How affordability assessments can help minimise bad debts: guide to what utility companies need to do to ensure customers can afford their services

07 April 2017

As read on Utility Week.

Eamonn Tierney, managing director of Credit Solutions at Callcredit Information Group discusses how you as a utility provider can use affordability assessments to better determine whether consumers are able to afford your services.  He believes that better assessment of affordability at the point of application and throughout the customer lifecycle is needed, in order to tackle the bad debt issue that effects the sector, comply with regulation and perhaps most importantly put fair customer treatment at the centre of practices.

According to PWC, bad debt across energy utilities rose from £400m in 2011 to £640m in 2015 with UK water firms showing a similar trend from £263m to £379m. When days sales outstanding (DSO) levels are also analysed, energy, water and telecoms utilities all saw a drop-in recovery and bad debt performance.

By using technology, data quality audits and affordability assessments, utility companies can get an insight into what services consumers are able to afford - enabling them to offer more realistic payment plans for individual customers.

Assess affordability at point of application to help minimise bad debts and support treating your customers fairly

Affordability is a complex subject with many variables. A customer’s ability to afford a service is not fixed by income alone, but also by family and personal circumstances, such as school-age children or dependents with disabilities, other financial commitments and previous credit history. Affordability assessments, using big data technologies, give the most accurate, real time view of a customer income, living costs and spending habits without the need for manual intervention.

By gaining a complete understanding of customer’s financial circumstances from the day they sign-up, you as a utility provider have a better view of your customer’s ability and readiness to pay bills on time, and can help ensure that they can afford the payment plans they sign-up to at both the start and throughout the course of their contract. Armed with knowledge about a customer’s income, expenditure and payment habits, it then also becomes possible to determine the customers’ needs and how they are likely to be impacted and act as their requirements change. Should affordability assessments flag that a customer’s financial situation has changed, you can use this insight to tailor your services and offer the tariffs and payment plans most appropriate for individual customers. Whether that is a credit account or a pre-payment solution. Thereby avoiding customers getting into arears, or agreeing to unsustainable repayment plans when they do.  

What’s more, our research of 200 risk professionals earlier this year revealed that treating customers fairly is also becoming increasingly important for organisations themselves. A large majority (72%) of respondents believe that their organisation has a social responsibility to prevent customers from over-stretching themselves financially. Affordability assessments provide you as a utility provider with greater confidence in what you are offering. And makes it significantly easier to achieve best practice in affordability and meet the tightened regulation on debt collection introduced by the FCA, and initiatives by Ofgem and Ofwat to prevent the disconnection of vulnerable customers.

Review a consumer’s affordability through the entire customer lifecycle

Continuously obtaining data on the consumers’ financial profile can not only improve customer experience, but is crucial in order to avoid bad debt throughout the entire customer lifecycle. Financial history, as the name implies, is historic. Circumstances inevitably change for some customers, and even those with impeccable affordability criteria can find themselves in debt, often through factors out of their control.

Affordability assessments allow affordability to be assessed both at point of application and future sustainability. This provides you with a comprehensive overview of your customer as a whole, rather than just a ‘snap-shot’ of the customer’s data at a particular point in time. Thereby allowing utilities to base payment decisions on future and present performance rather than solely relying on a customer’s payment history. And crucially, ensuring that should a customer’s financial situation change, this can be flagged early on, and utility companies can proactively adjust payment plans. 

It can also aid in identifying customers who should be claiming Warm Home Discounts or transitioning onto social tariffs, which can further help to avoid more complex and expensive debt recovery processes. We recently worked with a major utilities provider to train their team in ‘spotting’ customers who may be struggling with their bills, and are at risk of going into debt. Identifying these vulnerable customers by getting a better understanding of their financial situation, through our Integrated Collection Data (ICD), has helped the provider ensure that the right customers are getting aid before they fall into arrears, and their water bill spirals out of control. Importantly, this also helps customer experience as consumers don’t have to send supporting information to validate their income.

Essentially, by using affordability assessments in this way, you can adjust your approach from debt management to customer management and ensure that fewer customer accounts experience bad debt.  This is a critical part of not only regulatory compliance, but putting fair treatment of customers at the centre of every decision you make.

Ultimately, this change in approach will reduce the number of payment problems and provide additional benefits such as reduced volumes of complaints, higher customer satisfaction and better customer retention. Combined with fewer bad debt cases, this will lead towards increased profitability.

Considering these clear benefits, it is no surprise that in addition to credit checks, two-thirds (67%) of organisations carry out affordability checks, with a further 27% planning to introduce them within the next 12 months. At Callcredit, we have been extracting value from affordability data since the creation of the Over Indebtedness Initiative, to help our customers manage the expectations of regulators, minimise the levels of bad debt and the number of accounts falling into arrears, whilst importantly improving consumer outcomes. By ensuring you have access to quality data, companies can create a complete view of a customer, which means customers can have total confidence that the decisions made about them are fair while the utility knows it is meeting its regulatory obligations to that customer.

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