What would the Credit and Collections Models look like after Covid-19 ….

Tim Paulsen (Canada) said: “In perhaps the most challenging time we have ever experienced in receivables management, nineteen (that’s right, 19) of the worlds best experts in risk & receivables management want to share their knowledge, tips and techniques with you”….. - click this link to listen to the interviews from around the world

Topic 2:  After Covid-19, will we see ONE Global Credit and Collections Management model?

To follow … please come back …



Topic 1:  Can the Corona Virus be called a Black Swan event?

Eugene Joubert: The black swan theory is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalised after the fact with the benefit of hindsight. The term is based on an ancient saying that presumed black swans did not exist - a saying that became reinterpreted to teach a different lesson after black swans were discovered in the wild.

The theory was developed by Nassim Nicholas Taleb to explain: (a) The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology. (b) The non-computability of the probability of the consequential rare events using scientific methods - owing to the very nature of small probabilities. (c) The psychological biases that blind people, both individually and collectively, to uncertainty and to a rare event's massive role in historical affairs.

Unlike the earlier and broader "black swan problem" in philosophy - the problem of induction - Taleb's "black swan theory" refers only to unexpected events of large magnitude and consequence and their dominant role in history. Such events, considered extreme outliers, collectively play vastly larger roles than regular occurrences. More technically, in the scientific monograph "Silent Risk", Taleb mathematically defines the black swan problem as "stemming from the use of degenerate meta-probability.

Can we call the Corona Virus a Black Swan event?
YES To do so it must be an event with the following three attributes:
First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.
Second, it carries an extreme 'impact'.
Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

So, let us tick the boxes for the Credit Industry: 

Is Covid-19 a surprise?
Personally I must admit that I did not foresee such an “outlier”. Quite frankly, in the past, I have talked about “outliers” but foresee this one, not a chance in hell. Outliers in Credit came in “no surprise wrappings” clearly stating their purpose - even if the purpose is to rectify the market like the Credit Crunch a while ago. Credit used to be a segment of business that had no unforeseen outliers, normally when the outlier happened it came as no surprise. The fact that EAO’s were made extra difficult to obtain came as no surprise, we all knew about the abuse and also knew it is going to blow up. Same with Debt Relief, the volume of credit pushed into the market to gullible consumers was a time bomb with a short fuse, no surprises that Government was going to protect their voters.

Does Covid-19 have a major effect?
“Major effect” !!! you ain’t seen nothing yet !!! This surprise came without warning and that caught everybody with their pants down, no parked reserves for this kind of event. What could be more major than shutting down businesses and locking their clients away - now you tell me “is this going to have a major effect?” 

Is Covid-19 rationalised by hindsight?
It is not a question of “time will tell” - all so-called experts on Corvid-19 are already telling us why and from what this stems. We don’t even have the luxury of hindsight and they are already rationalising it.

Raymond Anderson: I would not consider Covid-19 a black swan event, as such things happen every fifty to hundred years, and are relatively predictable. In my readings, they are coming up as “known unknowns”, if one applies the Rumsfeld matrix.  You know they will happen, but do not know how they will play out. Black swan events tend to be associated with “unknown unknowns”.

Thomas Maydon: Collections models are likely to be affected on a variety of fronts. Some of the key changes will be the following:
  • Severe operational changes during the COVID-19 lockdown will likely see higher roll-rates than expected as fewer delinquent customers are contacted.
  • The models will therefore over-estimate probability of payment or under predict probability of rolling.
  • Stressed population will likely see a lower propensity-to-pay or higher probability of default than what the models originally predict.
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