2019

Integrated Annual Report

Q&A
With David McAlpin

TCRS CEO

Q THERE HAVE BEEN IMPORTANT REGULATORY DEVELOPMENTS RELATED TO DEBT RELIEF IN SOUTH AFRICA. WHAT IS THE IMPACT ON TCRS?

A

The National Credit Amendment Act (known as the Debt Relief Bill) was signed into law in August 2019. The key amendment relates to individuals who earn R7 500 or less a month, and who owe less than R50 000 in unsecured debt. They may now apply to the National Credit Regulator (NCR) for debt intervention, and based on the NCR's assessment, have all or part of their debt eliminated.

Providers of credit, including retailers and banks, and other market participants have raised a number of concerns regarding the Bill. To date, its practical implementation remains uncertain with no effective date and no guidelines set for how eligible consumers may apply for debt intervention.

There is also disagreement on the number of consumers likely to benefit from the Debt Relief Bill. A study commissioned by the National Treasury in October 2017 estimates that only 1.5 million consumers are persistently over-indebted, which is defined as being nine months or more in arrears. A further study commissioned by the Department of Trade and Industry estimated that only around 177 000 consumers could benefit from the Bill.

We have been following developments on these regulatory changes since they were first proposed, and have performed a detailed impact assessment. TCRS has a granular view and detailed understanding of all individual debtors in our portfolio, and in our assessment, we identified the consumers likely to apply for debt intervention. In the normal course of our collection activities, these consumers are typically assigned a low propensity to pay score and would not be selected for collection or factored into our valuation of estimated remaining collections on that book.

This means that the Debt Relief Bill will have little impact on TCRS's contingency collection activities, or on the carrying value of NPL portfolios acquired as principal. We have put measures in place to train our call centre agents to deal with Debt Relief Bill queries to help consumers understand their rights as we wait for certainty on the Bill's implementation


 

Q HOW DO YOU EVALUATE BOOKS ON A DEBTOR-BY-DEBTOR BASIS?

A

Prior to acquiring a book, we receive a data file from a client with each debtor's outstanding amount due, including their level of arrears and recent payment history, and other relevant information. We merge and compare this with the data we hold in our database – called the master data universe – relating to each specific debtor. This allows us to determine the debtor's propensity to repay that loan, and our ability to contact and transact with that debtor.

We then compare the book we are looking to buy with a comparable book that we have bought before (called a surrogate). This allows us to model and assess the likely performance of the book in question. This is a highly specialised skill, which we have perfected over many years, supported by our significant investments in technology, data and analytics. It is the basis for our ability to price a book competitively, and to generate a superior risk-adjusted return over the period that we collect on the book, while delivering the highest price for the seller.


 

QHOW DOES YOUR MODELLING ACCOUNT FOR THE DETERIORATING ECONOMIC CONDITIONS IN SOUTH AFRICA?

A

The methods we use have proven to be reliable, accurate and predictive through different economic cycles. We have purchased around 250 to 260 books over almost two decades, which provides a wealth of experience and data to keep testing and refining our model. In a deteriorating economic environment where debt repayments are slowing, our surrogates show us how our books are likely to be affected. We build this into our predictive models to account for changing conditions.

In the current economic climate, our high IP, rich data, scale and capital position still favour the acquisition of NPL portfolios from clients who are risk averse and want an immediate recovery on their NPLs. This helps our clients to accelerate cash flows and remove NPLs to strengthen their balance sheets, which then allows them to continue providing debt finance to the consumer market.

In South Africa, book buying is still relatively underdeveloped, but it is growing and we are investing heavily in this market – we spent R1 064 million on new books in 2019, which is a jump from the R639 million we allocated last year. To drive the development of the market, we are engaging with our clients to educate them on best practice in selling their NPL portfolios. We are seeing new sellers enter the market due to this initiative. Also, we are seeing that existing sellers are selling broader segments of their NPL portfolios and selling more frequently.

Beyond our historical focus on written-off unsecured retail debt sold via an auction process, we are extending our total addressable market to include NPL portfolios prior to write-off and those collected via legal process. We are also engaging with sellers to access the increasing volumes of portfolios being sold on a bilateral, contractually recurring basis (known as the forward flow model). Typically, these portfolios provide stronger cash flows and attract a higher purchase price.

So even in a really challenging environment, this part of our business is providing meaningful opportunities for future earnings growth, proving once again how effective our diversified revenue model is in supporting consistent performance through different economic cycles.


 

QARE CONTINGENCY COLLECTIONS STILL UNDER PRESSURE?

A

Our clients are certainly feeling the pressure of economic deterioration and are originating less debt as a result. Also, as pre write-off debt was traditionally outsourced for collection on a contingency basis, the higher volumes of pre write-off debt that TCRS is now acquiring as principal is reducing the size of the contingency collection opportunity.

These factors continue to have an impact on TCRS's contingency collections business. To offset the lower volumes and yields from contingency matters handed over for collection, we continue to follow a sector specialisation strategy, deepening our penetration in our traditional market segments (banks, retailers and specialist lenders) as well as in adjacent sectors (insurance, telecommunication and public sectors).

Despite the tough conditions for our contingency collection business, it is doing well to keep performing in line with our expectations. This is being supported by a relentless focus on efficiencies. A highlight across all the collections businesses has been the careful management of direct expenses, with cost growth kept below inflation. This operational leverage is a further buffer to the economic downcycle.


 

QTCRS'S OPERATIONS IN AUSTRALIA DELIVERED A ROBUST PERFORMANCE. WHAT HAVE BEEN THE MAIN DRIVERS OF ITS SUCCESS THIS YEAR?

A

Recoveries Corporation has had a very good year. It did well in its traditional contingency and FFS collections business, winning new mandates from existing clients. Our focused investment in new business development, supported by the benefits of greater efficiency that can be passed on to our clients, also translated into new client wins.

TCRS Australia has also focused on developing greater management depth and has refined its operational reporting lines. Detailed performance dashboards have been activated to manage and optimise productivity, and business intelligence initiatives have been accelerated to track mandate performance on a real-time and predictive basis.

Alongside these initiatives, our investments in data and analytics, and the successful deployment of technologies proven in South Africa, have supported the pleasing improvement in the business's performance. These included payment automation and collection technologies that drive operational efficiencies. Also, the positive response of consumers to non-voice and digital channels is driving higher levels of right party contact and technology-based payments. Besides these efficiencies, management has done well in containing costs, which translated into significant operational leverage.


 

QRECOVERIES CORPORATION IS DIVERSIFYING INTO ACQUIRING NPL PORTFOLIOS AS A PRINCIPAL. WHAT PROGRESS IS BEING MADE?

A

In Australia, this is referred to as purchased debt ledger acquisitions. We are growing this part of the business in a measured way, not taking unnecessary risk, but nonetheless we increased our investment to R122 million from R23 million in 2018. We continue to grow our Australian database and leverage TCRS's analytics and pricing expertise to establish a meaningful position in this market, which is considerably larger than in South Africa.

Our Australian database is obviously much smaller than in South Africa, but it becomes richer with each new book and mandate.

While we lose more books to competitors than we buy at present, we are resolute in maintaining a cautious approach and not overpaying for books. We believe that you cannot buy market share; our approach is to be guided by a set risk-adjusted return, which requires that we pay fair value for books. Achieving sufficient margin on these books requires an unwavering focus on cost control and optimisation, supported by our proven technology to ensure resources are targeted at the right debtors.


 

QTCRS AUSTRALIA ACQUIRED A STAKE IN A SPECIALISED CONSUMER DEBT ADMINISTRATION BUSINESS IN 2019. HOW DOES THIS TIE IN TO YOUR EXISTING OPERATIONS IN AUSTRALIA?

A

TCRS Australia acquired a 25% stake in a leading Australian debt administration business, Lanyana Financial Group (Lanyana) in May 2019. Lanyana offers a broad range of services in restructuring and collecting debt for consumers in difficulty, and has a current base of more than 5 000 consumer clients.

As a specialised business in an adjacent segment of the collections sector, Lanyana is a good strategic fit for TCRS, and provides another opportunity to diversify earnings and grow in the Australian market. TCRS is providing strategic insight and working actively with Lanyana's entrepreneurial management team to grow and develop this business, including sharing our technology and systems, and assisting to build a data and technology-driven platform. We are working with the management teams of both Recoveries Corporation and Lanyana to explore opportunities for collaboration.

TCRS has the option to acquire a controlling stake in the business over the next few years.

With levels of personal debt increasing, more stringent compliance requirements and a changing regulatory environment, we believe that the debt administration sector in Australia is set for further growth and consolidation. TCRS's strong balance sheet will allow us to allocate capital to acquisitive opportunities that arise for Lanyana as this sector of the market consolidates.

It is worth noting that transformation and consolidation is increasing in the fragmented Australian market. This is good for TCRS Australia, as we are positioned as a smaller player with strong credibility in our contingency business; this makes us a reliable counterparty for sellers. With the invariable disruption that comes with consolidation and fewer players in the market, we have the opportunity to elevate our profile as a solid business with a highly competitive offering.


 

Q HAVE THERE BEEN ANY DEVELOPMENTS IN STRENGTHENING YOUR TECHNOLOGY AND DATA ADVANTAGE OVER THE YEAR?

A

We continue to focus on process optimisation, which is key in managing costs and ensuring resources are leveraged optimally. These include ongoing upgrades to workforce management, the dialer, propensity to pay scorecards and right time to call. In South Africa, we are investigating and implementing new technologies in artificial intelligence and digital communications, as well as applying behavioural science to improve collections and assess the risk of defaults, all of which provide a competitive edge for TCRS.

Our master data universe continues to expand, with over 12 million identity numbers and corresponding information supporting our business activities. The master data universe is absolutely critical in pricing books and informing all aspects of day-to-day collections, from ensuring right party contact to segmenting the book into propensity to pay scores. As I mentioned earlier, this has been instrumental in our assessment of the impact of the Debt Relief Bill.


 

QONE OF YOUR STRATEGIC PRIORITIES IS TO FORMALISE TCRS'S EMPLOYEE VALUE PROPOSITION (EVP). WHAT PROGRESS HAS BEEN MADE TO DATE?

A

The development of our EVP started in 2018, with the aim of providing a unified and standardised human resources framework across all our businesses, and to ensure that our reward and employee support practices are competitive in their markets. During 2019, we continued to refine and communicate the EVP to our people. We are implementing it across all businesses in TCRS to ensure a consistent approach, while allowing some flexibility for customisation to the specific requirements of each business.

Given the competition for talent in South Africa, we need to ensure we can attract people with highly specialised skills, especially in data sciences and technology. We are increasingly being recognised as more than a collections business – but as a successful credit-orientated technology and data analytics business, which is allowing us to bring really good people into TCRS. Another important factor is that our data analytics capabilities extend to enabling effective management of key areas like performance, employment equity and change due to major programme implementations.

To support the development of our employees and build leadership skills to take the business forward, TCRS has established talent structures to manage a pool of selected successors. Each successor will be assigned to a mentor to fast-track their career development.

The business will also be introducing a fast-track programme that identifies and attracts high-flyers internally, as well as top graduates externally. The internal candidates will be paired with a leader and work closely with them on all significant projects, including client contact and board meetings as an invitee.

We continue to invest in appropriate training programmes across the business, keeping our people well up to speed on changes in the operations, technology and regulatory environment.

Lastly, I am particularly pleased with Transaction Capital Recoveries achieving a B-BBEE rating of Level 1, effective 5 December 2019. It reflects our focus on empowerment and our involvement in the YES programme, a business-led collaboration with government and labour that aims to create one million work opportunities for youth.