State of Credit and Collections

Moving Forward with an Eye on the Horizon

If credit and collections professionals had to pick a slogan for the state of the industry, “optimistic, but cautious” could be in the running. In advance of the 2020 Credit and Collections Conference, June 1–3 in San Antonio, Texas, Equipment Leasing & Finance magazine reached out to a group of seasoned credit risk professionals to discuss the sector as a whole, as well as to evaluate the opportunities and risks in a changing environment, both in 2020 and beyond. 

Strong, with Some Soft Spots

As the country continues to enjoy the longest period of economic expansion in history, speculation continues about when it will end. But even with various areas of uncertainty—the enemy of credit markets—including a looming presidential election, ongoing trade negotiations and geopolitical uncertainty, the economy remains relatively healthy, says Credit & Collections Committee Chair Lou Maslowe, Chief Risk Officer at Mt. Laurel, New Jersey-based Marlin Capital Solutions, an independent equipment finance company. But there are a few signs of weakness.

“Foremost on my mind is that, beginning in the second half of 2019, we started to see deterioration in portfolio performance and it seems that very small businesses on the lower end of the credit spectrum have been particularly impacted by some economic headwinds. While we have seen portfolio deterioration in a number of sectors, the one industry that is experiencing severe stress is transportation, due to declining freight rates and volume, and increased insurance costs,” Maslowe says. 

“As more banks consolidate, you have to look ahead and see what’s happening in the financing market, especially with new players and the power of Amazon and Google.”

—Lou Maslowe, Marlin Capital Solutions

Small businesses are typically an economic bellwether, signaling early signs of economic trouble. The PayNet January 2020 Small Business Delinquency Index 31-90 Days Past Due didn’t change from November to December but is 19 basis points above its 2019 level. The 91 to 180 Days Past Due category was up 4 basis points over the same time period. 

Overall delinquency in the equipment finance market is moving away from historical lows, says Daniel Goderis, Director of Portfolio Management at GreatAmerica Financial Services, a multiline commercial equipment finance company based in Cedar Rapids, Iowa. “We are seeing just a little bit of an uptick in delinquency, but the performance is still within normal standards and our litigation recoveries are solid and consistent with the industry,” he says. At GreatAmerica, even the slight credit loss uptick continues to be substantially below normal levels. “I think that’s very consistent with the industry,” Goderis says. 

“We are seeing just a little bit of an uptick in delinquency, but the performance is still within normal standards.”

—Daniel Goderis, GreatAmerica Financial Services

Customer needs are also changing, so finance organizations need to adapt accordingly, says Chris Jung, Senior Manager, Credit and Risk Management for Cisco Systems Capital Corporation, a captive equipment finance company based in San Jose, California. Customers are acquiring everything from hardware to software to services and subscriptions and they want to consume it based on their technology and budget needs. 

“These types of bundled solutions challenge traditional credit and risk models. We have had to evolve our processes and define our risk methodologies for theses dynamic payment solutions,” says Jung, who is based in Austin, Texas. The company has also moved to a single credit platform that is now integrated across its trade and term segments. “That helps us bridge Cisco’s go-to-market and our customers’ payment-over-time needs,” he says. 

Tech-Driven Change

As credit and collections professionals keep an eye on the horizon for additional market changes, they also have more immediate challenges. “The business is changing, and it’s forcing us to innovate,” Jung says. At Cisco Systems Capital Corporation, that means using technology and data analytics to automate scorecards, processes and work flows as well as how the organization engages customers and business partners. The company’s new proprietary credit platform was recognized with ELFA’s Operations and Technology Excellence Award in Project Excellence.

“The business is changing, and it’s forcing us to innovate.”

Chris Jung, Cisco Systems Capital Corporation

Continued economic strength has given some members the opportunity to invest in the improvements and tools that will help them in case of an eventual downturn. “While the economy is doing well, we’re taking this opportunity to optimize our credit scoring and make sure our models are performing as they should,” says Eric McGriff, SVP Senior Divisional Credit Officer of TIAA Commercial Finance, a subsidiary of TIAA, FSB, a Parsippany, New Jersey-based bank equipment finance company. His company is in the final third of a digital transformation that automated many systems, removing the rote work like data gathering and research from these functions. This empowers teams to focus on more high-value activities that help drive the business, he says.

Marlin Capital Solutions has also been investing in digital transformation, transitioning from a more traditional vendor equipment finance model to a digital-oriented finance company, Maslowe says. This shift, along with expanding into new product areas such as working capital loans, allows Marlin to offer more credit products to its small-business customers while being better able to compete with new competitors from the Fintech and nontraditional sectors. “As more banks consolidate, you have to look ahead and see what’s happening in the financing market, especially with new players and the power of Amazon and Google,” Maslowe says. The plays tech giants are making in the payments and financial services arenas can’t be ignored, he adds. 

Automation promises to deliver more personalized services, but it has its growing pains. Platforms and programs can be complex, and customers are demanding greater customization in their billing structures, Goderis says. They may need specific terms or features on invoices for payment, the complexity of which can cause administrative delinquencies. That doesn’t mean they add to your losses, but they can appear as such until taking a closer look. 

Recurring Challenges

In addition to market changes and the sea change that technology is driving, some areas of challenge are perennial. As technology advances, so does the potential and sophistication of fraud. A significant topic at last year’s Credit & Collections Management Conference, Maslowe says it’s still an issue many equipment finance companies face every day. “The bad guys are using technology to help beat lenders’ fraud prevention systems and so that continues to be an issue,” he says.

Increasing dealer fraud is a significant challenge that credit and collections professionals are grappling with. Some dealers exaggerate sale prices and end up funneling working capital back to borrowers, unbeknownst to the lender. This often leads to higher than expected default rates as the true purpose of the transaction was disguised. The industry is working on finding new ways to detect and prevent fraud, but “it’s always a game of catch-up,” Maslowe says.

In addition, managing regulatory requirements is another consuming issue for businesses in the banking sector. New lease accounting standards, specifically operating versus capital standards, have created changes among some customers in how they classify their loans, Jung says. “It’s important to understand what those changes mean and how it changes the way you’re viewing the risk. Be sure that you’re understanding the risk as you adjudicate the credit,” he says.

Outlook Remains Strong

Looking ahead, McGriff advises credit and collections professionals to use this time to prepare for the unexpected. The almost industry-wide investments in automation and technology can help. His team is strengthening its collection function, benchmarking collection headcount based on collateral types, industry, region and other factors that may affect risk. Self-service payment portals can also help improve collections, giving customers a convenient way to pay, access account data or get invoice copies. And the ability to send automated mass emails when necessary to past-due accounts is another efficiency gain that also strengthens collections. “We know that we need to be using that judiciously. You can’t send that to just anyone. But we’re looking at the automation options here,” he says. 

Efficiency is critical for credit and collections organizations that want to remain nimble and responsive to changing market demands, Maslowe says. To emphasize that point, balancing efficiency and risk will be a big topic of discussion at the June Credit & Collections Management Conference. As more organizations focus on speed, efficiency and automation, the door is open to incremental credit and fraud risk.

“While the economy is doing well, we’re taking this opportunity to optimize our credit scoring and make sure our models are performing as they should.”

—Eric McGriff, TIAA Commercial Finance 

“You want to make sure that you have enough eyes on the transactions to help you catch things that are going on, but still have a process that’s easy, fast and smooth,” says Maslowe. “We’re going to have a whole session at the Credit and Collections Management Conference discussing this concept of how to balance efficiency with risk activities. That’s something that we talk about every day at Marlin.” 

Despite concerns about the economy, new competitors, digital transformation and the general challenges of doing business in the credit and collections sector, optimism about the coming year prevails. With the coming presidential election, the party in power is incentivized to keep the economy strong, Maslowe says. However, trade or geopolitical conflicts could present additional challenges to doing so. 

McGriff adds that an abundance of caution is part of the job and that credit and collections professionals are trained to keep an eye out for potential pitfalls and obstacles. “I don’t think I’ve ever seen a time where there wasn’t something to worry about,” he says. “We’re credit professionals. It’s kind of our job to find things to worry about.”