Debt collection - back in the news
There are no signs of the credit card debt crisis abating. Figures released by the Federal Reserve for the US puts the outstanding consumer debt at US$3.34 trillion as of February 2015. One in three Americans now has some type of debt in collection. Simultaneously, the credit industry is facing several uphill challenges. The number of accounts from top issuers is shrinking (active accounts are down by 20% over 2009) and revenue per transaction too is decreasing. If this wasn’t bad enough, growth in credit cards issued by sub-prime banks is leading to fears of higher charge-off levels. And, of course, a number of bodies and regulations centered on collection methodologies and processes such as the Consumer Financial Protection Board and the Fair Debt Collection Practices Act (FDCPA) are being aimed at blunting collection practices.
As it stands today, collection practices must be optimized to minimize loss of accounts, delinquencies and charge- offs. The current debt collection landscape suggests that technology can become a major aid in improving collections.
Before we get to that, let us look at how to negotiate with the consumer - still the primary mechanism to collect debts. Good negotiation techniques are beneficial to everyone - the consumer, the creditor and the economy. In several instances the consumer gets a chance to improve his/ her credit history and their future credit worthiness, while money comes back into the economy.
Traditional debt collection negotiations
In order to improve success rates, it is just as important to know when to negotiate as it is to know how to negotiate. When to negotiate is a 2-step process.
The first step is gauging a consumer’s commitment to pay that involves the following:
- What is his/ her intent to pay?
- What is his/ her ability to pay?
- What will change his/ her ability to pay and over what period?
- What is the likelihood of the change?
he second step is to apply some common rules of negotiation using insights created by the consumer data to tide over negotiation deadlocks and motivate the consumer to make the suggestions about payment amounts and timelines. Here, one should not accept payment terms immediately and instead, ensure that customer’s intent is well evaluated before closing the conversation on agreed next steps.
Using technology to enhance collections
While a debt collector must have considerable empathy and persuasive skills, technology can play a significant role in making the process faster, more accurate and deliver better outcomes. These include systems that cut down human intervention in the process and ensure timely follow ups:
- Automated consumer contact strategy based on consumer’s preferences for modes of communication
- IVR assistance; and Virtual Agents to answer queries from consumers - app transfers consumer to a live agent based on text analysis
- Predictive analytics to identify risky consumers based on credit history, profiles, etc. and flag them to reduce bad debts
- Analytics and automation to help manage shift of focus from protecting the customer relationship to protecting assets and minimizing losses
- Analytics to create customized incentives - such as late fee waivers - to ensure timely repayments (and to prevent high risk account from going into delinquency)
Today, as bad debts grow and the urgency to improve collections mounts, every available tool must be used to address the problem. Technology can be used to simplify the debt collection process, reduce consumer handling time and meet regulatory requirements so that penalties and legal action is minimized. Most importantly, technology can be used to improve outcomes.