Lending Industry Adopts Unprecedented Collections Practices

In the wake of the recent economic crisis, credit issuers’ collections organizations have shifted their priorities and objectives. Whereas in the past, collectors’ primary objective was to prevent losses by obtaining payments on delinquent accounts, today, their focus is on minimizing losses.

As recently as two years ago, if collections shops wanted to increase the amount of money they collected, they would simply add staff to call centers (who would make more calls to delinquent customers) and send debtors more letters requesting payment. During the credit crisis, these techniques became ineffective, as consumers were overburdened by their debts and were simply unable to repay the monies owed.

Indebted consumers have become unable to settle debts in a shorter period of time than ever before. Data collected by Auriemma Consulting Group shows that debts are virtually uncollectable once they are 60 days past due. Prior to the economic decline, the cut-off was 120 or 150 days. The goal of collections shops is now to be the first lender to obtain payment. As a result, aggressive strategies have been put in place by lenders to ensure that they receive payments before consumers meet other financial obligations.

Lenders have had to develop new best practices in order to collect outstandings effectively in this new market reality. Today, collections organizations are willing to take a smaller, known loss earlier in an account’s delinquency rather than letting a debt roll through delinquency buckets into the inevitable charge-off stage. To accomplish this, collections executives have developed new strategies, adopting practices that may have been considered overly aggressive in the past. Some of the more effective new practices include:

– Pre-delinquency collections

– Early-stage settlements

– Offering cardholders (both delinquent and current) incentives like gift cards to pay off existing   balances

– Reassigning call center staff so that the most effective and experienced representatives are focused on collecting early-stage debt

– Extending communications channels beyond letters and phone calls to include SMS messaging, door-knockers and e-mail

It is important to note that these new practices are still in the development stage and are expected to evolve as more performance data is generated. As this information becomes available, lenders will refine their strategies, although we expect that until there is economic stability, collections organizations will continue to explore and implement new ways to collect payments from their delinquent customers.

Bio: Auriemma Consulting Group (ACG) is a management consultancy serving payments companies and broader financial services industry. Megan Bramlette leads ACG’s International Knowledge Management practice, splitting her time between the firm’s New York and London offices. An acknowledged payments industry expert, Megan serves as the Managing Editor of the UK edition of Cardbeat® and provides clients with business intelligence and market research services .