One-size-fits-all doesn’t work in collections any better than it does for clothing. No collections strategy should be based on a generic approach that treats every customer the same, let alone one that is based on a tired cliché.
Nor should every institution use the same process. Instead, the best collection strategies align with the unique brand of the organization, involve the right players early in the process and consider lifetime customer value above all.
Every organization has a unique brand. High equity brands such as Tiffany or Nordstrom are highly cognizant of their customers’ experience from the moment they step in the store, through the sale and an ongoing relationship. When a partner is issuing credit for a retail store it is essential they be in complete agreement regarding collection efforts. The lender needs to get their money, but if their collections method leaves the retail customer feeling slighted that will not only reflect badly upon the store’s brand but potentially cause lost business.
What if you drove away your best customers because in the pursuit of a departmental goal, the impacts on the rest of the business were not considered? A banker recently related an experience at his financial institution where this occurred that further exemplifies the need for a collaborative approach to the collections process.
The bank implemented a pilot program that fed information directly to its tellers about customers who were involved with collections. The collections department had been unable to contact these customers via phone or email but they knew these individuals were coming into the branch to perform various transactions. Here was an ideal opportunity to speak directly to them regarding their overdue accounts, right? Wrong. The marketing department asked them to shut down the program because it was destroying the branch channel and negatively impacting customer relationships.
The pilot seemed like a great idea to the collections department but they did not take into consideration the value of the entire relationship and the consequences an unpleasant experience during a routine transaction might have. Institutions that recognize the lifetime customer value proposition understand that customers behave differently and their individual circumstances must be taken into account.
For example, the crash of the housing market and subsequent residential mortgage collections has revealed a greater complexity in consumer creditworthiness that needs to be considered. As recovery starts to occur, there are people who have been through a foreclosure or collections process for various reasons, but may still be a good credit risk.
While the changing regulatory environment has placed a burden on financial institutions’ compliance groups, this has opened the door to facilitate more collaborative efforts between product development, credit risk and collections.
From a credit risk and pricing perspective, new regulations in the financial sector don’t allow an institution to enter a relationship with a customer and then adjust interest rates and other aspects of the account as you go along. It is now critical to have complete clarity upfront about the type of customer you are going to market and grant credit to. Having that transparency about the exact relationship ensures the products being created are in line with the established framework for managing risk and business growth.
In every lending situation some percentage is always going to go bad. Aligning collections with the unique brand and growth objectives of the institution will help proactively manage, if not reduce, that pipeline of bad debt. Strategies may even differ within the same institution between known customers versus potential growth segments. The most successful approaches will understand that one size does not fit all.
Karen Gordon is the public relations manager for Zoot Enterprises, located in Bozeman, Mont. Her email is firstname.lastname@example.org.