The strategic approach to debt management in the retail ... · Contents The strategic approach to...

An Experian white paper

by Dan Scholey, Decision Analytics, Experian

The strategic approach to debt management in the retail banking sector

May 2008

The strategic approach to debt management in the Retail Banking Sector

Executive Summary

A variety of pressures (market, legislative, competitive) are forcing change within the collection function, and the processes to collect debts are becoming increasingly sophisticated while adapting to change.

Debt management and collections is an issue that affects organisations across the whole financial business spectrum and any organisation that has outstanding payments with customers will suffer from delinquent customers.

Early action is required where payments are late or missing to prevent financial loss. Over recent years the retail banking market has changed significantly with the worldwide growth in consumer lending and growing regulatory complexity.

Leading organisations are deploying advanced methods to ensure their collection department performs optimally, by understanding the objectives for the different stages of collections and adopting a strategic approach.


The aim is to enable a rapid reaction to changing customer needs and market demands, as well as managing portfolio growth.

Increasing the effectiveness and efficiency of the collections process results in a strategy that allows profitability to be optimised.


Contents

The strategic approach to debt management in the Retail Banking Sector 3

1. Introduction 4

1.1 Growing indebtedness 4

1.2 Understanding the reason for delinquency 5

2. The collections process 6

2.1 What is the strategic approach? 8

3. Adopting a strategic approach to collections 9

3.1 Organisation 9

3.2 Process 9

3.3. Tools 9

4. The strategic approach in the pre-delinquency period 10

5. The strategic approach to early to mid collections 11

6. The strategic approach to late collections 13

7. Collections strategy optimisation – the next generation 14

8. Decision Analytics debt management 15

9. Strategic collections in action 16

10. About the author 17

11. About Experian 18


1. Introduction

4

Debt management and collections is an issue that affects organisations across the whole financial business spectrum and any organisation that has outstanding payments with customers will suffer from delinquent customers.

Early action is required where payments are late or missing to prevent financial loss. Over recent years the retail banking market has changed significantly with the worldwide growth in consumer lending and growing regulatory complexity.

1.1 Growing indebtedness The growth in consumer credit and subsequent over-indebtedness has been a trend seen across many markets globally. Credit is more available than ever before to consumers who were previously unable to qualify and unsecured consumer debt as a percentage of disposable income is at a record high in many countries around the world.

2002 2005 Change

UK £196 £217 10.7%

US $1986 $2292 15.4%

(figures above in billions) *

Table 1. The growth in consumer indebtedness*Source: Bank of England and US Federal Reserve

Growth in consumer debt poses a risk to households and can lead to higher delinquencies and personal bankruptcies. Constant borrowing in increasing amounts can result in consumers who are unable to meet their regular monthly payments. With this growth in delinquency, collections departments need, either to grow at a similar rate, or to find ways to operate more efficiently.

Increasing pressure on margins and collections practices Many consumer credit markets are also starting to feel significant pressure on profit margins with increased competition, government review of interest rates and fee structures all requiring lenders to find ways to increase business efficiency.

All organisations have pressures to reduce operational costs, and collection departments, often seen as high cost functions, are consequently feeling this pressure. In addition, many countries have legislation to ensure that collection practices satisfy stringent guidelines to protect consumers from overly aggressive collection techniques.

These pressures mean that it is now more important than ever to adopt a strategic approach to the debt management process.


1.2 Understanding the reason for delinquency Before a decision can be made on the collections action appropriate for a particular delinquent customer, it is vital to understand that the reasons for delinquency differ, and these need to be handled in different ways.

To determine the reason for delinquency, analysis is carried out on the behaviour patterns leading up to the point of delinquency. Experian has developed risk based behaviour scorecards that provide a powerful prediction of future customer behaviour. Combining these scores with segmentation based on account usage helps to determine the likely cause of the delinquency.

A fundamental requirement is that the risk models encapsulate, not only the behaviour of the delinquent account, but also the behaviour of the whole customer relationship across all accounts they hold. This customer centric approach has the added benefit of ensuring that collections strategies defined across different products are reliable in their risk assessment and therefore broadly consistent in their approach.

Delinquency type

Example profile Financial pattern Can’t pay or won’t pay?

Financial beginner

First time credit user

Rapid spend as soon as credit is available. Poor management of financial matters

Typically will pay until they become over indebted

Lazy payer Disorganised. Not very financially astute. Probably unaware of the penalty fees and interest charged

Manual rather than automated repayment mechanisms. Occasional delinquency. Not using all their available credit

Typically will pay until they become over indebted

Overindebted Have spent much time in and out of delinquency. Knows the systems well. Normally only acts when pushed into repayment

Credit lines extended over time. Use most/all of the credit available. Repay minimum amounts only. Regularly delinquent

Contains both

Major trauma Sudden reduction/loss of income, or significant change in lifestyle: new baby, divorce, etc. Can be proactive in wanting to highlight problems before they occur

Often demonstrate very good financial behaviour, but this can deteriorate very rapidly

Can’t pay today

Table 2. Examples of typical reasons for a customer becoming delinquent.


There are three fundamental stages within the collections process. Firstly, before a customer becomes delinquent, their behaviour can help identify those who have an increased risk of slipping into arrears.

Identification and treatment of such accounts is very sensitive (the customer has done nothing contractually wrong) and this stage in collections is referred to as the pre-delinquency period.

Secondly, when a customer actually becomes delinquent, the focus of activities is to find methods to make the customer repay outstanding arrears amounts. This period is referred to as early to mid arrears.

2. The collections process

6

When a customer continues to ignore requests for repayment and becomes increasingly delinquent, the third stage is reached, which is when a decision is made to terminate the relationship and to try and recover the full outstanding balance, which are the late arrears and recoveries stages.

The objectives of each stage of collections are different.

The traditional cycle normally starts when a customer actually fails to make the initial payment and so it therefore begins with focussing on recovering the arrears.

Stage Business objective

Pre-Delinquent Period To prevent delinquency occurring, by restructuring debts to give the customer manageable payments

Early to Mid Arrears To retain ‘good’ customers by assisting them in resolving their debt in the quickest time possible whilst still providing excellent service. Customers unlikely to recover are accelerated through to the late stage

Late Arrears To collect as much of the outstanding debt with the least cost. Some accounts may be retained in-house while others are assigned to a third party collections agency. Again, the objective is to recover as much of the debt in as little time as possible

Table 3. The stages and objectives of collections


Figure 1. Debt Management Timeline

Managing the Credit Life Cycle

Carefully balancing the ‘ideal strategic’ action against practical operational resource constraints Monitoring, using a balance of short, medium and long-term key performance measures to allow quantifiable evaluation

The strategic approach to debt management in the Retail Banking Sector8

Figure 2. A customer centric model where all collections operations are handled by one team with access to all infor-mation across all of the products

2.1 What is the strategic approach? As a result of the changes and pressures highlighted in section 1, it is more important than ever for organisations to deploy advanced strategic methods to ensure their collections department performs optimally.

At the heart of a strategic approach to collections is the ability to take a customer centric view to enable the total exposure of the customer to be viewed across every account they hold.

A holistic view of the customer enables lenders to deploy collections strategies that are closely matched to both the value of the customer and the overall credit risk they represent. This results in more effective collections performed at lower cost.

In addition a strategic collections operation focuses on:

Taking pre-emptive action on accounts showing ‘early warning signs’ before delinquency occurs Maximising the use of data to predict behaviour and payment ability Using data intelligence to ‘understand the customer’, enabling you to set appropriate actions for each individual Combining quantitative information (eg. scores) with qualitative information (eg. collector feedback) to drive subsequent appropriate actions Continuous learning exercises used, (champion/challenger testing) to find better combinations of actions to achieve the desired objectives Identifying customer service opportunities e.g. credit increases for low risk customers

•

•

•

•

•

•

•

•

Saving Products

CheckingAccounts

Mortgages Loans OtherProducts

Customeracquisition

Customerservice

Customeracquisition

Customerservice

Customeracquisition

Customerservice

Customeracquisition

Customerservice

Customeracquisition

Customerservice

Data integration layer

Collections


The four main elements of a collections strategy are segmentation, assignment, action and decision. Specific accounts are selected and assigned to available resources based on various criteria, such as balance, behaviour score and past due date. Actions are then assigned to each segment of accounts and, based on the results of those actions, decisions are then made to move the account through the collections process.

Real-time segmentation means that collections agents are informed immediately a payment has been made, enabling lenders to take action appropriate to the status of each account. Adopting a more strategic approach to collections within an organisation will result in the ability to actively manage and balance the differing objectives within the collections process and effectively use resources to solve the customer’s financial situation. The key traits of an organisation adopting a strategic approach in early to mid arrears include a focus on organisation, process and the use of sophisticated tools.

3.1 Organisation An organisation needs to be able to allocate its resources into teams based on experience, ranging from basic communicators to skilled negotiators. Using carefully designed key performance indicators the organisation can reflect each group’s skills in the objectives set for each communication, with basic communicators required to pass on a simple message and more skilled staff undertaking more complex customer negotiation.

3. Adopting a strategic approach to collections

3.2 Process The organisation needs to implement customer level decisioning to put in place processes that will result in the customer resolving their financial situation. These are underpinned by well defined and structured action plans tailored to the individual customer’s profile. Combined with the use of champion challenger testing strategies, continual learning allows the process to be regularly improved.

3.3 Tools Tools support the strategic approach and are critical to the success. These include the following:

Data The various data sources available (internal: account and customer behaviour, demographic data; external: credit bureau, customer information provided during a contact) provide a detailed picture of the risk and likelihood of cure or deterioration in behaviour of the customer.

Scoring Behavioural scoring helps to predict the future performance of a customer based on their past performance. It summarises the breadth of data described above into a manageable set of measures that describe what is expected to happen if different types of actions are performed.

Through behavioural scoring, collections activity can be focussed on accounts where it will make a difference, rather than on those that will ‘self-cure’ or those which will default irrespective of the action taken.

Debt recovery scores are used at the point a financial relationship has ended, and help inform the most appropriate action to be taken next. Typically this will involve use of a suite of debt collection agency or litigation teams.

When combined with rules, the behavioural score is used to select the optimal message to communicate to the customer and the tone of communication.

Collections and Decisioning SoftwareSophisticated software is vital to ensure the efficient management of the collections process. Decisioning software is vital for deploying collections and recovery scorecards, while operational collections systems ensure that both cases and collectors are managed in the most efficient manner.

Combined with mathematical optimisation software and sophisticated management information systems, collection managers can evaluate the effectiveness of each stage of the collections process, down to the individual customer level.

Automated Processes Automated processes drive cases into and through collections, with manual intervention occurring where it is proven to be most effective. Parameterised collections software controls the management of collections cases and can be updated rapidly to implement new and test alternative methods.


4. The strategic approach in the

There are a number of key events which can happen to a customer which can give an early warning of future potential delinquency.

Proactive treatment of the customer in these situations may prevent delinquency and, if this fails, the

pre-delinquent period

Trend Potential indicator of:

No credit turnover for more than 35 days

Loss of employment / income

Bureau data deterioration Default on other lender account

Worsening behaviour score Increasingly over-indebted

Rapid increase in revolving credit line usage

Runaway spend or fraud

Unusual transaction patterns Fraud

Table 4. Predictive trends for deterioration.

organisation can limit the potential losses by reducing exposure and starting collections activity rapidly.

The types of trigger that can initiate an action in the proactive period are described in the table below:

Customers are selected for proactive action on a daily basis and the customer is contacted. Certain triggers can initiate a move to reduce exposure, for example by reducing a credit limit.

More sensitive messages should only be communicated by telephone.

For example, in cases where a deterioration in behaviour is seen and the customer is suspected to be struggling with their payments, the discussion about restructuring debts to prevent delinquency is a difficult message to communicate. Several organisations have seen that getting this message wrong can harm their reputation.

The key to success in this period is to apply credit risk assessment and proactive monitoring for early identification of those customers at risk.


5. The strategic approach to early to

In early to mid arrears the objective of the strategy is to collect the outstanding arrears at the lowest cost while retaining the customer for future business. The organisation needs to also consider whether the customer will be able to continue meeting credit commitments in future, whilst maintaining a high level of customer service in the process. The cause of the delinquency is a key factor in determining the most appropriate action to take. Seeking to establish this information during contact with a customer can provide useful data for informing subsequent actions.

To achieve the right balance, organisations need to maximise the use of data to create an understanding of the customer. With this knowledge, detailed strategies can be defined to allocate the most effective collections activities. For telephone contact the most appropriately skilled communicators should be deployed with access to all information surrounding that particular customer and empowered to work with customers to resolve their financial situation.

The information from this call is fed into the customer profile and this will form part of the next review. This will give a more accurate picture of the delinquency situation and collections actions can be selected more appropriately.

To achieve the collection of debt at the lowest cost possible automation is introduced on many collections activities on lower risk accounts whilst those customers who always make late payments are left to self cure, and the option to self serve is offered to appropriate customers too.

The objective is to maximise the collection of debt and so a personalised approach to communications is taken at this stage.

mid collections The strategy in the early to mid arrears stage focuses on the message delivered, the decisions taken and the allocated set of actions applied for each customer. These will differ according to the customer profile and desired outcome. In addition, the organisation must consider the resource constraints and cost of the action and can combine scores and rules to define the best strategy to use for each customer. Factors to consider include:

Customers will respond differently to actions Costs vary significantly across the various types of actions available (e.g. do nothing versus outbound call) The success rates vary significantly across the types of actions performed (e.g. telephoning is more effective than sending a letter)

The cost of collection may outweigh the cost of return. It is often a combination of actions that make a customer repay. The strategy needs to define:

Delinquency/customer type Communication message Most effective combination and order of actions The customer’s priority Allocation to collecting resource

The real constraints of resource

must be built into the strategic approach, as collection departments have a limited supply of staff and monetary resources.

Customers and actions should be prioritised to focus resource on maximising the return. Additionally it is critical that the team which defines the strategy, which is often very analytically focused, work in close co-operation with the operational resource team.

At this stage, management of the collections resource is vital. Managers and team leaders need access to information that can help them make the right decisions to improve operational efficiency.

Whether this is the use of activity based costing to help balance cost to collect against amounts recovered or the use of appropriate KPIs to manage collections staff more efficiently, the right tools, such as real time dashboards, are essential.

•

•

•

•

•

••

•

Figure 3. Management of the collections resource is key to maximising return.


Trigger Description Strategic approach Collections Strategy

Missed payment, 1 day past due

Low risk customer

Strong relationship

Small arrears amount

Low current exposure

Notify Wait 15 days THEN Letter - gentle reminder THEN Wait 15 days

Missed payment, 1 day past due

High risk customer

Two other payments missed this month

Medium exposure

Warn Letter – request urgent payment THEN Wait 7 days THEN Phone – “worried about payments” THEN Wait 7 days THEN Phone

Missed payment, 60 days past due

High risk customer

No collateral available

Collect Phone – “final threat must make payment” THEN Wait 7 days THEN Estimate recovery THEN allocate to a debt collection agency

Table 5. Examples of collections strategies and collection messages in the early to mid arrears stage. The strategy determines what type of communication the customer will receive.


Once a customer moves into the late stage of collections, the challenge becomes one of maximising recovery amounts and minimising collection costs.

As for early collections, a strategy is defined for the most effective actions to achieve the objective of recovering the full debt. If the organisation is unsuccessful in the recovery of debt or tracing customers in arrears, there are further options, including outsourcing the activities (on a commission basis) or selling the account to another company, most likely a debt collection agency (DCA).

The challenge at this stage is deciding how best to allocate accounts to these internal and external debt collection agencies. Customer intelligence is generated through models, including debt recovery models, and helps to define which accounts to pass to each agency.

Significant benefit can be achieved by introducing a competing DCA, where the volume of accounts they receive is governed by how well they work the accounts that have already been allocated.

With competing DCA the challenge is to identify their particular strengths with customers. By classifying the agencies into particular niches the process can be very effective: when the type of debt allocated to each DCA is more closely matched to their ability to collect successfully collections are optimised.

6. A strategic approach to late arrears

In addition, the organisation should be regularly reviewing the commission paid to each DCA for successful collection.

Using models to predict the likelihood of recovery allows an organisation to price debts based on the performance of the DCA and the expected outcome.

For Retail Banks with complex relationships with their customers moving from early collections to recoveries is a fundamental decision point. What should happen to a customer’s overdraft if they become seriously delinquent on the credit card, particularly if they are currently managing the overdraft facility within the agreed terms?

A responsible approach, and the most effective, would be to consider the total debt level of the customer, their ability to service those debts, and formulate a manageable repayment plan, the first moment that the delinquency becomes serious on the card.


Collections strategy optimisation is the next revolution in credit decisioning. It is an objective, mathematical decisioning technique that is becoming widely used in the credit risk management environment. Within collections and recoveries it aims to answer the question, what is the best set of actions to assign to customers to maximise recoveries within the operational and financial constraints?

Optimisation has the potential to determine the best action to simultaneously:

Maximise recoveries Retain customers over the medium term Operate within existing budget and resource constraints Identify which customers to focus scarce and experienced resource on Determine, not just the best action, but also the best timing

7. Collections strategy optimisation - the next generation

Strategy Optimisation enables an organisation to identify the optimal collections action and timing for each individual customer, based on the customer’s profile in order to maximise returns within the business’ budget, resource levels and other constraints.

It enables an organisation to assess the effect of different actions, decisions, limits or terms on profit and other business metrics. It produces clear information on the trade-off between different collections scenarios so the business can understand the effect of different constraints on business profitability. It then enables the business to implement the results and gain the benefits in the minimum time period.

••

•

•

•


Effective collections is about the balance between customer service and debt collection, and between recovery cost and debt recovered.

Experian offers complete end-to-end collections management to help organisations develop a value enhancing debt management environment.

Experian has used its collections experience and expertise to combine advanced analytics with sophisticated tools for decision support and workflow management to create a complete Decision Analytics collections package. It enables organisations to improve efficiency and effectiveness, maximising customer service and reducing both costs associated with collecting debts, and the credit losses written off.

15

8. Decision Analytics debt management

The elements include: Prioritisation of collections activity, using behavioural scoring and segmentation to dynamically create accurate and tailored collections activities according to the level of risk and value of the customerAutomation, workload balancing and intelligent allocation of cases matched to appropriate collectorsFocus on rehabilitation to identify which customers should be retained and to take action that balances recovery with the relationshipAgile deployment to ensure the benefits of the solution are realised more quicklyValue added solution, implementing a complete debt management solution specifically designed with built-in intelligence for the market

Experian delivers industry standard and custom collections solutions in markets all around the world, working closely with customers to tailor it to their specific business/market requirements.

This experience ensures detailed insights into predicting collections behaviour from customer data and the deployment of the best of breed software systems and debt management processes.

•

•

•

•

•

Improving productivity of collections by more than 70% for a Dutch bankBusiness Challenge In recent times, banks have seen an increasing level of delinquency in the dynamic consumer credit market, and are having to increase provisioning as a result. As part of a bank-wide project to overhaul the credit and risk systems, ABN AMRO recognised that the collections operation could make a significant contribution to improving impairment levels and managing provisioning levels.

Decision Analytics answerABN AMRO selected the Tallyman Debt Management solution from Experian Decision Analytics. This specialist solution enables ABN AMRO to automate and streamline the collections process to collect more debt from a complete insight in the entire customer relationship. The solution integrates with the existing customer management solution, Probe SM, for a customer-centric approach.

The benefits Increased productivity – with operators working 70% more casesImproved cure rate by 24% reducing the number of cases being passed to late collectionsReduced employee costs by 31% with more automation of manual tasksDecreased net additions to provisions by more than 20%Improved roll rates as shown by reduction in net flows of over 60%Implemented a customer-centric approach to collections and recovery

16 The strategic approach to debt management in the Retail Banking Sector

9. Strategic collections in action

•

•

•

•

•

•

Enabling smarter, more relevant decisions for Bank of QueenslandBusiness Challenge Consumer credit has grown to new heights of popularity as loans and mortgages are used, not just for necessities, but to supplement household income and improve the general standard of living. The downside to all this is that a growing number of customers are simply not repaying their debts. BOQ wanted to adopt the most effective and proven techniques for ensuring that recovery rates were kept as high as possible, whilst still maintaining a high level of customer service.

Decision Analytics answerThe Tallyman Debt Management system was chosen, not only because it fulfilled the criteria of helping the bank to reduce debt and save money, but also because of its ease of use and implementation.

The benefits Increased efficiency: administrative costs of collections department decreasedBetter monitoring: Tallyman enables the performance of the arrears book to be monitoredAutonomy: Tallyman operates independently within Bank of Queensland and requires no external supportAutomated recovery of accounts based on actions taken

•

•

•

•


10. About the author

Dan Scholey began his career in software development. He has since gained a number of years experience within the financial services industry.

During his career he has played a key role in the development of innovative automated solutions to address specific business issues, including collections management.

Recently, he has focussed on strategic debt management to ensure operators maximise the return from automated decision led collections systems whilst maintaining a strong customer relationship.

11. About Experian

Experian is a global leader in providing information, analytical and marketing services to organisations and consumers to help manage the risk and reward of commercial and financial decisions.

Combining its unique information tools and deep understanding of individuals, markets and economies, Experian partners with organisations around the world to establish and strengthen customer relationships and provide their businesses with competitive advantage.

For consumers, Experian delivers critical information that enables them to make financial and purchasing decisions with greater control and confidence.Clients include organisations from financial services, retail and catalogue, telecommunications, utilities, media, insurance, automotive, leisure, e-commerce, manufacturing, property and government sectors.

Experian Group Limited is listed on the London Stock Exchange (EXPN) and is constituent of the FTSE 100 index. It has corporate headquarters in Dublin, Ireland, and operational headquarters in Costa Mesa, California and Nottingham, UK. Experian employs around 15,500 people in 36 countries worldwide, supporting clients in more than 65 countries. Annual sales are in excess of $3.8 billion (£1.9 billion/€2.8 billion).

For more information, visit the Group’s website on www.experiangroup.com.

The word ‘Experian’ is a registered trademark in the EU and other countries and is owned by Experian Ltd and/or its associated companies.

For more information, visit the company´s website on www.experian-da.com.

About Experian’s Decision Analytics divisionDecision Analytics is the international division of Experian specialising in providing credit risk and fraud management consulting services and products.

Over more than 30 years, it has developed its best practice analytical, consulting and product capabilities to support organisations to manage and optimise risk; prevent, detect and reduce fraud; meet regulatory obligations; and gain operational efficiencies throughout the customer relationship.

With clients in more than 60 countries and offices in more than 30, the decision analytics division of Experian delivers experience and expertise developed from working with national and international organisations around the world across a wide range of industries and business size.

18

www.experian-da.com

© Experian 2008. The word “EXPERIAN” and the graphical device are trade marks of Experian and/or its associated companies and may be registered in the EU, USA and other countries. The graphical device is a registered Community design in the EU. All rights reserved.

Date post:	27-Jun-2018
Category:	Documents
Upload:	vodiep
View:	213 times
Download:	0 times

The strategic approach to debt management in the retail ... · Contents The strategic approach to...

Documents