Experts in Debt-Recovery.
Specialist Advisors on Credit and Distressed Debt

Financial literacy imperative for sustainable credit and collections

When it comes to sound credit provision and debt collection strategies, businesses focus on a few core areas: promotion, evaluation, approval, risk management and alternative payment methods. But what about financial literacy? This seemingly unlikely addition to the list has the potential to significantly reduce defaulters while simultaneously improving overall collections.

In April in the USA and in November in Canada, financial institutions turn their attention away from solely selling products and services to promoting financial literacy as part of Financial Literacy Month.

This annual, month-long initiative is a proactive effort by banks to educate consumers on their personal responsibilities when it comes to establishing and maintaining healthy financial habits.

Since America’s economic meltdown, a lot more focus has been placed on consumer debt management and consumer understanding of the terms and conditions of financial products. Because, some analysts argue, American consumers’ financial illiteracy was partially to blame for the burst in the US housing bubble that preceded the recession of 2007-8.

Although we are not alone in this position, South Africa has a significant (and steadily growing) financially overburdened consumer base.

According to the SA Human Rights Commission (SAHRC), of the 19 million credit-active SA consumers, 50% have impaired credit records, three months plus in arrears, and 15% are debt stressed, one to two months in arrears. This equates to around 11 million South Africans who are over-indebted.

We know that previously, unscrupulous lenders took advantage of cash-strapped consumers by unleashing their high-interest loans on a largely unsuspecting populace. The National Credit Act has since closed those loopholes, paving the way for regulated microcredit. However, just because the lending practices are above board today, it doesn’t mean consumers’ financial literacy is.

Typically, consumers have no idea of the responsibility that comes with credit, and just how easy it is to land up in a negative debt cycle. Estimates are that South Africans spend between 70% and 80% of their salaries just on servicing monthly debt.

I believe a solution to this challenge is sound financial literacy. We need to create, at grassroots level, a tangible understanding among the unbanked, those with limited financial knowledge and even those with an acceptable financial knowledge, of available regulated credit products, the impact of signing up for these products, and how best to settle them over the short term.

This idea should be incorporated into schools as well, where instead of just teaching learners about maths and accounting, we also teach them how to open the right bank accounts for their needs, what types of approved credit facilities are available to them, and even how to safely balance their incomes and expenditures to repay credit and curb debt spirals.

Beyond the educational benefits, financial literacy has the power to evolve ordinary credit and collections approaches into sustainable strategies capable of greatly reducing defaulters, positively rehabilitating debtors and improving collection levels.

At a strategic level, businesses should consider allocating dedicated resources for financial literacy, and using these for specific customer-centric interventions. These could range from intensive, formal education drives for clients struggling to make repayments to payment reminders and tips for servicing debt on statements.

There’s also a golden opportunity to educate younger consumers who are signing up for financial products for the first time. Service providers should capitalise on these fresh-faced customers and use the opportunity to inform them now, from the beginning, on the correct way to manage credit and debt.

Proactively educating consumers not only enables them to make better financial decisions, but also transforms these ‘liabilities’ as ‘bad’ debtors into empowered, long-term assets for future business sustainability.

Mark Essey is director of Debt-IN, experts in debt recovery and specialist advisors on credit and distressed debt.