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Taming the True Cost of Collections

by Mukul Mittal

Costly. Complex. Time-consuming. These are just a few of the challenges companies face when trying to collect on non-performing loans and leases.

Collections are a major strain on finance businesses worldwide. In the US, a company with a 5% net profit and $100,000 in bad debt must generate an additional $2 million just to make up that loss, one source estimates. In Australia, a business turning over A$5 million a year loses A$68,000 in cash flow each day of non-payment, according to another source.Credit risks will always be part of growing a finance business, so what can lenders do? First, they should realize that clinging to old ways of handling collections is a costly mistake. Strategies are available today to boost efficiency and recovery rates while reducing associated costs. Chief among these strategies: using today’s technology to automate key steps in the collections process and improve the effectiveness of collectors.Experts say the time to act is now.“Collections needs to get ahead of future losses by employing next-generation techniques, which include VAR segmentation, strategies informed by behavioural economics, and advanced digital collections tools,” advise McKinsey & Company consultants.The Costly & Complicated AlternativeThe cost of complacency is high. Non-performing accounts are cutting into profit margins that are already slim for some sectors. Time and money spent on collecting bad debts is a necessity but also must be factored into the final dollar amount of the recovery.What’s more, the collections process is a complicated undertaking. Specifically:

  • The first 90 days are crucial because recovery rates nosedive after that point. Companies have a 90% chance of collection within the first 60 days, 50% over 90 days, and 20% over 180 days, based on one industry estimate.
  • There are internal vs. external collections to consider, since collectors may be employees or outsourced collection agencies. Many businesses handle early stage collections internally the first 60 or 90 days, then outsource.
  • Companies must make sure that all collectors and collections activities adhere to guidelines specified by the lender, comply with regulations, and promote a consistent experience for the borrower when dealing with multiple people representing the company. Example: the Consumer Financial Protection Bureau has requirements on contacting debtors in the US, and companies in Australia must follow National Consumer Credit Protection Act regulations. Lenders must also handle collections for special cases in accordance with regulations if the customer has declared bankruptcy or hardship.
  • A recent report by Euler Hermes shows countries can vary greatly in the complexity of laws governing debt collections. Western European nations tend to have straightforward laws, with some exceptions, while US and Australian laws are considered more complex.
  • Some equipment-finance collections managers are also concerned about hiring and retention issues within their organizations. “The discussion on this topic was lively,” the Equipment Leasing and Finance Association (ELFA) reported following its annual credit and collections conference and survey. “Collections remains a stepping stone for building a career in equipment leasing and finance.”
  • There is also the challenge of preserving customer relationships as much as possible throughout the collections process. Customers tend to respond to best practices when it comes to collections. Even when the debt is not collected, companies always hope the customer will return someday in good financial health to make more deals.

Digitization is KeyLenders and lessors still using cobbled-together legacy systems and manual processes are in a weak position today for managing modern-day collections. This is because strategic technology investments deliver distinct benefits for companies that use them.“Technology enhancement and implementation was a hot topic at this year’s conference,” according to the ELFA report. “Email campaigns across all delinquency buckets, along with e-invoicing, online payment portals and portfolio scoring, all [showed] efficiency gains and increased productivity.”ELFA also reported that the use of analytics to create collection strategies leading to better collection measurements is key to the continued success of member companies. A total of 36% recently implemented a new collection system or software, and 45% now use an online customer payment portal. Noted an ELFA source, “Leasing 101 has been replaced by Leasing 401.”Predictive analytics can improve collections in specific ways. If the first payment is not made, or the first two payments are made and the third is not, this indicates a new behavior pattern for the customer, and the collections process may be modified for each of these cases. Analytics can review the behavior patterns of one or more customers with the same profile to predict the touchpoint most likely to generate a response.Other advances make it possible for technology to handle much more than simple billing and tracking of delinquencies. Lenders can use some systems to define collections strategies for their portfolio—or a segment of their portfolio, e.g., one collection strategy for consumer loans and another for business loans. Lenders with newer systems can also:

  • instruct the system to automatically trigger tasks when a specific event occurs
  • generate automated or manual actions from collection strategies, and
  • record customer interactions, including promises to pay and dunning letters.

Such systems can aggregate contracts and assign them to different queues or buckets based on defined criteria. Doing so automates the collections process and triggers different actions, improving effectiveness and keeping associated costs as low as possible.  Example: on Day 1, a customer automatically receives a text. On Day 5 he or she receives an email, and on Day 10, a letter. If no payment is made by Day 15, the system may interact with the dialer and alert collectors to start calling. The company’s collections rules are maintained in the system to ensure that customers are contacted on time and as specified. For example, rules might include not contacting a customer more than a certain number of times within a specific timeframe. The system tracks all of this, as well as criteria that constitutes a contract. It’s all part of the technology.Companies improving their collections technology in these strategic ways report a number of benefits. One is the ability to streamline multiple customer interactions involving different people. Another is having complete visibility of prior interactions for collectors. Technology also reduces the cost and effort of managing collections and managing by exception. Newer systems can track promises made and kept—or broken—in a contract. They can also reference customer interactions in the collection process to eliminate servicing errors, such as non-payment due to mistakes in the contract.In summary, technology is only part of the equation for meeting the collections needs of a new era in finance. Its strategic use is increasingly important for a company’s success.

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