Can Collections Be a Win/Win?

CU360
October 5, 2009 | COMMENTS

Facing hard times, some consumers have a novel solution for handling their share of the nation's $939 billion in revolving credit card debt: They just don't pay it.

Beginning in the fall of 2008, many banks and credit card companies, eager to cover their losses, started to treat collections as a negotiation with debtors. Often, financial institutions are happy to settle for 50% of the amount owed because it's better than the alternative—regulations require card companies to reduce debts to zero on their books if a balance hasn't been paid in six months. The issuers know that indebted consumers who haven't paid by then probably never will.

What's at stake is the long-term health of the unsecured debt industry, argues the Bank Administration Institute's Banking Strategies magazine. With past-due accounts hitting 6.5% in the first quarter of 2009, consumers' ability to negotiate or even ignore debt marks a dangerous turning point in the industry. One scenario holds that payment becomes like a game of poker, with winners and losers determined by who blinks first. Increasingly, debtors believe they have the stronger hand.

The industry, of course, wants to keep good customers onboard and paying. The challenge is how to convince them to do that, particularly with unemployment rates approaching 10% and consumers far more concerned about life's essentials than with credit card payments. Since recessions are limited in duration, the answer lies in understanding consumer behavior during and after a downturn.

When the economy turns around, consumers will want to continue using credit for a range of purchases. Recognizing this, financial institutions can help consumers take a responsible approach to debt that serves both parties. The key is to find ways to turn troubled but valued accounts into customers who deliver long-term value and support future growth—and to reach them early. The right combination of predictive modeling, analytics, and service can help financial institutions identify their best customers, understand what they want, and quickly serve their needs.

Empower Staff

Consumers' highest priority in dealing with financial institutions is having access to knowledgeable employees who can quickly access information and resolve issues during the first contact, according to research conducted by relationship-management firm Convergys. Knowledgeable member service reps are even more important to the collections process, where it's essential that they have detailed account information in real time to make critical payment decisions.

New systems can help your collections staff single out the members who are most likely to repay. These techniques rely on analytics and the ability to deploy those findings at the operational level. Convergys recommends:

Propensity modeling. The key to driving collections lies in generating a statistical score that categorizes members in terms of how likely they are to pay or how much they're likely to pay—or both. You can use the score on a stand-alone basis or with other information to determine how to interact with the member.

Recovery strategy. With data in hand from analytics, you can then apply what you've learned to develop segment-specific strategies. You can then align recovery propensity and other debt characteristics to the right channel, contact timing, and level of collection effort.

Best practices. You must integrate analytics and your recovery strategy at the operational level. While modeling and recovery aren't new collections concepts, a disconnect typically occurs when these two areas are integrated into daily operations. Getting the most from the collections contact center requires selecting and keeping the best employees and rethinking technology to meet various kinds of debtor behaviors.

This integration involves collections and the functional area that routinely comes into contact with members—your service reps. By integrating “member care” with collections, you can improve member satisfaction, which increases the likelihood of faster payments and fewer delinquencies.

Financial institutions that follow this approach deploy integrated care/collections staff with a deep, broad knowledge of members' financial obligations and the right training and skills to secure payments. These employees can identify payment challenges more readily, sell the benefits of keeping accounts current, and offer a solution that sounds agreeable to the member.

Such caring outreach is designed to ensure that delinquent members emerge from a collections interaction with greater satisfaction than if they were simply being dunned for payment. The potential benefits include increased long-term value from identifying and keeping good accounts, reduced time-to-payment, and reduced delinquencies.