Accelerating the return on investment from your collections process

An Experian white paper

A cost-efficient approach to achieving leading collections capability

Page 2 | Accelerating the return on investment from your collections process

The changing global economy has put new pressures on lenders. New competitive entrants to the market are applying pressure on existing organisations to grow their portfolios despite previous stress around delinquencies. At the same time, underlying economies have been slow to recover post Eurozone crisis. The need therefore to treat Collections as a completive environment is becoming ever clearer and with that the collections process has evolved from an overhead and cost centre to one that is seen as a central driver of profit.

This white paper examines how consumer credit lenders can attempt to raise their payment priority with customers and make sure that their debts are repaid first while controlling and balancing the challenge of collecting more debt at the lowest cost.

The paper also discusses how lenders who have faced financial or information technology (IT) investment barriers can now use the recent innovations in advanced collections technology to achieve a sustainable competitive advantage – and do so cost-effectively.

Evaluating collections systems

The key challenge within today’s modern collection function is to achieve more with less.

Many lenders have seen their collections delinquent book grow both unexpectedly and rapidly. When this happens the first instinct of the operational collections group is to provide more collectors to handle the increased volumes; however, the collectors continue to work the accounts in the same manner. This can be successful in the short term, however, since the underlying behaviour patterns and pressures on customers is evolving, the recovery rates can worsen over time.

Many lenders are limited to recruiting new staff and therefore need to find more creative solutions that are sustainable to improve their collection rates in a deteriorating environment. These organisations need to employ their resources shrewdly, combining knowledge of their customers with a segmented and targeted approach, and as much automation as possible.

Justifying capital investment in a large-scale dedicated collections system is a significant challenge for a business restricted by limited cash flow. As a consequence, many lenders are hampered by legacy and frequently inflexible collection decision and workflow systems. Others turn to their existing provider of billing or customer relationship management (CRM) systems to extend their use to support collections processes. In many cases, this improves some support functions and the repackaging of this offering to address this market opportunity can appear as an attractive short term option. The true cost of ownership however is often concealed. Since Collections has neither been considered a core focus area nor a core competence for these support system vendors, and due to years of underinvestment, these systems typically lack sophistication, with any adjustment to strategies requiring ongoing third-party configuration and active support.

With capital expenditure under such intense scrutiny across the whole business, it is vital that the appropriate system selection focuses on key long term benefits within the collections criteria that will deliver a proven rapid return on investment and satisfy the need for a low cost of continued ownership.

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Key collections criteria

A dedicated Collections system should allow lenders and service providers to improve the efficiency and performance across all aspects of their collections process. Five crucial capabilities have emerged as having the greatest impact on collections success:

• Segmentation

• Automation

• Integration of contact channels

• Consistency of collections activity

• Capability to match communication with customer preferences

Segmentation: Maximise collector productivity

One of the core success criteria within Collections is the ability to empathise with the customer’s issues and preferences. A highly targeted approach that is appropriate significantly increases a customer’s willingness to work with the lender to rehabilitate themselves and thereby reduce outstanding debt. Without the ability to differentiate between portfolios, collectors can spend a lot of time managing simple cases instead of focusing their efforts on more complex or higher-value debts. By identifying customers who will pay their arrears without any proactive

action, lenders can deploy self-cure strategies that provide a grace period. This can enable those customers to return to order (or cure) without incurring costs through collections activity. The targeting and correct identification of these groups are essential for this to be effective.

Not only does this save costs, but it also can protect the relationship with the customer. Aggressive collections tactics for these types of debtor can result in alienating the customer, damaging the relationship and reducing the chance of collection; in the longer term these customers may become an attrition risk.

For the proportion of indebted customers who are in extreme financial difficulty, or those who attempt to exploit the system to avoid paying, gaining visibility of their true financial circumstances can enable the application of a customer-centric approach. Collectors who can view and assess a customer’s total exposure across all their accounts can discuss with the customer realistic options to resolve the missed payments, while balancing the view of an accurate evaluation of the customer’s total longer term business value. This informed approach ensures that realistic promises to pay, with regards to value and timing, are more likely to be honoured, resulting in improved cash flow, less rework chasing a failed promise, and less long-term delinquency.

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...Sophisticated analytics can provide insight into the customers most likely to default, allowing the creation of effective targeted collection strategies... ”

More granular segmentation can be achieved when bureau data is leveraged. This allows the identification of customers who have missed payments elsewhere and therefore are showing stress across multiple lenders versus those who have only missed payment with the lender. Sophisticated analytics can provide insight into the customers most likely to default, allowing the creation of effective targeted collection strategies, as well as the development of pre-delinquency campaigns to help stem the flow of cases entering the full collections process.

Automation: Improve collections efficiency

Optimal collections performance demands that the cost of collecting outstanding debt is balanced with the amount requested — generally, the lower the better. Automating standard and routine collections activities significantly improves the cost-efficiency of the collections department, enabling more cases to be handled while driving down overheads.

Collections products and services that require human intervention can leverage segmentation and workload targeting to enable the collections team’s strengths to be focused in the right place by matching the complexity of cases to the collectors’ skills.

From a strategic perspective, the underlying approach to treating a customer appropriately requires tests to be undertaken to verify that the actions taken are effective. This testing approach is known as a Champion/Challenger (test and learn) analytical technique and allows the assessment of both cash recovered and the relative value of each activity required to achieve it to be objectively evaluated. This provides deeper insight into communications strategies such as which channel to use to contact the customer, how often and when to communicate, as well as, which incentive programme works best – and at what cost.

By testing strategies on a small, live sample the cost/benefit impact of any change can be accurately assessed in a real-time, low-risk environment. This controlled pilot-testing approach ensures that collections strategies are kept up to date in today’s ever changing and challenging environment.

Access to management information reporting tools enables the performance and efficiency of the collections team and system to be evaluated in real time, allowing for a continual cycle of fine-tuning and improvement.

Integration of contact channels: Increase the value of collections activity

Timely, right party contact is essential to increase overall recovery rates, however, this is becoming more costly to achieve. In the past, many lenders adopted a one-size-fits-all approach to customer communications; these work for many customers but do not gain the buy-in of many others. Most lenders have now realised that this is not the most efficient way to approach collections. Personalisation and appropriate targeting of collections strategies improves the quality of customer engagements, increases customer satisfaction and, most importantly, increases cash collected.

The more leading edge Collection functions are adopting controlled optimisation of this process. This is achieved by identifying the right message for each customer, executing it at the right time, via the right channel, with the right terms. This practice allows the business to maximise the efficiency of its customer communications. Advanced optimisation techniques have been developed to address such issues and have been successfully implemented in some leading-edge collections environments.

Collections efficiency can be further increased with the integration of predictive dialer services, which use information from other enterprise applications and enable real-time data interoperability via web services. Such systems are particularly effective in early-stage arrears management, where the interruptive medium of an automated voice call, email or short message service (SMS) is less easily ignored than a letter. A direct link to an interactive voice response system or web page for self-settlement, or the ability for struggling customers to opt in to a conversation with a fully briefed collector, significantly increases collections success.

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Consistency of collections activity: Improve the customer experience

Increasing regulation demands that Collections departments look beyond the recovery of debt to focus on rehabilitating debtors to become revenue generators in the longer term. Collectors can demonstrate social responsibility and comply with requirements to treat customers fairly by distinguishing between those who can’t pay and those who won’t pay. This approach results in improved customer satisfaction and can protect the customer relationship for long-term retention.

Collections systems can assist by ensuring that treatment is consistent across the portfolio while also enabling collections departments to better comply with a variety of regulatory requirements. This can enable more accurate assessments of the risk level of individual customers, predictions of recovery rates and estimates for lower levels of provisioning.

Regional variations in regulatory codes increase complexity and risk of non-compliance for companies operating in multiple regions. However, the ability to add scripting to the Collections system ensures that collectors are making the correct statements for the business and specific legal steps required by local legislation can be inserted into a route.

Capability to match communication with customer preferences

In today’s increasingly technologically sophisticated population many lenders are severely lagging behind their customer’s expectations. Many Collections functions limit communications to letters and phones. The use of SMS and voice recognition systems are becoming more common but making these communications accessible via the internet, smart phones and tablets are rare. This means that huge segments of customers who use their phones or tablets as their main communication devices are not being contacted via their preferred channel, resulting in lower response rates. When reviewing segmentation one of the quick wins to increase responses is to match expectations with a request to make the payment. Development of flexible systems that enable additional new channels to be added over time, and strategies to be updated, are becoming mandatory to allow for the efficient evolution of collections efficiencies.

Market demands on global Collections and Recoveries solutions

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Making it happen

Often the biggest barriers to acquiring a leading Collections system are the time and capital expense required to implement it. An investment of this kind involves commitment from multiple stakeholders from across the business. Developing an appropriate, detailed and flexible scope and implementing all the requirements of each stakeholder into a single, large project are time-consuming as well as costly.

Now, preconfigured systems are available that can be live within weeks, giving almost immediate access to best practices for collecting more debt sooner. These predefined collections strategies eliminate the need for complex bespoke customisation but can still retain the flexibility for strategy development in the longer term. This type of system also offers predictable costs and a reduced reliance on IT resources thus providing a lower total cost of ownership.

These targeted systems leverage the industry’s most advanced collections capabilities to markedly improve results over more generic CRM or business system frameworks. They provide a powerful service that interfaces with existing systems. They quickly enhance the collections process and deliver a rapid return on investment to boost cash flow. Hosted delivery helps overcome IT barriers and reduces up-front costs.

With consumer delinquency threatening profits, now is the time to take a fresh look at how to boost performance with a purpose-built collections product.

...With consumer delinquency threatening profits, now is the time to take a fresh look at how to boost performance with a purpose-built collections product. ”

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About Decision Analytics

Experian Decision Analytics enables organisations to make analytics-based customer decisions that support their strategic goals, so they can achieve and sustain significant growth and profitability. Through our unique combination of consumer and business information, analytics, decisions, and execution, we help clients to maximise and actively manage customer value.

Meaningful information is key to effective decision-making, and Experian is expert in connecting, organising, interpreting and applying data, transforming it into information and analytics to address real-world challenges. We collaborate closely with clients to identify what matters most about their business and customers, then create and implement analytics-based decisions to manage their strategies over time.

In today’s fast-paced environment where developing, implementing, and sustaining an effective strategy is imperative, Experian Decision Analytics helps organisations unlock a wealth of benefits immediately—and set the stage for long-term success.

Increased revenue: Our products and services enable clients to increase revenue by providing the insight and agility they need to find and engage the right customers, target products more effectively, and grow market share.

Controlled risk: A broad range of risk-management products and services help organisations verify identity and manage and detect fraud, optimise collection and recovery, and balance risk and reward.

Operational efficiency: Experian Decision Analytics helps organisations quickly integrate various information and processes to enhance operational efficiency and boost agility. Our flexible, collaborative approach helps organisations increase speed to market, enhance business agility and improve the quality of customers’ experiences.

Compliance as differentiation: Proven expertise lets clients use compliance as source of competitive advantage. Experian Decision Analytics helps ensure compliance with essential regulations, while helping organisations better understand customers.

About the Author

Mark Keyworth is a Client Consulting Director at Experian. He has extensive practical experience within the UK banking industry across the whole credit cycle, at both strategic and operational levels. His experience consists of developing profitable and pragmatic solutions, along with previous portfolio profit and loss responsibilities across multiple consumer product lines. Keyworth’s experience has been obtained from a background of 13 years within the UK banking industry, six years running portfolios in the retail finance industry and 15 years working internationally in a business consulting role across multiple industries.

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