Covid-19 related customer debt must be addressed now

The UK’s Covid-19 vaccination programme promises to allow some of the related restrictions to be removed within a few months. This is great news but does not mean all our Covid-19 challenges will soon be in the past.

In November last year, Rishi Sunak, Chancellor of the Exchequer, said, “Our economic emergency has only just begun.” In the same month, Ofgem launched a consultation on raising the price cap by £21 from April 2021 to help suppliers with a greatly increased risk of customer debt due to Covid-19.

Simple mathematics shows Ofgem anticipates Covid-19 induced bad debt this year of around £550m. This is additional to existing customer debt across all suppliers of around £300m. Exacerbating this situation further, wholesale costs are increasing, which will lead to price rises and, therefore, more customers unable to pay their bills.

Suppliers will find themselves facing rapidly increasing levels of debt, but it is unlikely to be distributed evenly. Some suppliers started this year with an already problematic level of debt. If they have a greater than average exposure to rapidly increasing new debt related to Covid-19, some will find it very difficult to survive. We have looked at the finances of suppliers that ceased trading. Customer debt was typically very high and poor cashflow was often a major factor in the outcome.

All suppliers need to preserve cashflow by ensuring they can manage existing customer debt and reduce its growth. We have been encouraged that suppliers we work with recognised early the likely new debt pressures that Covid will cause. They are taking stock of their existing debt book, assessing the impact of debt were it to double or even treble, and building tactics to avoid that position being reached.

Debt reduction initiatives need to be quick to deliver results

It can be tempting for suppliers to try to create a sophisticated new debt collection system. Frankly, there is no time for that. However, there is a lot that can be done very quickly to better manage debt.

Many suppliers have focussed on their customers setting up Direct Debit payments. In a standard year, this means there is less chance of customers falling into arrears. However, Direct Debit does not guarantee payment. Direct Debit adequacy and failed mandates need to be reviewed more often to discover customers who are struggling sooner. As soon as those customers are identified, suppliers need to contact them to limit their impact.

Customer segmentation allows suppliers to customise their debt recovery approach to deliver better results. If that segmentation work has not yet been completed, suppliers should segment customers into three categories: ‘can’t pay’, ‘won’t pay’ and ‘shouldn’t pay’. Having just three segments means suppliers only need to create three core approaches, avoiding significant delay while creating highly granular ‘perfect’ processes.

Selecting customers for these segments is as much art as science - it may become evident further down the line that a ‘won’t pay’ is really a ‘shouldn’t pay’. However, there are some tried and tested indicators you can use to support segmentation decisions. For example, a total lack of engagement, multiple complaints or employment in a severely impacted industry could be read as ‘won’t pay’, ‘shouldn’t pay’ and ‘can’t pay’ respectively. Additionally, external data sources may help. Open banking affordability assessments are growing in use in this area.

This final advice is perhaps a simplification, but advisers need to be empowered to have an empathetic and openminded conversation with the customers they speak with. They also need to be equipped to quickly resolve any customer service issues uncovered during conversations. A caring approach to conversations resulting from SMS, email or phone campaigns can be incredibly successful. If you can’t deliver that style of contact quickly, using a good third-party specialist can be a short-term solution to increasing your capacity while you develop your capabilities.

Given the amount of business premise closure due to lockdown, B2B suppliers should make every effort to gain accurate, up to date meter reads. These will remove ‘fictitious debt’ that over inflate their debt books and distress their customers.

Now is the time to act

Even with the government’s furlough scheme still in place, Covid-19 has negatively affected hundreds of thousands of household incomes. This pressure is only going to get more severe through 2021 and possibly beyond. Even with perfect debt collection management, debt will be a significant area of concern for suppliers. Suppliers must not put off taking steps to meet this oncoming debt challenge. Act now to avoid a potentially existential impact in the coming months.