A physician friend recently told me how much he appreciates his American Medical Association (AMA) credit card. It’s designed to meet the unique characteristics of a doctor’s lifestyle. There is not a traditional 30-day payment cycle or an aggressive collections process when payments are missed.
These special terms work without a lot of concern about default on the part of the card issuer. They know their AMA customers have the income and assets to pay their bill and likely will never file for bankruptcy because they hold a professional license and want to protect their community reputation. Just as there are ways to adapt credit card offers, or other financial products, to meet the needs and characteristics of a certain group of people there are ways to adapt collection strategies to meet the differences in the characteristics of people who default.
There are creditors who begin making calls if they have not received a payment the day it is due. They continue making those calls every day until payment is received. If you are a creditor who heavily pursues a subprime, high-risk market being aggressive with late payments and collection processes is probably the right strategy.
If you issue the AMA card, a better approach might be to send a friendly email reminder when a payment is past due at 30 days, 60 days, etc. and do everything possible to avoid sending the account to collections. There is a wide range of customers between those considered subprime and AMA card holders. How do you decide the right approach with individual customers when default is imminent or has already occurred?
Banks don’t want to ruin long term relationships, especially with their best customers, but they still need to collect delinquent accounts. With losses from delinquencies, charge-offs and bankruptcies a daily threat, lenders must have a way to ensure they are making the best decisions about how to handle each individual.
A customer-centric approach to collections is possible with the use of advanced analytics and scoring models, alternative credit data and a more sophisticated rules engine.
Advanced analytics and scoring models can help financial institutions gain a more comprehensive view of their customers and the risk they impose.
These models use a variety of alternative credit data sources to determine the best course of action to take with each account. They can help predict the likelihood a consumer will file for bankruptcy, their ability to pay and willingness to pay.
By using their internal data in combination with external data to find out who their customers are paying first, banks can more successfully rework loan terms. A customer-centric approach might also include having the customer choose how (phone, text or email) and when they wish to be contacted.
With all the hype surrounding big data, there certainly is enough information out there to make well informed decisions regarding how to treat individual customers when it comes to collections. Many lenders already employ rules to trigger different actions for 30 days past due, etc. The use of a more sophisticated rules engine can also be applied throughout the collections process to consider the unique traits of individuals and segment them for the appropriate collection action.
During the economic downturn many things changed, including consumer behavior. The order of who got paid first by consumers reversed. It would have been unheard of to let your house go prior to the burst of the housing bubble in 2007.
Many people in the position of owing more than their home was worth started paying their credit card bills and auto loans first and mortgages last. Serious delinquencies or defaults were no longer a subprime issue. A new face of collections is driving the need for a differentiated approach to managing collection processes.
Collection calls are never going to be easy, but as long as customers default improving collections will always be a priority. If collection processes were to become more customer-centric, like the AMA credit card, creditors will likely see better outcomes and greater recoveries.
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Bob Lonergan is a national accounts manager for Zoot Enterprises, located in Bozeman, Mont. His email is firstname.lastname@example.org.