This blog is part of a series, which includes recommendations for a robust and comprehensive collection strategy. These blogs serve as a guide to help lenders protect their organization and mitigate losses by preparing for a downturn in advance. Read part one of the series here.
In our last article, we discussed why pre-delinquency account management strategies are critical as lenders evaluate and strengthen their collections strategies. Often, a recession causes hardships for customers and they may progress into early delinquency. If lenders can identify customers at risk of default, they can more effectively allocate resources and engage customers before the delinquency progresses.
In this article, we’ll explore how you can address early delinquency in your portfolio by identifying and prioritizing delinquent accounts.
Early delinquency: 1–29 days past due
At this stage, lenders should determine which accounts to work and how to apply the most effective treatment. Though a significant number of accounts will miss a payment and lenders will consider them delinquent, it’s not advantageous to work all accounts equally. As more delinquencies occur in a recession, it’s important to prioritize.
With external credit and internal behavior (“on-us”) data, lenders can increase the effectiveness of applied strategies, reducing delinquencies and preventing many accounts from rolling into serious delinquency. Using public, alternative and credit data, you can identify three pools of accounts.
First, lenders should consider segmenting high-risk accounts to ensure working them doesn’t cause significant risk. Using high-quality, up-to-date information to discover which delinquent accounts are high risk is critical. Example indicators of high-risk accounts include bankruptcy, a history of lawsuits, active military, incarcerated customers or potential fraud. Each high-risk type requires a different approach – and potentially a specialized team to handle. Isolating and ensuring these accounts are properly worked helps minimize risks.
A large portion of accounts are delinquent because customers forget to make payments by the due date. Lenders can deem these “distracted” customers low priority, as these accounts typically cure themselves prior to reaching 30 days past due — though some consumers may need a reminder. To identify distracted accounts, serious consideration should be given to the use of external trended credit data, which then allows you to evaluate payment behavior leading up to the first missed payment. Segmenting these accounts helps you apply scalable, automated treatment strategies (such as automated emails/SMS/dialers) as opposed to labor intensive treatment strategies (such as collectors calling). As distracted customers don’t appreciate collection efforts, we recommend you treat them with a softer touch that won’t risk future revenue-generating opportunities or permanently impact the customer experience.
Where possible, your automated tools should refer customers to a self-service, digital collections portal where they can make payments and cure delinquency without engaging a human. This removes the stigma of speaking with a collector and allows resolution after standard work hours, if necessary. For lenders, a digital collections strategy can reduce labor costs and ensure a consistent, compliant experience, while improving recoveries and lowering delinquency.
With an auto-dialer that quickly and efficiently dials large pools of delinquent accounts, you should ensure compliance with applicable laws, but especially the Telephone Consumer Protection Act (TCPA, 1991), which requires expressed consent from consumers. Lenders may have diverse interpretations of the TCPA and associated regulations, but a conservative perspective lends toward documented customer consent and up-to-date verification on the owner of the phone number to be loaded to the dialer. After verifying consent, lenders can quickly alleviate the risk of extensive fines ($500–$1,500 per violating call) by scrubbing all numbers from accounts against a phone data provider to verify phone line type (landline, mobile, VoIP) and ownership. You should scrub numbers frequently to ensure you have accurate information on numbers that customer service workers or collectors may add, or for those numbers that ported or changed owners.
“Struggling” customers are the last group of accounts. These high-priority accounts usually require the most effort to prevent them from becoming an eventual loss. As with other groups, not all accounts should be treated the same; you should evaluate, identify and apply the appropriate treatment strategy for each account.
Lenders have a number of tools and channels available to contact the customer in an attempt to cure the delinquency. Using internal behavior data, external credit data, and any other data attributes, you can better identify the appropriate treatment strategy by using tested resources that are proven to be predictive at determining which customers are likely to pay. This compiled data can create probability models, which you can pair with specific treatment strategies. For example, a model may determine customer A is highly likely to repay, so treatment strategy A should be applied to customer A – helping you to prioritize and save time and costs during a recession. You may benefit from partnering with a trusted data and analytics partner to assist in the creation of new or enrichment of existing models.
Identifying customers in early delinquency who are high risk, low priority and high priority enables you to apply high cost resources efficiently and effectively to improve recoveries and reduce delinquency.