stakeholders and enables us to identify and work with vulnerable customers to help them repay in line with what they can afford,” he says.
“For the majority of platforms we work with, we focus on early arrears collections, curing arrears and getting them back into the ‘good book’. But we also support full recoveries all the way through to legal enforcement if and where necessary.”
Last month, Plend partnered with Ophelos to help customers resolve their debt in an ethical way.
The debt collection firm, which has a Pending B Corp status which demonstrates its environmental, social and environmental fundamentals, uses machine-learning technology to simplify and automate the debt resolution process, allowing borrowers to set up manageable instalments through personalised repayment plans.
Read more: The 15 P2P and crowdfunding platforms with B Corp status
“It has an amazing, radically different approach,” Pasco says.
“There is no calling or letters in the post, they send customers a link to refinance with no friction.”
Selling off bad debt via securitisations is another way in which platforms can collect funds for their P2P investors.
For example, Funding Circle has previously sold defaulted loans to Azzurro Associates. Now, the debt buyer – which is owned by US asset manager Elliott Management – plans to purchase more P2P business lending portfolios.
“The portfolios we have acquired are performing to plan, and we retain appetite for further such transactions,” Andrew Birkwood, founder and chief executive of Azzurro Associates, told Peer2Peer Finance News in May.
“It is part of our strategic intent to acquire more P2P business lending or B2B receivables portfolios.”
As the country falls deeper into a cost-of-living crisis with the Bank of England predicting a recession soon, platforms are being extra careful and focusing on the affordability of borrowers while monitoring their loans and the markets in which they operate.
Ben Shaw, chief executive of HNW Lending, says that for his platform the focus is on creditworthiness.
“We are a little concerned so we are looking more closely at affordability and ensuring we think carefully when writing our creditworthiness assessment report,” he says. “We often ask the borrower for additional information so we can make a better assessment.”
Law says Assetz Capital has boosted its collections and recoveries teams over the last year, but that was due to keeping up with the platform’s growth, rather than reacting to the threat of a Covid-linked spike in defaults.
He says the platform has not seen a surge in recovery activity but is closely monitoring big economic factors such as inflation and house prices.
Read more: How to address inflation in your P2P portfolio
However, Hilton-Baird warns that platforms should be worried about the possibility of rising defaults, especially in those instances where they are not the sole lender to the business.
“Above all else it’s about knowing your customer, the affordability of the borrowing, their ability to repay and their viability,” he says.
“Beyond this, our advice would be to take a sector analysis of your portfolio in terms of identifying which customers might be under more pressure than others, and within those looking for and refreshing information about customers’ ability to repay.”
So far, P2P platforms’ collections and recoveries processes have performed well during the pandemic and are predicted to withstand worsening economic conditions.
“Collections and recoveries have mostly worked very well, although they have been delayed by a massive backlog in the courts, caused by their temporary closure during the pandemic,” says 4th Way’s Faulkner.
“I expect that judges will continue to offer borrowers some leeway due to the rising cost of food, energy and other important goods. But ultimately, borrowers who have cash, property or other assets will usually still be made to settle their debts.
“Therefore, P2P lending platforms’ recovery processes will withstand the cost-of-living crisis.”
Times may get tougher but P2P platforms now have proven experience during a turn in the economic cycle. Even if defaults rise, these firms will continue to focus on ethical recoveries and on prevention rather than cure, through regular monitoring of the situation and careful underwriting.
