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Optimising collections for the current climate:Key Principles for Success
Head of Collections
Experian UK & Ireland
Lenders are currently faced with the significant challenge of dealing with considerably more accounts rolling into a delinquency position and dramatic changes in customer profiles. Accounts historically considered medium to low risk and profitable, are increasingly entering collections due to the changing economic climate.
With operations under strain due to increased workload, capabilities are being pushed to breaking point. Without the ability to invest in major technology improvements many organisations are simply throwing additional head count at the problem.
The current environment requires new thinking. Experian's work with lenders around the world has enabled it to both identify and define optimal collections techniques that can be applied to the vast majority of markets and industries and which enable organisations to significantly reduce the amount of bad debt they are writing off.
Experian believes the following strategic principles should always form the basis for best practice in debt management:
1. Use of dedicated collections scoring and pre-delinquent engagement
Many lenders already use behavioural scoring that generally covers a six-month outcome period and predicts the likelihood of three missed payments in that period. A six-month outcome period is often longer than the entire collections cycle, so it becomes vital to be able to predict and adapt to the changing circumstances of certain customers far more quickly.
More advanced collections teams will complement these longer term behaviour scores with the shorter term predicted power of dedicated collections scoring. This then allows the collections team to engage with the consumer and implement specific prevention strategies even before they enter the traditional collections cycle.
2. Use of external data to supplement the internal view
Financial institutions that hold the primary current account relationship with a consumer have at their disposal a rich vein of internal information on which to base their decisions. It is, however, a recognised fact that, although better informed than their peers, they still only have a partial view. External data can provide a crucial overview of a customer’s other credit relationships and how they are performing on those, as well as the extent of any potential debt problems.
Organisations can take a regular feed of external data that dynamically interacts with and updates their own internal information. Not only does this enable collectors to track down those that have moved, it allows them to better understand the individual circumstances of those they need to engage with, and helps to identify potential remedies that may be appropriate.
3. Information to indicate change of behaviour
Although information based on a fixed point in time is useful, the greatest insight can be attained by understanding and spotting trends in an individual consumer’s financial behaviour that may change over a period of time.
In its simplest form, spotting a steadily increasing credit card balance, with only the minimum payment made each month, can indicate signs of growing financial stress and a slide towards potential delinquency. Changing behaviour patterns often suggest that things may be going wrong financially. A trigger event, such as a regular salary payment not arriving in the current account, is a strong indicator of impending potential delinquency problems.
4. Affordability estimations
In every debt portfolio there are the hardcore ‘won’t pays’, typically fraud cases or disputes with the lender, and the casualties – the ‘can’t pays’ – who, due to circumstances beyond their control, such as loss of job or marital breakdown, experience temporary or longer-term payment problems. Affordability estimations, which provide an indication of an individual’s ability to pay, can help inform the collector’s approach to dealing with a particular case, as well as providing an appreciation of the potential longer term value of the customer.
5. Champion vs. challenger environment
Another important improvement an organisation can take is to regularly review its processes and continually evolve its approach to collections through experimentation. Champion v challenger allows the organisation to test in a controlled manner the timing, approach, tone, message, and segmentation of the collection process on a small population of its debtor base in order to understand what works and what doesn’t in different circumstances. Results in the test environment can be measured and compared against the dominant champion strategy. Successful evolutions can then be rolled out across the broader debt portfolio.
6. Flexible workflow and process management
The ability to flexibly control the collections strategy and procedures that enable the business to cope with changing circumstances and priorities is a key element of success. The efficiency of the operational process will significantly benefit from a modern collections system that integrates effortlessly with all the other systems applicable to the collections process, including billing systems, customer information systems, document managing systems, messaging systems and strategic decisioning systems.
Integrating all of the software architecture ensures that collections agents always have access to accurate customer data and productivity tools available to enable fast and accurate decisions. Such systems can use strategic segmentation to automate many of the customer interactions, freeing up collections agents to concentrate on the more difficult cases that need individual attention.
7. Well-trained collectors
Collections is a demanding job that requires significant tact and diplomacy, as well as strong analytical, communication and negotiation skills. Interactions between collector and customer are often a defining piece in the entire relationship. Organisations must invest to ensure that their collections activities are being undertaken by the right people with the right skills.
8. Controlled decisioning throughout the credit lifecycle
In many cases the collections team is not solely responsible for the inability to effectively recoup a debt. Collectors must become a source of valuable and considered insight for their colleagues working in acquisition and customer management. Analysis of those customers in the collections cycle can help identify how decisions made further up the chain have contributed to delinquency and help remove any future problems.
9. Strong management information
Monitoring and the information it provides is an essential part of the day to day management of a debt management system. From an operational and strategic perspective it is vital for the organisation to understand the performance of the collections and recovery activity over time, how effectively resources are being used and highlight current and potential trends in the portfolio and market that may affect results. This insight feeds into a continual cycle of evaluation and improvement.
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