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When consumer collection leads to consumer rejection

Aug 9, 2018 / Consumer Banking

Today’s collection strategies tend to be overly aggressive and collectors are infamous for their relentless attempts to chase down past due bills no matter the cause or individual’s case history. Now think about that for a moment: At a time when the financial services industry is obsessed with personalized service, how personal is that?

This kind of negative experience leads to high customer attrition. And while businesses shouldn’t accept delinquencies as the status quo, they also don’t have to lose customers as they settle their debts. When businesses use insights from consumer profile information, they can make better collections decisions and provide customers with convenient, more user-friendly way to pay off their balances. Knowing the difference between a customer who missed a payment—perhaps because of a lost job—and another who simply forgot their due date allows banks to help and keep their good customers.    

Experian research found that three percent of people with 30-day delinquencies in card portfolios closed their accounts after paying their balance in full. Of those people, 75 percent paid and closed their account in the same transaction. The remaining 25 percent brought their account current and closed it out within the next 60 days. That should alarm banks fixated on collection as opposed to retention.

When customers close an account, the bank not only loses the immediate revenue: They also lose the potential lifetime relationship. That can damage business growth and it’s even worse when young consumers exit. Millennials constitute the largest portion of the total population and are probably the most valuable in the long run, as they are set to inherit more wealth than any generation in history.

Conventional wisdom dictates that turning away that kind of potential business is crazy. But young, urban, affluent consumers were four times more likely to close their accounts after enduring aggressive collections strategies. Their balances may suggest they could fall into the lowest scoring groups and thus receive more aggressive collections outreach. But they might only need to feel empowered by choice. Sometimes putting the lender in control of when and how the consumer resolves their debt owed is a better means to resolution.

Young affluent consumers, walking away

For example, young affluent urbanites were shown to close their accounts after paying off their low balance (let’s say an average of $290) because of overly aggressive collections tactics. One day, these customers will want to buy a house or start families: the characteristics of valuable lifetime customers in search of future borrowing opportunities. Their bank has a chance to grow with them. But these urbanites walk away because of earlier negative customer experience with the brand. Therefore, the question becomes: Is the need to recover such a low amount worth losing a much more profitable long-term customer? Even an elementary school student can do the math.

Banks must learn to take a wider view of the customer: to maintain the relationship instead of focusing on a customer’s risk profile and poring over their credit risk attributes. In today’s world, plenty of competitors want the business, which means consumers are expensive to acquire. And once they become a customer you have to invest even more money in digital experience improvements. So why damage the already costly association with overly aggressive collections practices that do not put the customer experience at the center of the relationship?

Four focus areas to sharpen collection practices

An enriched approach with the following focus areas will allow banks to collect debt and grow a stronger customer relationship.

1. Pay attention to customer experience metrics

Customer experience metrics—customer satisfaction, retention and account closure—should be included in the risk attributes of collections models. These all rank as important factors in the short-term impact on account closure and the potential long-term effect on lifetime value.

2. Use data to drive personalized collections

Most lenders have consumer information beyond product usage and repayment history. Third-party data providers can help fill in data gaps and unlock new insights that add levels of detail. Each new level helps banks understand their customers and customize their collections.

3. Invest in technology to make the change

Investment in modern technology will help set up systems that support data. Integrated collections platforms provide real-time decision management capabilities along with the power of data and analytics to determine the optimal contact time, channel and intensity. They also offer automated, efficient collections workflow.

4. Incorporate analytics to inform decision-making

Historically analytics have provided insight for customer retention activities. Using them can also inform segmentation schemes and collection strategies. Customers invited to repay their debt on their terms will more likely square up their account and keep it current.

Banks need to realize that overly aggressive, one-size-fits-all collections hurt revenue. The remedy comes when they apply data-driven insights to improve customer experience and strengthen the customer relationship. Aggressive collection leads to consumer rejection—and what banks gain in the short run they will likely lose many times over in the years to follow.

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Andrew Beddoes is principal consultant, Experian Advisory Services.