Having successfully built an online channel to deliver marketing materials to cardholders, issuers are looking to leverage the Internet to boost recovery rates and make collections budgets go farther.
When the Internet era dawned in the mid-1990s, card issuers saw the Web primarily as a consumer-marketing channel. First, they created Web sites that provided information about their cards. Next, they added online applications, and finally, bill payment. Now they are turning to the Internet as a way to improve collections on delinquent balances and recoveries of charged-off debt while lowering costs.
A major reason for the trend toward online collections is that the Internet has become a customer-friendly communications channel. Consumers say they like using the Internet to bring past-due accounts current because it affords anonymity, saving them the embarrassment of having to talk to an agent. A recent survey conducted by Lakewood, Colo.-based FiSite Research of 1,000 consumers revealed that 83% of respondents said that paying on an overdue balance would be a much better experience online compared to making a payment through an agent who contacted them by phone. Respondents also cited a higher level of convenience since a collections site is available anytime.
On the other side of the fence, card issuers are embracing the technology because of its self-service features, which translates into low overhead. Since delinquent cardholders can be directed how to bring their account up-to-date online without an agent talking them through the process, issuers can hold the line on staffing. At the same time, seasoned agents can be redistributed to work on accounts better suited to their skills or that need more handholding.
Issuers also can use scoring models to determine which accounts are suited for online collections, such as low-risk, small-dollar accounts that can be directed to a collections Web site with a message on monthly statements. The payoff is at least a 10% reduction in operating costs and double-digit increases in recovery rates, according to industry experts.
The drawbacks? They seem to be primarily centered on consumers' technological savviness. Despite the huge gains of the Internet over the past decade, tens of millions of households still don't have Internet access, and these unconnected people are concentrated among lower-income groups that are more likely to have financial problems.
The kind of Internet connection a household has also is important for collections executives looking to turn the Internet into a cash-flow channel. Like most other Web sites, collections Web sites work best with high-speed cable or DSL hook-ups, not traditional dial-up. Hence, the universe of delinquent cardholders who can use an online collections service is limited.
Only 20.5% of households in the United States have broadband Internet connections, according to statistics supplied by eMarketer Inc. Another 62% of U.S. households have dial-up Internet connections, leaving 17.5% of U.S. households with no Internet connection at all. New York-based eMarketer is an aggregator of statistical data from various sources.
Despite the limited reach of online collections, the benefits still can be a huge plus for a manager running a collections department on a tight budget.
"Collections is becoming more about understanding how to segment your portfolio by communications channel and agent skill level," says Jeff Bernstein, global solutions leader for Purchase, N.Y.-based MasterCard Advisors, the consulting arm of MasterCard International. "The Internet is another tool that can be used to optimize how resources are dispersed."
Although the technology is relatively new, it is catching on with issuers, collections agencies and debt buyers. On the card-issuing side, America Express Co., Bank of America Corp., MBNA Corp. and Target Corp. are among those that have deployed Internet collections applications. Meanwhile, agencies and bad-debt buyers are embracing the technology to stretch information-technology budgets. Debt buyers especially like the technology because any reduction in operating costs frees up capital that can be applied to purchasing more charged-off accounts.
Key to the economics of online collections is that many software vendors offer the service through an application service provider (ASP) model. The ASP model not only spares a user the cost of building its own infrastructure to run the application, it is highly scalable. For issuers that need to temporarily expand their work forces at certain times of the year, that is an attractive feature.
"There is really no need to hire temporary help for 30 or days or so and increase your budget, especially to work accounts likely to self-cure, when a larger portion of the portfolio can be directed to the online channel," says R. Fred Houston, president of The Intelitech Group, a Vancouver, Wash.-based consulting firm.
Indeed, cardholders likely to bring their accounts current with minor prompting are considered the best candidates for online collections. In many cases, these cardholders have run into some temporary financial difficulty and need only a mild reminder to make a payment.
Once the cardholder reaches the online collections site, which usually is separate from the issuer's main Web site, he is presented with multiple payment options. Choices range from paying in full or making a partial payment via an electronic check to setting up a repayment schedule, making a promise to pay, or receiving directions on how to contact a live agent, if necessary.
"There are customer segments to which we no longer need to place an outbound collections call," says Tom Butler, head of strategic planning and business development for Bank of America's Consumer Risk Operations Group.
In 2001, Charlotte, N.C.-based Bank of America launched its online collections strategy for credit cards as part of a larger plan to improve recovery rates by implementing technologies and communications methods that make the collections process less painful for the cardholder. Butler, without being more specific, says the initiative has been effective at significantly boosting recovery rates across BofA's entire $55 billion card portfolio. BofA has expanded the service to include other credit products.
One aspect cardholders like about online collections, according to Butler, is that it can reduce the embarrassment factor. Creating a more comfortable situation means past-due cardholders are more apt to respond positively to a delinquency notice. Hence, the technology is not just limited to delinquent cardholders likely to self-cure.
"Not all our recoveries online are from self-cures; we also get payments from high-risk delinquencies," says Butler. "For some high-risk customers there is a real benefit for being able to resolve the debt privately in a less embarrassing environment."
Identifying which cardholders are apt to respond to a letter or phone call directing them to an online collections site requires some kind of predictive model. The reliability of such scoring models depends partly on the lender incorporating recovery rates and actual behavior patterns for similar customers. BofA has built scoring models based on responses to previous campaigns aimed at directing delinquent cardholders to its collections Web site.
"The industry is going to see a much closer tie into predictive modeling with online collections," says MasterCard Advisors' Bernstein. "Some issuers are already developing customer profiles that help them identify communication channels to which the customer will most likely respond."
Moving to the online channel those delinquent cardholders less likely to respond favorably to an agent removes a key barrier to the recovery process-lack of agent training. Granted, it is a subject issuers don't like to discuss much, but high collector turnover rates and tight training budgets mean that having enough qualified collectors on hand at any given time sometimes is difficult, industry experts say.
"Training is a big issue, because there are not many career agents," says Bernstein. "Many agents lack good negotiating or communications skills. In some respects, the rise of online collections points out the difficulty in adequately training the workforce."
Many issuers are compensating for the high cost of training by outsourcing early-stage delinquencies to collections agencies outside the country that employ lesser-skilled, lower-paid agents. But some of these agents can be overly aggressive and create a confrontational situation where the delinquent cardholder either pays less than he might have otherwise or nothing at all, just to spite the agent, sources say.
"Consumers don't want to go through the stress and humiliation of a contentious confrontation with an agent," says FiSite President Paul Jamieson. "Online collections is the softer side of collections that has been missing from the equation."
More than 78% of respondents to the FiSite survey said online collections is a way to reduce the emotional stress they feel when interacting with an agent. Further, 21% of respondents who identified themselves as chronic late payers said they would be more attracted to online collections if it meant alleviating the stress of talking to an agent.
"Issuers are facing a lot of competition for cardholder accounts and they really can't afford to alienate a valuable customer that may need a little help in becoming current," says Jamieson. "If they do, that customer may take their business to another issuer."
One way issuers are creating a friendlier collections environment online is by providing cardholders with information about how to better manage credit. Some issuers, including BofA, provide links to credit-management Web sites. Others provide links to sites that tell cardholders how to receive a free copy of their credit report or provide calculators that allow them to compute the cost of revolving a balance over a multi-year period.
"Online collections also offer an opportunity to serve as an education tool for the cardholder about managing their money," says Bill Kinnelly, chief marketing officer for Incurrent Solutions, a Parsippany, N.J.-based provider of collections software. "It's another way to interact with cardholders and reduce losses."
The flexibility of how online collections applications can be deployed and the ease of use for the cardholder is prompting some issuers to use the technology for late-stage collections. Typically, these accounts are 90 days or more past due, which means issuers often are more willing to consider negotiating a settlement to avoid a chargeoff.
A drawback to using a live agent for late-stage collections calls is that the agent may be more interested in meeting a quota than maximizing the dollars recovered. In these instances, the agent often ends up accepting the internal floor limit set by the issuer.
"Sometimes it is a training issue, sometimes the agent does not have good negotiating skills, other times they just want to get through the call and move on the next account," says Richard Rosa, senior vice president and chief technology officer for Debt Resolve Inc., a White Plains, N.Y.-based collections software firm. "When this happens, the agent does not necessarily maximize the dollars recovered."
Research indicates that when delinquent cardholders can negotiate a settlement online, they typically pay more than the floor limit. The reasons vary, but the prevailing theory is that when cardholders are placed in a more comfortable collections environment, they are apt to pay more.
"The online environment takes away a lot of the impediments to reaching a higher settlement when dealing with some delinquent accounts," says Bernstein of MasterCard Advisors.
Rosa says clients using Debt Resolve's online collections application report that, on average, 52% of delinquent cardholders directed to an issuer's online collections site settle for about 18% more than the floor limit.
Debt Resolve, which licenses its online collections application to a leading bank card issuer and a retailer that offers a cobranded card, uses blind auctions to help cardholders reach settlements. After a delinquent cardholder has logged onto the issuer's site, he is offered several options for settling his debt. If the cardholder chooses to negotiate a settlement, he places three bids for the amount he is willing to pay.
Sitting at the other end is a collections agent who also submits three amounts the issuer is willing to accept to settle the debt before seeing the bids placed by the debtor. Once all bids are in, Debt Resolve checks them to determine if there is a match. Recognizing that the odds of an exact match are long, most issuers provide Debt Resolve with instructions to accept the highest bid by the cardholder that is closest to any of its three bids or the floor limit. If a settlement cannot be reached, the debt returns to the collections stage.
Eliminating an agent when negotiating a settlement for a late-stage delinquency also removes the risk that an agent may violate the federal Fair Debt Collections Practices Act should the negotiations become contentious. "An online system sticks to the script, so there is no real concern of running afoul of regulatory issues," says Rosa.
There's little question that online collections offer beleaguered collections managers the opportunity to stretch their budgets and bolster recovery rates. But until the Internet revolution conquers lower income, high-debt households, issuers and collections agencies shouldn't be hanging up on phone-based collections anytime soon.
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