At a time when more consumers are declaring bankruptcy than ever before, banks need to put more emphasis on their collection efforts.

Many consumer finance companies, issuers of proprietary credit cards or entertainment cards, and companies that finance new cars have concentrated on collection efforts for years.

They know that solid collection practices not only discourage customers from declaring bankruptcy but also encourage those who do to reaffirm their intention to repay particular debts.

Behind the Times

But many banks are out of step with the current trends in collection.

Perhaps this is because until bank credit cards proliferated, most bank loans to consumers were backed by security.

One of the sayings in the credit industry is: "Customers will protect their homes first and their automobiles second; everyone else is third".

Now banks must learn how to get delinquent customers to pay them first on their unsecured bank credit cards, many of which have very large balances and cash advances that replace the old secured personal loans.

Long-Term Moves

Effective collection requires effective business strategies as well as support from upper management.

Actions aimed at the long term might involve looking at the collection computer system, centralizing the collection department, reorganizing the department if it is already centralized, and revamping hiring practices and compensation systems.

These steps require a lot of time and planning. In the meantime, however, there things banks can do quickly.

One is to look at the customer-service aspect of collection efforts.

Collectors as Advisers

Remember, your bank wants to be the one that customers pay first.

To achieve that end, your collectors must adopt the role of financial adviser in dealing with customers.

The idea is to let customers know that you want to work with them to help bring their accounts current and protect their credit rating and purchasing power.

This means that you need to emphasize the quality of customer contacts and be less concerned with the number of calls made per day, productivity standards for talk time, and so on.

In a perfect world, one call would do it all -- win a commitment from the customer to a payment arrangement that would bring the account current and keep it current.

In reality, this won't always happen. But the percentage of good promises to pay could be increased substantially if collectors' calls were more oriented toward customer service.

Adjusting the Incentives

To help make employees' calls more effective, evaluate your bonus system.

Perhaps your bank provides bonuses based on the number of accounts "broken" -- that is, the number on which part of the past due amount is collected, preventing their roll-over to the next-higher stage of delinquency.

Breakage and control of rollover rates can be accomplished by getting a minimum payment arrangement from the customer -- sometimes a portion of a contractual monthly payment.

But when bonuses are based on these criteria, collectors may never ask for the "now due" amount -- the past-due sum plus the next monthly payment.

The Wrong Approach

Usually, the collectors just go right for the minimum payment due -- and negotiate downward.

This is especially true at the end of the billing cycle, when there's often a rush to try to collect delinquent accounts.

The end of the cycle is too late to act. If good payment arrangements are made on the first contact and appropriate letters are sent and reminder calls made to follow up, customers are more likely to keep their promises.

The extra hours at the end of the month would rarely be necessary.

So evaluate your bonus system. Does it reward collectors for doing the right things throughout the month?

Effective Criteria

Breakage rates and rollover can be among the criteria for bonuses.

But others used by effective collectors include:

* Dollars collected.

* Follow-through on promises to pay -- the number made versus the number kept.

* The number of account-holder contacts per day.

* The quality of the collection calls, which can be determined by monitoring calls.

* The number of customer complaints received.

Success in meeting these criteria can be evaluated on both an individual and a groups basis.

Targeted Training

Another step that need not take very long is to evaluate your training needs.

A complete training system consists of new-hire training, enhancement and refresher training for experienced collectors, and ongoing training.

Training needs may range from updating a formal system to developing one to replace an existing "buddy" system.

You should make sure your training focuses on customer service skills as well as effective collection strategies.

Collectors should be taught to:

* First, try to get the now-due amount. Resort to such remedies as extensions only when all else fails.

* Ask customers how close they can come to paying the now-due amount. The alternative, asking how much they feel they can pay, puts the customers in control. It often forces collectors to negotiate upward from too low an amount, rather than downward from a higher amount.

* Set up a payment arrangement designed to cure the account permanently. Don't just focus on a short-term fix.

* Do not accept arrangements for payment to be made more than seven days in the future. Longer-term arrangements can easily be forgotten.

* Make sure the customer has sources of money to honor the promise to pay.

* Confirm the payment arrangements with the customer and schedule and complete appropriate follow-up.

With upper-management support, well-planned strategies, and effective training, your bank can achieve collection success.

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