Long ago and far away, the collection function centered on embarrassment and intimidation. Collectors could call endlessly at work, or at home any hour of the day. Repeatedly and without mercy. The Fair Debt Collection Practices Act ended most of that in 1978 when legislators observed consumers were ‘faced with “abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors,” 15 U.S.C. § 1692(a), in 1978, Congress enacted the Fair Debt Collection Practices Act “
The collection function in bank cards operates on a set of standards which are more focused on separating the wheat from the chaff, based on cardholder ability and intent to pay. When I ran Chase’s large collection operation in Tampa, Florida, the goal was to train negotiators and develop staff who would listen more than talk.
People want to pay their bills. Sometimes they might have been overly optimistic about their ability, other times they may have hit a landmine with a sick child or a run-down car. In either event, we proved in hundreds of test cases that you get better results with a carrot than a stick.
Here is a good read from the Harvard Business Review titled “How Behavioral Economics Could Help Reduce Credit Card Delinquency.” Perfect for a summer Friday afternoon.
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With U.S. household credit card debt at an all-time high of more than $1 trillion, delinquent payments can be more costly than ever.
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For companies, delinquencies can mean massive collection costs and write-offs of entire accounts.
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For consumers, delinquency can mean late fees, increased interest rates, downgraded credit scores, the loss of vehicles or homes, or even bankruptcy, despite their intentions to bring their accounts current by making a payment large enough to satisfy their credit card balance.
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Recent research indicates that simple modifications of automated phone prompts provide an inexpensive way for companies to help consumers make good on their intentions, benefiting both parties.
The strategy is not rocket science but look at the simple test.
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Our first modified version added an interactive menu level that asked call recipients to select a concrete timeframe within which they would make their payment during the ensuing three days: “If you are going to pay within the next 24 hours, press 1” and so on, continuing through 36, 48, and 72 hours. We expected this intervention to prompt deeper mental engagement that would help them remember their intention.
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Our second modified version added yet another interactive menu level right after this new one. Call recipients were asked to take a personalized pledge: “[Customer name], you have committed to pay [total amount due] within the next 24 hours. Press 1 to confirm your commitment to this pledge.” The idea was to strengthen call recipients’ sense of commitment to their expressed intention.
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Over nine months we randomly assigned a small subgroup of the company’s early-stage delinquent customers, around 50,000 people, to one of the three IVRs. We found that compared with the baseline IVR, the prompt with the concrete timeframe increased customers’ likelihood to pay by 2.26 percentage points and led them to pay 0.23 days faster. Adding both the concrete timeframe prompt and the pledge increased the likelihood by 2.54 percentage points and the speed by 0.51 days.
Every percentage point counts when you collect debt payments. Strategies like these do not work alone. You need solid, industrial strength collection management policies such as those built into FICO Debt Manager and ACI Risk Manager that allow you to develop, deploy, and execute.
There is plenty of recent content in the Mercator library that covers collection strategies, such as U.S. Credit Card Debt: Circle the Wagons and Fortify and one of my personal favorites, Credit Card Management: Seven Strategies to Take Advantage of the Growth Wave.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group