By Julie Austin and Vytas Kisielius

Historically, delinquency rates and charge-offs are tightly correlated and directly fueled by unemployment figures, a key factor contributing to cardholders’ financial solvency. Today, in a knee-jerk reaction, many customers previously perceived as attractive — now deemed high-risk — are being dropped from many institutions’ portfolios, or are being treated to the traditionally harsh and aggressive collections practices that could cause them to flee to other companies in the future. This is a potentially short-sighted strategy with long-term repercussions. An opportunity exists for financial institutions (FIs) to strengthen relationships with their share of the 58 million American consumers burdened with debt, especially the first-time debtor segment.¹

Today’s collections customers defy traditional risk models

What characteristics define the stereotypical collections customer? Most often it is those customers deemed to be a credit risk based on their higher propensity for defaulting on payments. These credit risks are most frequently identified by reviewing one or all three of the credit bureaus’ reports that reveal a customer’s payment behavior, whether or not payment is made, and the timeliness of payment. Traditionally, a typical collections customer’s credit history is peppered with negative records, such as unsteady employment, liens, late payments, bankruptcy filings and previous collection records. These credit events contribute to lower than average credit scores and are the tell-tale signs of a higher likelihood of default.

By contrast, the current economic climate has ushered in a wave of first-time debtors — customers who may be delinquent for the very first time, are unaccustomed to such an uncertain financial state, and don’t fit within the typical risk profile, or the criterion upon which institutions’ predictive risk models have been patterned during the past few decades. Many may have had a delinquency in their past, but in general their records — up to now — have been characterized by very few negative ratings and a history of paying their bills on time. These are consumers hard hit by the credit crunch and who no longer have a safety net, as evidenced by future dated payments, post-dated checks or distinct changes in payment patterns. Many may be depending on credit cards and accumulating mountains of debt, an embarrassing predicament. First-time debtors are proud of their (previous) financial responsibility, demonstrated through their holding of multiple credit card accounts, car loans, mortgages and student loans — all reflected by their respectable credit scores. When implementing strategies to reengage these customers, recognize that it’s not that they won’t pay, it’s that they can’t pay right now.

As delinquencies rise, it is important to emphasize that first-time debtors are unaccustomed to speaking with collectors. Even more so, they will tend to remember how they were treated and make future decisions based upon these interactions.

Retaining today’s delinquent customers: more asset than liability

A FI’s collection strategy and capability to handle the sheer volume of cardholders with debt will affect its future profitability. Upon market recovery, first-time debtors have a high probability of continuing as loyal customers. Retaining these customers is a potentially profitable strategy, given that customer acquisition is costly and new regulations are squeezing FIs’ margins on newly acquired account relationships. Maintaining these customer relationships may seem costly in the short-term or risky over the longer-term, yet customer satisfaction is potentially rewarding to the tune of $1,000 per customer. J.D. Power and Associates recently reported findings from The 2009 Retail Banking Study: “Moving the customer service satisfaction rating just 5 percent from ‘satisfied’ to ‘highly satisfied’ has the bottom-line impact of adding $1 billion in deposits for every million customers.”²
 
While customer acquisition is a standard measurement of success for a FI’s card program, maintaining existing customer relationships continues to be more cost effective. A recent report from TowerGroup estimated that, “the cost to replace one bank card customer ranges from $160 to more than $200, and issuers that work with their customers through this difficult period will retain those customers for life.”³

Debt collection techniques top consumer complaint in 2008

Previous strategies and techniques for collections efforts were based on the profile of the stereotypical debtor. Collection shops’ procedures — whether for internal, first-party or third-party organizations — typically entailed contacting customers regarding delinquent payments with an informative tone, initially. Over time, the tone may escalate with the use of more aggressive tactics. Data from the Federal Trade Commission (FTC) identifies debt collection practices as one of the most common complaints recorded in 2008. Of the 104,642 collections-related complaints filed, the top five included: “(1) misrepresentation of the amount or legal status of a debt; (2) excessive telephone calls; (3) telephone calls from collectors looking for other individuals; (4) use of obscene, profane or abusive language; and (5) threatening to sue if payment was not made.”⁴ While some of these tactics are illegal and not used by many collection operations, such aggressive tactics are perceived to be widespread despite being inappropriate for nearly all debtors.

Responding to the rise of first-time debtors

A new study, “The Vulnerable Middle Class: Bankruptcy and Class Status,” details the previously upwardly mobile middle class’ 100,000 filings for personal bankruptcy each month in 2007. By November 2009, bankruptcies were forecasted to reach 1.5 million.⁵ The study’s findings emphasize that those dealing with financial instability are not those customers typically considered high risk. Most likely, first-time debtors are unfamiliar with how to address a deteriorating financial situation. While some of the aggressive collections practices described above may comply with the Fair Debt Collections Practice Act (FDCPA), these practices will not likely move today’s debtors to action. Faced with a surge in first-time debtors, a customer-focused strategy is often a more rewarding approach for issuers. Heavy-handed approaches, aggressive tones or harassing tactics do not resonate with the new wave of debtors.

Customer-focused means the right strategy for each customer

An approach that allows collectors to display empathy toward the customer’s dire financial situation while offering a highly personalized solution can provide great value to FIs. Two of the most important factors to address when creating a more customer-focused collections strategy are changing aggressive tactics and leveraging a full-channel approach — one synchronized across all customer touch points. The treatment of delinquent customers is directly correlated with satisfaction, loyalty and financial performance; and, while the balance between retention and collections is challenging, it deserves more than a “one-size-fits-all” approach. Implementing a highly segmented approach to collections allows FIs to leverage terms and offers appropriate to a customer’s associated level of risk, taking into account their ability to pay and acknowledging their perceived willingness to pay.

Over time, optimization of collections tactics based on each customer segment’s payment patterns will improve overall recovery performance, mitigating the risk of a shrinking bottom line. FIs that provide customers with assistance in navigating the complex debt landscape by offering online payment channels and flexible payment programs will generate more kept promises to pay. FIs will also recover a higher percentage of debt while retaining future reliable customers. According to several TSYS clients, more than 50 percent of cardholders evaluating payment programs on an online collections platform enroll in payment programs or make an immediate payment. Additionally, payment plans supported by an integrated response management system result in the recovery of more payments. While approximately 80 percent of these payments are future dated, automated payment reminders have contributed to a 92 to 98 percent payment keep rate.⁶

Implementation: identifying and evaluating new risks

The multi-million-dollar question is predicting which of today’s debt-laden customers will continue to be your organization’s good customers. Evaluating charge-off risk against long-term profitability varies from one FI to another. Profitability is the primary determinant, which could be calculated on the basis of a single product, multi-product, or net present value (NPV) over several periods versus an annual profit measure. Another important aspect is developing a criterion for recognizing a first-time debtor. Identifying who will in fact be an attractive customer in the future involves evaluating the debtor’s customer profile, such as the duration of the customer relationship, length of time on the books, historical revenue generated, and one’s risk score prior to the recession.

Collections as a customer retention tool provides short-and long-term benefits

Customer satisfaction is a predictor of the endorsement of and commitment level to a particular brand or institution.⁷ A July 2009 report from Mercator Advisory Group found that, “If the customer is ‘highly satisfied’ with her/his experience, not only is that person 50 percent more likely to listen to the entire subsequent pitch, but that person is 200 percent more likely to actually accept a new product offer than if he/she were ‘dissatisfied.’” This philosophy applies to back-office operations, such as collections, which has the opportunity to be a valuable customer touch point for FIs.

A change in approaches toward collections from aggressive and limited payment programs to segmented communications and collection offers based on a customer's risk level, along with flexibility in negotiating payment terms, will positively affect an issuer's financial health. Additionally, it will build customer loyalty over the longer term. According to Daniel Henry, American Express' chief financial officer, "The object of the shift in collection practices is to keep certain card members active, and over time, they turn out to be really good long-term customers." A paradigm shift from collectors' often-used "show-me-the-money" tone to one of empathy and mutual problem solving can provide value to the organization in several ways, including collecting receivables more efficiently, capturing a higher portion of debt, deepening customer loyalty, and ultimately, increasing customer retention and its subsequent enhancement of profits.

About the Authors

Julie Austin, Director of TSYS Collections & Recovery Product Development, is responsible for the strategic direction and integration of all TSYS collections products and services. The TSYS Collections and Recovery System has a comprehensive suite of collections solutions geared to help clients improve their enterprise collections performance through increased efficiency and effectiveness as well as capacity management through outsourcing.

Vytas Kisielius serves as CEO of the Collections Marketing Center (CMC), a pioneering adaptive collections services company that deploys completely synchronized collections offers, contacts and treatments. CMC’s managed services solution is helping a rapidly growing number of top lenders across credit card, real estate, student and installment loan products to manage their charged off, delinquent and predelinquent portfolio operations.

1 National Foundation for Credit Counseling “The 2009 Consumer Financial Literacy Survey.” April 2009. Web. 6 November 2009. <http://www.nfcc.org/Newsroom/FinancialLiteracy/files/2009FinancialLiteracySurveyFINAL.pdf>.
2 Tews, John. “J.D. Power and Associates Reports: Customer Commitment to Retail Banks Declines for a Second Consecutive Year.” J.D. Power and Associates. 19 May 2009. Web. 25 November 2009. <http://www.jdpower.com/corporate/news/releases/pressrelease.aspx?ID=2009087>.
3 Moroney, Dennis, “Revitalize the Credit Card Pre-Charge-off Collection Process and Improve the Bottom Line.” TowerGroup April 2009.
4 United States Government Accountability Office “CREDIT CARDS: Fair Debt Collection Practices Act Could Better Reflect the Evolving Debt Collection Marketplace and Use of Technology.” September 2009.
5 Dugas, Christine. “More members of middle class file for bankruptcy.” USA TODAY. 19 Nov. 2009. Web. 20 Nov. 2009. <http://www.usatoday.com/money/perfi/general/2009-11-19 bankruptcy19_CV_N.htm?csp=34>.
6 Austin, Julie and Vince Sutera. “TSYS Flex Collect.” TSYS & CMC. PowerPoint.
7 The White House “Fact Sheet: Reforms to Protect American Credit Card Holders.” 22 May 2009. Web. 16 November 2009. <http://www.whitehouse.gov/the_press_office/Fact-Sheet-Reforms-to-Protect-American-Credit-Card-Holders/>.