Friday, 21 April 2017

The business cycle is very much alive

Just before the crash in 2007, we had never had it so good. The housing and stock markets were racing ahead, banks and financial institutions were falling over themselves to lend further and further into the subprime market and then the music stopped. Almost overnight the credit markets seized up and the rest is history.
Around ten years before this, the Asian financial crisis swept through East Asia decimating the emerging ’Tiger’ economies and impacting severely the developed economies in Europe and North America.
The late 80s and early 90s were characterised by a recession which was in itself preceded by the stagflation which dominated much of the 1970s.
Looking at this objectively (and despite many claims that the business cycle is dead) it is evident that we are in a cycle of boom and bust that resets itself, to varying degrees, around every ten years. So, is now the time to start preparing for the next downturn?
As we look at the economy in 2017, stock markets are back at record highs, housing markets are rallying, lending continues to rise and many of the underlying structural issues that caused the 2007 crash remain unchanged. On the public sector side, government debts are spiralling and student loans have reached record levels. To be blunt, the warning signs are everywhere and once again we find ourselves in a credit fuelled bubble that will, like all bubbles, inevitably pop. Looking back to 2007, one of the key features of the economic crisis was how quickly it unfolded; the time from the first signs of crisis to individuals queuing outside banks was remarkably short. The key lesson, therefore, is that individuals and organisations need to act before any crisis hits if they are to protect themselves from the full impact of the downturn.
Here at TDX Group, like everyone else we experienced the rollercoaster ride from the global financial crisis as it impacted and ultimately reshaped our business. Thinking back, however, the activities of one of our clients in the year leading up to the crisis seemed insightful – and perhaps gives us all a lesson or two we can learn in the current situation.
Accepting that the economy was overheated our client embarked on a strategy to prepare themselves for what they thought was inevitable. Their strategy encompassed two key elements:
1: Fix the collections and recoveries process
To ensure the process in collections and recoveries was truly fit for purpose and scalable, they invested, up-front, in this capability to ensure that when volumes did start to increase they were ready to respond. Working with TDX Group provided flexibility and optionality across collections and recoveries and ensured that there was a plan B as suppliers exited the market and volumes spiked. In comparison, too many other creditors relied on debt sale, specific purchasers or specific DCAs and were severely impacted when they were no longer able to operate post the financial crash.
2: Clear out all warehouse and legacy debt
This client also embarked on an ambitious programme with us to divest all outstanding warehouse debt that resulted in the sale of around £1-2 billion of assets. The programme was so successful that as the crisis hit at the end of 2007, non-performing loans on the balance sheet were at an all-time low almost to the extent that there were no post default accounts.
What was generally lacking in 2007 were strategies aligned to individuals’ financial circumstances.  The strict one-size-fits-all approach implemented by many creditors simply resulted in consumers ignoring their problems, triggering a further rise in defaults and personal insolvencies, and a reliance on high-cost short-term lending. 
Being able to effectively identify and verify those who are capable of paying versus those who are potentially vulnerable and / or falling into genuine financial difficulty produces a wide-range of scenarios, each one requiring a carefully considered strategy. By responding to customers fairly and appropriately, active engagement with the customer is likely to be retained and recoveries activity can be targeted accordingly. 
Hindsight truly is a wonderful thing, but I think there is logic in really looking at the economic evidence around you and, using history as a guide, being prepared for what lies ahead. I think all lenders in the markets should be thinking now about the business cycle and how they can prepare for what lies ahead, this is not a question of ‘if’, it is a question of ‘when’.
Here at TDX Group, across our range of international markets, clients are starting to approach us worried about the next downturn and asking for help to ensure they are as well equipped to manage the consequences. As we move forward with these clients, the experiences of 2007 seem to resonate and as I look at the economic picture around us, being prepared now seems more important than ever.
By Stuart Bungay, Director of Product and Marketing, TDX Group