Credit risk management and collections Part 1: Social tariffs and lessons from the water industry

May 31, 2020

Written By

Tommy Mortberg

Head of Pre-Sales

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Building resilience as an energy provider

Resilience has never been so important in the energy industry as it is now, during the current climate.

Effective Credit Risk and Collections Management can help determine which companies are best placed to manage a downturn.

We’ll be running a series of articles in this space, with this month’s focus on financial vulnerability.

Lessons from the water industry

In the deregulated market, energy companies face the most competitive retail landscape that the UK has ever seen.

With margins squeezed by the price cap, classic industry challenges like managing your settlements imbalance and keeping control of overdue debt are now critical to making a profit.

The domestic water sector still benefits from regulated pricing which allows bad debt to be smeared across the whole customer base, the good payers covering the payments which the non-payers can’t or won’t make.

In addition, social tariffs are used to spread the burden of paying for water more fairly across society, by reducing the bills of those who can least afford to pay.

The evolution of the competitive energy market means that maturing start-ups will find it difficult to finance support for financially vulnerable customers once they get into difficulty. This means that the importance of proactive credit management cannot be understated.

Innovation is needed to come up with ways to support those who cannot afford to pay.

So how can energy companies learn from the water market?

A key change over the last few years has been the improved design and application of social tariffs.

Social tariffs allow customers to obtain a subsidised price, and analysis shows that obtaining payment from customers who otherwise wouldn’t pay anything, improves P&L performance, even though the discounted tariff reduces revenue.

In designing social tariffs, customer simplicity is key. Why force a customer to apply separately? Have a difficult conversation? Complete an exhaustive income and expenditure form? Then provide reams of documentation to prove eligibility, when 3rd party data sources are available to provide you with a simple yes/no against your eligibility criteria?

Being proactive in your approach

An example of this sort of proactive approach would be to screen all new customers monthly. Cross referencing financial vulnerability data with cabinet office data will show any customers in receipt of certain benefits

Where the customer meets both criteria, a discounted tariff can be applied and a positive communication sent to the customer, focussing on reducing their bills and not prying into their circumstances.

In trials using government data, this sort of approach has been proven to reduce early arrears and bad debt write off, more than offsetting the reduced revenue and significantly improving the relationship with impacted customers.

This also acts as a good way of managing your credit risk over the medium term. Companies with the ability to predict and manage risk can reduce their bad-debt charges by between 10 and 20 percent, when compared to their competitors.

In our experience, it pays to build this capability whilst the business is growing. Both to avoid the buildup of overdue debt over time, but also to ensure that credit risk management is embedded into the culture of the business from an early stage.

Once you have hundreds of thousands of customers, it can be difficult to retro fit both the processes, and the cultural fit.

ENSEK have a team of experts who specialise in debt management and payments. We work with you to understand your challenges and the needs you require to manage these processes.

Find out more

If you’d like to understand more, click the link below and get in touch. Equally, stay tuned for part two of the series.

Have a query? Click the link below to get in touch.