Rethinking Debt Collection Analytically

American Banker recently posed the question, “Is Debt Collection a Dying Business?”

Hardly. Debt collection ranked among America’s top jobs in 2014, according to U.S. News and World Report, which noted, “Being a bill collector isn’t just about hounding debtors. Bill collectors also help negotiate a repayment plan and provide credit advice.”

Consider that collectors’ jobs depend on their ability to coax promised payments from the unwilling or straitened. Coax, not coerce. If they are going to do that well in today’s highly regulated and restricted environment, they need to have a deep understanding of each customer and use it to mutual advantage during each and every contact with that customer.

Lenders collect so that they can lend again. Borrowers “get” that. At least 85% of customers pay their loans back on time because they want future access to credit. They don’t want to see credit become harder to obtain because of the 15% that can’t or won’t pay.

But the question about the death of Collections wasn’t an idle one; this industry has been through a wrenching transformation in recent years. Many firms that couldn’t adapt fell by the wayside. The survivors have learned to heed the following lessons:

If stricter regulation is Collections’ new lot (and it is), be great at compliance. Many perceive the regulatory environment to be adversarial and excessive, but there’s no denying reform was bound to happen. The old stereotype of the bullying caller may have been an exaggeration but not always a fabrication. When you don’t have detailed customer information that helps you make discrete appeals, you’re left with a blunt instrument – volume. More calls, more often, more pressure.

Inevitably, when the recent recession found the economy awash in bad debt, those collectors’ first reaction was to turn up the volume and intensity. Advocates for besieged debtors found a sympathetic ear with regulators, who reacted with new restrictions on when collectors could call, on which device, what they could say and not say, and so on, multiplying the complexity of the regulatory maze.

Today, the only way for collectors to comply consistently and efficiently is to systematize the new requirements, making them configurable, automated and easy to follow. Let your collectors and managers focus on what they do well rather than worrying about inadvertently breaking a rule, such as calling the West Coast too early or the East Coast too late, reaching a forbidden mobile number, leaving a message at the debtor’s workplace or some other new tripwire.

“Willingness to pay” got another wrinkle, thanks to new attitudes toward debt. “Voluntary defaults are a new phenomenon,” reported the New York Times in 2010 under the headline “Walk Away from Your Mortgage!” And it’s true: while the majority of delinquent debtors think in terms of honoring obligations, a growing number do not.

A stigma loses its sting when too many people share it. Debtors were, and remain, inundated with advice on how and why to avoid paying, with many resigning themselves to the consequences of not paying. Collectors have long segmented debtors on their ability to pay, recognizing the futility of spending resources on a poor likelihood of return. Now, they also need to estimate willingness to pay so that they can avoid spending resources on poor repayment prospects or else assign them to collectors skilled in converting them to willing payers.

Losing the use of some traditional tools, Collections needs to make better use of new tools. Regulators are constraining banks from selling the debt of delinquent payers, limiting a favorite lenders’ tool for managing bad-debt exposure. An inhospitable legal environment has caused many large banks to stop or limit their filing of lawsuits against debtors. They are also strictly limited in making calls to mobile phones and in using predictive dialing to improve their chances of reaching debtors. The Consumer Financial Protection Bureau is surveying consumers on their collections experiences and building a database accordingly.

All this raises the stakes for collecting as much revenue as quickly as possible before debts reach the point at which banks might have, in the past, sold the debt or filed a lawsuit. To move expeditiously, they need powerful analytics that quickly reveal the debtor and his situation so that they can quickly target the appropriate actions. It also means tapping the full potential of the delinquent portfolios that they cannot sell.

A customer in Collections will be somebody’s customer again. Good customers are harder to get these days, so it’s a mistake to risk losing those who might be in debt trouble for the first time and who will, when they recover from their financial difficulties, represent future profits. If collectors are not fully cognizant of who these borrowers are and how they should be handled, they will fail to take actions that create loyalty and unwittingly diminish existing loyalty by actions that tighten terms, create insecurity or offend good customers.

It takes powerful analytics, regularly updated, to reveal the status of the customer, to distinguish potentially good customers from those who will be poor future risks. Moreover, it takes a management focus on this second face of risk to ensure that collection analytics are precisely calibrated with both these risks in mind.

The corporate world is rife with examples of companies that used data analytics to understand their customers better and change the way they sold or serviced them, making the customers happier and the companies more profitable. Once clothing stores learned via analytics that women have a profound preference for trying on clothes at home before deciding, they replaced draconian return restrictions with liberal, no-questions-asked policies and discovered that customers not only took home more clothes but ended up keeping more of them. Car dealers, who once worried that Internet-educated customers would hurt profits learned, again via analytics, that knowledgeable customers make more engaged customers. The collections industry has a perfect opportunity to drive a similar transformation.

So, no, Collections is not dying. Nothing would grind the gears of our still fragile economy like discouraging lending, which the death of Collections would do just as surely as outlawing parachutes would discourage sky-diving. Taking responsibility for repayable debt is an essential and desirable transaction for most homeowners, entrepreneurs, students and corporations. Collectors who can “help negotiate a repayment plan and provide credit advice” do all parties a big favor – the party owed, the owing party and the rest of the credit-seeking world.

Mr. Miller is vice president of Analytics Solutions for Atlanta-based Noble Systems Corp. He can be reached at [email protected].