CHALLENGES AHEAD
DEBT AND THE COST OF LIVING: THREE ‘MUST ADOPT’ STRATEGIES

LANTERN

As we enter 2023, there has been a discernible shift in the conversation around the UK’s cost-of-living crisis. Increasingly, the focus is on a subject we know all too well: household debt. From debt advice charity StepChange warning it will take years for Christmas borrowing to be repaid, to NatWest announcing it will extend the amount of time customers have to repay unsecured loans or overdrafts by six months – lenders and collection businesses are being forced to ask some tough questions.

As Chris Leslie, CEO of Credit Services Association (CSA) puts it: “The squeeze on available income after accounting for essential expenditure is still set to get worse in the coming year – which in turn will raise the number of households in deficit budgets and make the collections challenge harder still.”

At Lantern, we’ve been reflecting on the trends we’ve seen over the past year and how we should approach the challenges ahead. We’ve distilled these reflections into three ‘must adopt’ strategies for lenders and debt collection businesses.

STRATEGY #1 (LENDERS)

Improve ‘up-stream’ care of vulnerable customers
Some lenders have a mixed record when it comes to effectively categorising and looking after customers who are truly vulnerable and unable to pay. The temptation has often been to offload non-performing debts to collection businesses – but in the current crisis, they should consider some tough questions around their duty of care. Sonex Financial (part of the Lantern Group) – a specialist white label service, helping lenders look after vulnerable customers in a bespoke fashion, are seeing first-hand lenders’ response to the cost-of-living crisis.

According to CEO Stefan Russell: “It’s crucial for conversations to be held by the right people, who can empathise with the difficulties faced by customers in today’s climate. Having a team who understand and can relate to the challenges is important for building trust and long-term relationships with customers, to provide a caring, effective and compassionate customer service for as long as it takes”.

STRATEGY #2 (COLLECTION BUSINESSES)

Prepare to be flexible and patient on repayments
The cost-of-living crisis has been part of our day-to-day conversations with customers for the past year. Overall, we’re not seeing significant reductions in repayments – with customers choosing to reduce spending in other areas and preferring to maintain their existing, affordable repayment plans.

From Lantern’s perspective, this can be explained by the fact that many of our customers are already in vulnerable circumstances, with repayment plans forming only a small proportion of their net disposable income. These customers are naturally resilient when it comes to cutting back household spending, generally used to very tight budgeting in their day to day life.

Across the wider collections industry, there are stories of fewer payments in full or settlements, as customers choose to hold back on using savings accrued during the pandemic. This is also potentially an indication of a new kind of customer experiencing debt for the first time – one that should push lenders and collectors to ask the honest question: “What is actually the right outcome for the customer here?”

STRATEGY #3 (LENDERS & COLLECTION BUSINESSES)

Rethink assumptions around vulnerability
In many ways the cost-of-living crisis acts as a magnifying lens on the reality of collections amongst the vulnerable population. This crisis is simply magnifying what’s already there. It is forcing everyone to see the complex reality of ‘vulnerability’ – what this really means for people’s everyday lives, and how it impacts their ability to manage or repay debt. These nuances have always been there; the cost-of-living crisis has just made this picture much more visible.