With the proliferation of peer lending, payday loans, and crowd-funding sources, today's borrowers have more options than ever when it comes to getting credit.
Indeed, a recent survey revealed that over half of bankers think that customers are now more likely to use alternate sources of credit. As such, banks can no longer be complacent – they must improve their customer service to maximise customer retention, particularly when it comes to collections.
Although the economy is on the rise again, demand for credit is still increasing, especially in the run up to Christmas. This, combined with the need for financial institutions to ingratiate themselves with customers, puts a lot of pressure on collections departments, which need to successfully communicate with customers, adapting and using new technologies to stay ahead.
The new breed of debtor
The economic crisis of the past few years has created a new breed of debtor. These people have sometimes been dubbed "fallen angels" – people who used to pay their bills on time but lost their jobs or experienced other financial hardships that made them fall behind in their payments. For example, in the troubled Eurozone, we have seen grandparents fall behind on their grocery cards, having lived their whole lives as reliable bill-payers.
These debtors behave differently, and they are challenging collectors to behave differently as well. Before 2008, it took around six years for a seriously overdue consumer to get back to good payment behaviour. For the new breed of debtor, that time is more likely to be eight or nine months. Why the difference? Because the new breed do not accept that financial hardship is their fate. They are highly motivated to "get good again," and that starts with getting re-employed.
This affects the hardship procedures employed in collections. Some lenders would charge off a debt at six months, but with the new breed, writing them off as a bad debtor means you will lose them as a customer. The alternative? Hanging in there a little longer may be worth it when they get a new job and can start repaying their debts.
However, the new breed of debtor can also be more difficult to work with. Why? It doesn't yet know how to be a debtor. It has never had to pay off a large, overdue debt. Needless to say, it doesn't want to get calls or letters from collections agencies – but rather than face the music, it may be even more inclined to ignore collectors out of frustration or embarrassment.
This is why less-intrusive contact methods, such as using mobile communications, as well as self-service online payment plans, are such a good idea. Unlike the past generation of debt-savvy delinquents, these new debtors need a gentle touch. Banks aren't the only firms that have to find new ways to deal with this type of customer: insurance firms, telecommunications providers, retailers and even government agencies – to say nothing of the third-party collection agencies servicing these debts – have to adapt and learn to communicate effectively with this new species.
B2C mobile interaction
Creditors must get the customer's attention before other creditors vying for a piece of the debtor's pay check enter the fray. In countries shaken by financial crisis - even where consumer debt and delinquency levels are declining - many consumers are still struggling to pay all their bills. In such an environment, using every possible channel to connect with the customer is crucial.
The ubiquity of mobile phones offers a great opportunity for more effective collection practices. Many people have their phones with them nearly round-the-clock, increasing the likelihood of contact. Since mobile phones are personal rather than household communications devices, the odds of contact are also increased. Also, recipients of well-targeted mobile communications are more inclined to take a payment action in the moment, rather than sitting down later to mull over a stack of bills and figure out which to pay.
Indeed, in recent FICO research, one respondent from a UK financial institution said: "[Mobile] should allow us to engage with users wherever they are. You can push information towards them. They can respond to you. It's a perfect tool for direct and personalised engagement."
Worldwide technological advancement
The spread of mobile devices and the advance of Internet technologies have opened up new avenues for collections organisations to contact delinquent customers across the world. This is important, as competition for payment share is increasingly fierce and debt levels are rising. In India, Poland, Sweden, Brazil and South Africa, for instance, household debt levels have climbed in recent years as credit has become more widely available.
Over the past decade, technological, social and economic changes have had a profound impact on global collections and recovery operations. While the effects vary across countries and regions, all organisations need to adapt to one or more of these developments:
- The ubiquity of mobile phones Increasing competition in the race for payment share
- Complex, changing regulations
- The impact of social media
- Evolutions in consumer attitudes toward debt
- Rising consumer use of the Internet for financial transactions
These changes aren't necessarily positive or negative — often they're both. The growth of mobile and prepaid phones and the disappearance of residential land lines, for example, poses many challenges for collectors. Mobile phone users can easily evade contact by diverting calls to voicemail, or swapping out their phone's SIM card to get a new number. Moreover, telecoms companies regularly recycle numbers to new customers. Creditors must, therefore, be more careful to verify right-party contact and maintain accurate contact information.
However, as the landscape changes, collections organisations must also change how they operate. But even while the technology gets more advanced, the basic advice remains startlingly simple.
Contact customers in the way most likely to succeed
Changing payment priorities have pushed some creditors 'down in the stack.' For instance, US consumers are now paying auto loans before credit cards and mortgages, so creditors must develop smarter strategies to move toward the top again, coordinating customer-level collections that take changing payment priorities into account. Reaching out via mobile communications is a quick and efficient way of actually getting through to customers in a very busy market.
Recognising these advantages, collections organisations in the US, UK and Western Europe are rushing to catch up with their Asia-Pacific counterparts, which have long used mobile communications as a primary channel for collections contacts. Recent FICO research revealed consumers in developing markets to be much more open to and savvy with B2C mobile communication. China (51 percent) and Korea (50 per cent) were joined by India (49 per cent) as the countries found to have the highest percentage of people who interact with businesses via mobile devices daily, while France had the lowest percentage of mobile-native responders at just 12 per cent. Japan (15 per cent) and the United States (16 per cent) were second and third lowest, with the UK coming in fourth (17 per cent). Nevertheless, 41 per cent of UK respondents said they found the idea of receiving alerts on their mobile for overdue bills via a payment alert app attractive, compared to only 27 per cent of French respondents.
The quickest method (and most scalable for high volumes) is usually an automated call, text or email to a mobile phone. Yet the undifferentiated SMS blasts some creditors send every few days to all delinquent customers are not very effective. In most cases, the creditor has no visibility into whether these one-way outbound messages were even delivered to a valid number.
To fully leverage the potential of automated contacts to mobile devices, collections organisations need finely targeted, even customer-specific communications strategies. Analytics, business rules and workflows should be used not only to segment delinquent populations based on credit risk, but also to determine which channels and sequence of actions are most likely to be effective based on the customer risk profile, customer preference and the results of past contacts.
Target consumers properly to get success
Automated, intelligent communications solutions use scores and data from numerous sources to determine the best contact strategy for each customer at a certain point in time. They coordinate strategy execution across all channels, capture results and manage follow-up.
Well-targeted automated messages are generally positively received. In fact, when one of the world's largest electric utility companies surveyed its customers, 61 per cent said they preferred an automated contact (voice, email or SMS) over dealing with collection agents. Consumers prefer automated contacts because they find it less embarrassing than talking with a real agent. Automated contacts enable personal, secure and convenient self-service options for making a payment or even negotiating a payment plan. And with the growth in worldwide sales of smartphones, opportunities are increasing for self-service applications.
An automobile credit company is having considerable success with such methods. Using an appropriate solution for both outbound and inbound contacts, the company found that 79 per cent of customers contacted successfully used self-service options, resulting in payments made on 44 per cent of the assigned portfolio. Similarly, a UK banking group achieved a 75 per cent self-service rate for inbound contacts. Embracing self-service in this way reflects one of the ways consumer attitudes toward debt are changing in many parts of the world — toward the desire to have a greater sense of control.
Automated collections processes are also far more cost-effective than any other method. For example, the UK division of a global bank achieved an 18 per cent reduction in cycle roll rate, along with a 45 per cent reduction in closing balances over its current call centre, and a 30 per cent reduction over an offshore call centre.
For collections organisations, the benefits of targeted, automated communications are not only higher contact rates and faster payments, but also improved customer satisfaction and fewer complaints. With the ability to work large volumes of cases in a short time, collectors can also identify accounts with issues early and focus agent time on these more complicated delinquencies.
Moreover, since the intelligence in these solutions comes largely from editable business rules, collections managers are able to change account segmentation and treatment strategies without a need for IT assistance. This way they can also quickly adjust processes to regulatory changes. In the UK, recent regulations include a rule that says within 24 hours of leaving a voicemail, collectors may contact the consumer only in the presence of a live operator. These rules add complexity to collections processes, but they're readily folded into intelligent contact and treatment strategies — and automatically executed with 100 per cent accuracy and 100 per cent documentation of compliance.
Cultivate relationships when customers aren't delinquent
With more consumers becoming delinquent and entering collections, anyone trying to get out of debt may represent a last-chance to retain a customer. But collections departments are not graded on friendliness, they are paid to perform. So what can collectors do to improve collections results, whilst focusing on the customer and their needs?
As obvious as it sounds, companies that build relationships with customers while the going is good are better placed to collect if those customers run into trouble later. Some card issuers in the UK are already beginning to make pre-collections contact with customers, which can help cardholders avoid running up troublesome debt levels. This approach seems to be working well – FICO's latest quarterly UK data showed that the percentage of credit cards that are over limit hit a two-year low in 2013. Of course, this positive performance also reflects a number of other factors.
Firstly, many people have an erratic cash flow, and need their cards more than ever, so they are being careful to avoid overextending themselves or risking fees. Secondly, recent data comparing the performance of the UK cards market with individual card issuers' showed that average credit card limits are at their highest point in over two years in the UK, but that cardholders appear to have high enough limits as they are spending cautiously and not taking advantage of these high limits.
Increasingly, consumers go to social networks for advice on choosing service providers, and to air complaints when dissatisfied or feeling harassed by collectors. Shared experiences and opinions exert a growing influence on others. It's a situation that makes getting collections processes right and building a strong relationship with consumers more important than ever before.
Fortunately, social media also points the way to better collections, by demonstrating the power of relationships. If consumers liberally share information with social network contacts while holding it back from companies they do business with, it's because a relationship exists with the former that may not exist with the latter.
Lack of current contact information is a key cause of delay in reaching delinquent customers, and demonstrates the detrimental effect of not having a prior relationship. During the financial crisis, as large numbers of good customers appeared for the first time in delinquency queues, creditors were unable to contact many of them. These customers, who previously kept their accounts current, had required so little attention that the organisation hadn't kept in touch enough to keep contact information up-to-date.
Companies that cultivate relationships with consumers when they aren't in debt are in a better position to collect if they become delinquent. There are opportunities in every industry to stay in touch and be helpful in ways that encourage dialogue, while leveraging these interactions to keep contact records up-to-date. Even in societies experiencing rapid credit growth, where the predominance of prepaid mobile phones and inadequate account origination processes may create additional challenges, companies can find incentives (information, contests, discounts, and so on) to make it advantageous for consumers to engage in a closer relationship.
Resolving delinquencies in a flexible manner
By building and sustaining relationships and trying different collections methods, creditors can create more opportunity to prevent serious delinquencies from developing. When analytics spot behaviour patterns in payments and other transactions indicative of increasing financial stress or of probable impending strategic default, collections organisations can intervene with pre-delinquent treatments. Customers who've already been engaged in dialogue are more likely to be receptive to educational information and offers of assistance, and may be predisposed to cooperate.
The efficacy of this approach is demonstrated by the experience of a multinational retail banking group, whose Eurozone operations are under increasing margin and cost pressure, and subject to the constant overhead of managing regulatory change. To meet these challenges and raise performance, the banking group is implementing a three-pronged collections process improvement. Intelligent automation is now being used to:
1) Provide agent replacement services for both outbound and inbound collections contacts
2) Handle inbound payments
3) Engage in proactive communications with customers
In all interactions, customers that need to speak with a human being are routed to the right person (collections agent, skilled negotiator, or loan officer) in priority order, and early results for agent replacement and payment handling are impressive. They include reductions in average provision per account by £60 and average cost per account worked by £2.50. The company has also improved its ability to handle variable incoming volume without adding staff. An impressive 98 per cent of inbound payment calls are picked up within 10 seconds, and there's been a peak-day savings equal to 22 full-time collectors.
However, it's when it comes to proactive communications that this company is truly a leader. One of its key requirements was to provide the means to rapidly implement new initiatives without IT involvement. While the solution performs basic relationship maintenance functions - such as telephone number capture and validation during automated interactions - it also supports the company's efforts at stronger customer engagement. Pre-emptive communications reach out to returned-mail customers through other channels, so they can be contacted in the event of a future delinquency. As a result, the number of 'lost' customers found has risen from 10 per cent to 25 per cent. Another initiative will proactively contact customers with interest-only mortgages to encourage them to consider options for repayment earlier, and thereby reduce the number reaching loan maturity in a negative equity position.
While these communications have different objectives, they are all coordinated. The automated solution not only orchestrates all touch points, it also maintains a history of contacts to inform the next step in engagement and messaging, as well as for escalation of any issues requiring customer attention or agent intervention.
Boost success rate with mobile outreach
Many businesses assume customers won't respond to communications outside normal business hours. However, two recent case studies call this view into question, suggesting instead that after-hours engagement strategies are worthy of consideration, especially when the method is via mobile or text.
A large European credit card issuer implemented a two-way SMS strategy to explain to delinquent customers the situation, the process, and the need for them to respond. Contrary to conventional wisdom, response rates after hours (20:00 to 08:00) were significantly higher at 66 per cent, compared to business hour rates (08:00 to 20:00) at 50 per cent. Interactive SMS for simple transaction verification was clearly effective and acceptable to these consumers, and they actually tended to respond to after-hours texts much more quickly – of those consumers that responded, over 80 per cent did so within 15 minutes.
Another substantial European card issuer pursued an SMS-to-call strategy. Here again, conventional wisdom suggests that you shouldn't contact customers and invite them to call outside of normal business hours, but 60 per cent of consumers responded for Internet or telephone banking transactions when contacted between 20:00 and 08:00. Across both strategies, we see consumers embracing after hours contact if the reason for contact is strong and beneficial to them.
Engaging customers quickly increases customer satisfaction, because it allows the situation to be resolved as soon as possible and at a time when people are not at work and free to consider banking issues, rather than having to wait for in-hours contact. From the company's point of view, it also allows the typical morning rush of call volumes to be spread, as much of the activity can be resolved after hours, helping to reduce consumer wait times at peak hours.
Technology puts the customer first
Changing attitudes toward debt are combining with a rising spirit of consumer empowerment to affect customer expectations for delinquency resolution. Consumers are also turning to third-party debt management companies to intervene with creditors and negotiate individual voluntary agreements (IVAs). If more companies engaged in ongoing dialogues with their customers, conveying the message that they are flexible and responsive, there might be less demand for such intervention, and more speedy and cost-effective delinquency resolution. Moreover, the way that customers are treated when their accounts are delinquent may affect their loyalty later on, and, therefore, the creditor's ability to retain future good customers.
Many collectors still scoff at the idea that collections is becoming a customer service-focused industry that necessitates building relationships rather than simply collecting overdue payments. In fact, the two can go hand-in-hand, and mobile communications technology is the key to success. Today's best practices recognise the role of collections as a customer service, and they build from a foundation of stronger ongoing customer relationship management. Whatever your current collections processes and particular challenges, you can move towards the new best practices incrementally, achieving measurable gains that multiply with each improvement made.