In good times collections was the forgotten part of the credit life cycle, and little or no investment was made to improve its processes. Instead, priorities were focused up front on acquiring customers.
But during the last two to three years, those priorities have been almost completely reversed as most banks retreated from customer acquisition and shifted their focus to the record numbers of delinquent customers in the collection process.
As the economy slowly recovers, banks are beginning to shift priorities again. To get off this roller coaster, banks should develop an integrated customer view that would improve not only the collections process but also banks' overall strength.
Financial institutions we work with have said one of the biggest collections issues they face is getting a unified view of their customers across all lines of business. Their lines often operate, however, as if they were separate corporations. This makes tying together collection centers for mortgages, indirect auto lending, credit cards and other lines extremely challenging. The ways each line acquires and stores customer data make it very difficult to get a global view without a lot of manual steps or custom software.
Even if financial institutions could easily tap all the information about each customer to make more informed decisions, the data must be aggregated in a consistent way. If the collections team has a 30-day-past-due attribute that is different than the one used in originations, the two sets of data cannot be used together to analyze behavior and trends or to improve the bank's ability to identify troubled accounts early and take appropriate action.
A common set of data attributes across all lines and divisions, from origination to collections, gets everyone talking in the same language.
Historically, the canary in the coal mine was the credit card relationship, but now customers are hanging on to their cards in order to conduct normal life but letting go in other areas, often their mortgages.
The relationship showing the first sign of strain is the one the bank wants to act on first. It is imperative to then closely monitor the other lines of business involving that customer to address issues as they arise.
The reality in collections is that the sooner a problem is identified the more likely payment becomes.
Managing collections does not have to be just about damage control. Many credit risk employees are now modeling in collections and bringing their expertise to the table. Collections and portfolio management groups are using the same sorts of propensity modeling and scoring as the people in originations in order to take a more analytical approach to their functions.
A lot of information is available at the bank, demographically and in the credit file, to start mapping behavior and assist in segmenting borrowers, for example, total revolving debt, income estimators, geographic areas with high unemployment and use of payday loan services. All this data can be used to set priorities and adjust the collections effort for maximum effectiveness.
Revising collections strategies today will have a positive impact on the way the financial industry does business. A more integrated approach across all departments — marketing, originations, ac-count review and collections — builds a stronger institution and may prevent accounts from going to collections.
Lenders that implement more data, statistics and analysis are able to make better decisions and determine the best responses not only for originations but also for customers on the verge of delinquency.
