Overdue!

More and more people are defaulting on secured and unsecured loans, credit card and mortgage repayments. It’s a fact. And it’s a worrying prospect for lenders.

Last year, UK financial institutions took a collective dent to their bottom line of around £7.7 billion in writing off non-performing consumer loans 1. Unsurprisingly, many are now urgently looking at how to reduce write-offs – a clear admission that they could be managing arrears more effectively.

That’s the view of some 408 senior managers who were surveyed for Talgentra’s annual “Trends in Revenue Management and Collection” report.

The results were startling:

•99.5 percent of those questioned admitted to writing off unpaid customer bills in 2005 with 58 percent writing off between 5-9 percent of revenues.

•96 percent expect that the level of consumer bad debt write-off (as a percentage of their company’s revenue) will increase in 2006.

•93 percent expect to see an increase in the number of customers with repayment difficulties over the next 12 months, with general economic conditions cited as the main reason for the expected increase.

Equally startling, 68 percent of the senior collections managers questioned didn’t know how much they spent annually on collections activity, the major reason being that responsibility in this area is often spread across a variety of departments, ranging from IT, fraud, credit management, customer service, collections and the finance departments.

Inevitably, this makes it very difficult to devise a cohesive and truly effective revenue collections strategy. So, bearing in mind the statistics highlighted in the report, is it finally time to do something about it?

Revenue management and collections systems

Revenue management and collections systems are specifically designed to manage customers in arrears with the emphasis on rehabilitation wherever possible. They also ensure that collections costs are minimised and that recovery rates from customers who cannot be rehabilitated are fully optimised. They incorporate innovative methods and proven techniques for managing revenue collection and minimising write-offs. Furthermore, they help organisations adopt a more proactive approach to identifying customers in trouble and helping them to meet their repayments.

For example, collections processes can be improved hugely, by consolidating all customer-related communications – including phone calls, e-mails, SMS, letters and faxes – into a single digital repository. Perhaps even more importantly, these systems have the unique ability to segment customers in arrears in the same way that marketers segment customers and prospects using CRM systems.

In other words, it’s about customisation, personalisation and creating a real dialogue with customers, who are increasingly hard to find and expensive to recruit, and need to be retained. Ultimately, it’s about making a distinction and not simply sending that same red letter to both the established customer who usually settles bills on time, and a new customer who defaults on their very first payment.

The consumer lending industry typically considers revenue management and recovery to be a three-stage process:

Stage 1
Early stage collections – predict the likelihood of delinquency and manage the arrears as they happen with the objective of rehabilitating customers.

Stage 2
Late stage collections – typically involves the use of internal and external debt collection agencies and tracing services. Usually defined as between 3–6 cycles in arrears.

Stage 3
Recovery and write-off management – typically involving litigation, field collections or debt sale.

At all three stages, a specialist revenue and collections system can maximise the money collected and keep shortfalls to the absolute minimum by performing the following processes:

Customer segmentation
Segmenting customers in arrears pays real dividends, for the simple reason that decisions and collections processes can be made based on detailed knowledge of the customer and then tailored to individual circumstances.

Ultimately, your chances of recovering debt improve vastly when employing an approach that is matched to the behaviour and profile of the customer.

Automating standard processes
A collections system allows standard procedures and processes to be automated based on a rules-based engine, thus taking the pressure off customer services representatives and enabling them to spend their time more productively on more complex cases – like helping customers in arrears to reschedule payments or change the terms of their loan.

Automating customer communications
Another major benefit of segmentation is the ability to ensure that the tone, frequency and accuracy of communications are appropriate to specific customer circumstances – automatically.

Looking forward
Collections experts in the financial sector have said that both write-offs and the number of customers with repayment difficulties will increase in 2006. With the problem only expected to get worse, now seems like the right time for financial organisations to implement strategies for managing customers in arrears more effectively, and start saving millions of pounds in revenue. With return on investment typically achieved in less than 12 months, specialist collections systems are an option that lenders won’t be able to resist for much longer.

Ultimately, good customers shouldn’t be made to pay the price for those who don’t pay their bills. And neither should their lenders…

Chris Buckham is Director of Marketing at revenue management and collections specialists, Talgentra. Copies of Talgentra’s survey “Trends in Revenue Management and Collection 2005” can be requested at www.talgentra.com/downloadannualresearch2006