In the wake of COVID-19, local councils and housing providers have been jolted into finding new ways of delivering services and interacting with their tenants - especially when it comes to income collection and rent arrears. Increasingly, we’re seeing providers employ innovative strategies while moving from debt recovery to support provision.
In our latest report, we predict that the implications of the Coronavirus Act 2020 will result in a greater reliance on repayment arrangements, thus bringing further challenges to overstretched income recovery teams. The current arrangement landscape tends to be characterised by a series of broken and re-made arrangements built around low-value instalments and extended payment durations.
This results in registered providers carrying substantial amounts of unsecured debt over a prolonged period of time; inflating risk factors and opportunity costs as well as the potential for write-offs. These factors coupled with the increase in demand places providers under intense pressure to invest more resources to reduce this increasingly risky debt.
We believe this challenge of low-quality, high-risk arrangements requires radical innovation to deliver both business and social impact. Landlords need to redesign how they assess, establish and manage repayment arrangements.
However, with the strain already being placed on resources, how can providers ensure that rent is paid while protecting the landlord-tenant relationship?
Paramount to the success of an arrangement is how well it is created in the first place. As part of the process, teams should always establish a duration and instalment value for clarity. This will give tenants a fair and tangible framework for reducing their debt sustainably over time. Set instalments too high and they are unlikely to be maintained, too low and you prolong the repayment time frame and increase the risk of default.
In order to succeed, providers need to create arrangements in the right way, and monitor them over time. Which is where data science, behavioural insights and technology can have a significant impact.
Behavioural insights tell us that individuals tend to focus on three areas when it comes to repayment arrangements:
1. Number of debts
2. Instalment values
3. Repayment duration
By applying behavioural insights to each of the above, housing providers can establish and nurture more sustainable arrangements.
1. Number of debts
How many debts we have and their interest rates have important implications on our repayment decisions. Rationally, we should pay the minimum amount required to avoid charges on each debt, focusing any additional funds on the debt with the highest interest rate. Instead, we tend to be more motivated towards paying off the debt with the smallest starting amount. This concentrated strategy prompts faster repayment of that particular debt, to the detriment of other debts. For this reason, where appropriate, it is worth having a discussion with tenants about the number of debts they are managing. Only after considering a tenant’s situation in full will arrears teams have an appreciation of what instalment value a tenant will be able to maintain.
2. Instalment value anchoring
Providers need to consider how they frame the choice they give to tenants in relation to the instalment value. Due to a cognitive bias called ‘anchoring’, individuals rely too heavily on initial pieces of information or numbers when making subsequent decisions. The first instalment value we suggest should provide tenants with an automatic indication of roughly how much they should pay, and research has shown that this in fact reduces repayment amounts. Given the power of anchors to reduce repayment amounts, it is crucial that the arrears team is able to make the first suggestion of an affordable amount.
3. Payment duration
The length that tenants have to make repayments is a crucial consideration in any arrangement. Usually individuals want to reduce their repayment duration and will factor in the affordability of increased instalment repayments if it enables shorter repayment periods. However, given the flexible nature of arrangements, the long-term consequences of their decisions are often unclear. Basing an arrangement on a timeframe is a useful way to avoid low anchors and provides the tenant with a clear understanding of how long this process will continue for. By taking into consideration the number of debts a tenant has, their instalment value and their payment duration, landlords can start to build a process geared towards optimised, sustainable arrangements.
Maintaining the arrangement commitment
Establishing behavioural-based interventions will help to optimise the arrangement process as well as helping to nurture the landlord-tenant relationship.
A positive landlord-tenant relationship can increase the likelihood that a tenant will inform landlords of sudden changes so they can introduce early intervention strategies aimed at mitigating the problem before it escalates. These strategies can be tailored to align with individuals’ internal motivations or can focus on external motivations such as financial rewards.
Maintaining a positive landlord-tenant relationship is the end goal. Not only will this result in happier and more proactive tenants but research has shown that when organisations treat people fairly they are more likely to show greater compliance, accept future decisions and behave in a cooperative manner.
Overall, the application of behavioural insights and cultivation of a positive landlord-tenant relationship can transform income services and future-proof organisations.
Chris Walker is behavioural insights lead at Voicescape