Since the recession, Americans have whittled away at their debts, saved more and used less credit. Banks have been more conservative, cautious to avoid taking on too much risk.

Consumers seeking help regarding personal finances seem to be shifting away from distressed, recession-related questions toward more long term, forward-thinking topics. There is a long way to go but the recovery is gaining footing and banks are employing proactive measures to meet both consumers’ financial needs and build their balance sheets with the least amount of risk to the institution.

New regulations are making it difficult for financial institutions to change terms to manage risk after issuing credit. The need for information beyond traditional credit scores to make the most informed decisions about consumers is rising. Banks are placing a greater emphasis upfront on ensuring customers are given the appropriate product for their risk level.

To proactively address changes in customer behavior they are employing new strategies across all stages of the credit lifecycle. Specifically, collection groups are benefiting from some of the same approaches used in origination and account servicing including account monitoring triggers and the use of simulation environments to test and validate new strategies.

Just as account monitoring triggers and data can be used to identify if a customer is considering closing an account (i.e., they discontinue direct deposit, change automatic payments to other accounts, change their address or their average daily balance steadily decreases), they also can be used to identify a potential default.

Using third-party data banks might identify that a customer has taken out a payday loan or is behind on payments of other accounts such as utilities, cell phone or rent. Early intervention may keep the same customer’s bank accounts from moving into collections.

While Champion/Challenger is a well-established methodology for validating the effectiveness of changes to financial institutions’ decisioning logic and risk policy, simulation environments are proving to be more efficient and cost effective.

They can detect accounts that are headed for trouble and test strategies for managing accounts once they have gone into collections. Using third-party data in this way helps banks test the propensity for customers to default and weed those out before offering credit.

A simulation test environment also assists banks in improving their collections strategies (i.e., who is most likely to pay, who is most likely to answer, best time to call, etc.). This provides the best recourse for how to treat each troubled account and can provide a decrease in delinquent roll-rates while increasing payments collected.   

While there are signs of improvement in consumers’ debt health and the economy, data for the first half of 2012 from consumer-oriented Web site shows the number and size of collection accounts continues to grow with 11% of consumers in collections and an 18% increase in average collection balances.

These statistics underscore the need for strategies to proactively keep accounts from going into collections as well as optimization of processes when a customer defaults. Banks emphasizing new approaches to managing credit risk and collection efforts are discovering great success and leading the way toward economic recovery.

Paul Thielemann is senior vice president of sales and marketing for Zoot Enterprises, located in Bozeman, Mont. His email is


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