Insanity, it’s often said, is trying the same thing over and over and expecting a different result. Nowhere is this axiom truer in financial services than in the collections process.
The Right Treatment at the Right Time
The goal in collections is to efficiently deal with delinquent accounts in a way that will minimize your losses while providing the best possible customer experience under those circumstances. The challenge that every financial institution (FI) has in collections is optimizing their process to ensure that each delinquent account is getting the right treatment at the right time.
This is more difficult than it sounds. There are some customers who are going to be habitually late in making payments, but will always resolve their debts without any intervention from the FI. They have the ability and willingness to repay, it just slipped their mind. With these customers, any time or resources spent trying to cure them is a waste, because they are eventually going to cure all by themselves. On the other hand, you might have a group of customers who experience some type of financial hardship that inhibits their ability or willingness to repay. With this group of customers, early intervention—maybe in the form of a specialized repayment plan—is often the difference between getting them back on track and having to write them off.
Hindsight is 20/20
Once an account has gone through the collections process, it’s pretty easy to look back determine exactly what happened to the account and how effective the collection strategy that was employed turned out to be. You can drop all of the data into a spreadsheet or business intelligence tool and quickly pick out the accounts that didn’t receive treatment early enough or the self-curing accounts that you wasted treatment resources on.
This backward-looking analysis is relatively easy. The hard part is applying what you learn from that analysis to your future collections interactions. This is critical because without that adjustment, you’ll just be doing the same thing and expecting a different result.
A Better Result
So how do you apply what you’ve learned? How do you improve your portfolio management and collections processes to ensure a different (and better) result?
It starts by identifying the underlying characteristics of the delinquent accounts that you mishandled. For example, let’s say that you had a customer that fell behind on their mortgage and ended up walking away from their house all together. At the time, their delinquency seemed relatively standard—a consumer with a good credit score who just missed a payment. In reality, that customer experienced a financial hardship that forced them to strategically prioritize the payment of their credit card and auto loan ahead of their mortgage. It turns out that this customer wasn’t just a standard delinquency, but a strategic defaulter and instead of giving them time to self-cure, you should have proactively reached out to them as soon as they missed that first payment.
The interesting thing about this example is that there would have been a number of characteristics about that delinquent account—easy to recognize in retrospect—that would have been enormously valuable to have known about in advance. For instance, according to a presentation by FICO at this year’s CBA Live Conference, strategic defaulters are usually financially savvy consumers who make a premeditated decision to stop repaying specific loans in order to optimize their financial situations. Accordingly, there are a number of unique characteristics about strategic defaulters that can be used to identify them very early in the delinquency stage. A credit card inquiry is a great example. If a consumer takes out a new credit card right before defaulting on their loan, that’s an indication that they were planning to default and were looking to gain extra liquidity before that default damaged their credit score.
Once you have identified some of the characteristics that might lead to better collections decisions, you need to adjust your portfolio management and collections processes and systems accordingly. Speed is critical here. If you can’t introduce new decisioning logic and review triggers into your account monitoring system quickly, then you will end up making a lot of insane decisions before you start seeing a different result.