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This article was published in the February issue of Collections & Credit Risk.
Given today's economic realities, with growing numbers of individuals who previously never missed a payment now in debt, collectors might want to rethink whether a traditional – arguably more aggressive – approach is the best choice for everyone, several industry insiders tell Collections & Credit Risk.
Collection agencies should consider a softer, more holistic method – some call it a "sales-based" approach – for debtors who have had little or no experience with collectors.
"We're seeing a migration from the confrontational to the 'I-feel-your-pain-and-can-help-you,' approach," says Bruce Cundiff, director of payments research and consulting at Javelin Strategy & Research, based in Pleasanton, Calif.
Old school collections often meant threatening a debtor's ability to obtain credit in the future. It might count on scare tactics, even harassment and intimidation, says Judi Lisbin, director of new business development at United Debt Collections, based in Fort Lauderdale, Fla.
But strong-arm tactics can chase away debtors. The approach also means agencies might find themselves in danger of violating the Fair Debt Collection Practices Act, says Stephen Marcus, president at A New Horizon Credit Counseling, based in Fort Lauderdale, Fla.
The new style is rooted in convincing the debtor to be responsible, he says. Collectors want to sell the idea that they are trying to help the debtor make good on an account, says Christopher Viale, president at Cambridge Counseling Group, a financial literacy non-profit based in Agawam, Mass.
American Express uses the soft approach, says Lisa Gonzalez, manager of public affairs/risk management at AmEx. "We make an effort to help a credit card customer facing financial difficulties and find the most equitable solution," she says.
Customers facing a temporary financial hardship, for example, may be eligible for a customized payment plan for a brief period to resolve an amount due, she says.
A common misnomer about collections is that the business is enjoying a heyday thanks to the recession and the availability of scads of consumer debt.
The reality is that when individuals struggle with a growing number of payment choices, collecting becomes more difficult. While placements rise, there are not necessarily more dollars coming in, adds Cundiff.
The idea behind soft collections is that the collector learns to listen to the debtor and analyze, as opposed to escalating, the situation, says Cate Williams, vice president of financial literacy at Money Management International, a non-profit credit counseling agency, based in Chicago.
The ultimate goal is to put the individual on a budget and work out a payment plan. Screaming the loudest to see who will get paid first does not always work, adds Viale.
A simple script works best, he says: "Hello, I'm Joe with collection agency Z. I'm sorry to have to call you but we need to find a way for you to pay this debt. So let's work out a budget and see what you can pay."
At AmEx, customers who expect to face a temporary financial hardship might be eligible for a customized payment plan, says Gonzalez. American Express also may lengthen the time before canceling the account of a customer participating in the plan. Depending on the customer, the plan can build flexibility around the interest rate, fees, length of plan and payment amount.
John McNamara, chief marketing officer at LiveVox, a hosted-dialer company in San Francisco, says the average payment received by collectors using the soft approach – meaning building a rapport with the consumer and encouraging them to get a loan to consolidate debts – is nearly twice as high as that of collectors using the harder, more script-driven dunning approach.
McNamara based his assertion on both "25 years of anecdotal evidence" and on hard data gathered through a study he conducted while at Nationwide Credit/ACB.
"I think the collector who attempts to empathize stands out from the noise of other collectors for other creditors," he says. "It takes little skill to take a hard approach. It takes much more skill and experience for a nuanced talk off. It was actually hard to find agents who used a firmer approach as they washed out."
The soft approach has been deemed so effective, continues Marcus, that the Internal Revenue Service has started a pilot to explore if using the softer approach is more effective in collecting back taxes.
In general, the soft approach is about selling hope, financial freedom and piece of mind, adds McNamara.
A good collector sells to consumers the idea of freedom from the fear of answering the phone or opening the mail, he says.
Because the effectiveness of the softer approach depends on one-to-one relationships that collectors establish with debtors, training is critical. "A lot of it involves establishing a relationship, so interpersonal skills are a must," says Cundiff.
Training should focus on honing techniques to understand what works best in convincing debtors to make arrangements to pay their debts, he says.
Collectors also need to be taught how to deal with abusive debtors. Some individuals might become verbally abusive, maybe a result of previous collectors being too aggressive, so collectors should role-play with the debtor to learn the reason for the delinquency, McNamara says.
Training collectors to use the soft approach can be challenging, he adds. The hard approach is more by the book. The soft approach teaches the collector to stop talking and listen, meaning collectors more often need to veer from a script. The soft approach involves more observation and monitoring, requiring more training, including up to 90 days of on-the-job training, he adds.
Wells Fargo teaches its collectors for four-to-six weeks, says Ganesh Nandy, a risk manager at Wells Fargo Financial, based in Lombard, Ill.
The company then offers side-by-side training. Many collectors are fresh out of school so Wells Fargo focuses on teaching them to better understand why debtors might have trouble paying and what life circumstances they are facing.
Nandy prefers the soft approach to collections, especially in the early part of the cycle. The average consumer, he says, carries five to six credit cards. If an issuer wants to be the card of choice, then the softer approach is advisable. "You can't twist the arm of the customer," he says. "The first line of defense is to call the customer once they are delinquent and find out why they haven't paid."
Most of the time that reminder call is all that is needed. For others, an assessment of the debtor's situation can help determine if the problem is long term or short term. If the problem is short term, suspending interest payments or fees can help address it, for example. If it is long term, then one has to assess if time is all that is needed, or if the loan can be converted into another product to better manage the debt. The only time the soft approach is not effective, adds Nandy, is when a debtor simply has no intention to pay and that, of course, is difficult to predict.
Nandy refers to collecting as a combination of sales and underwriting. Collectors want to be the first choice, which is where "sales" comes into play. "Underwriting" takes place when the collector lines up the tools the consumer needs to pay, he says.
At United Debt Collections, collectors are trained to become certified as credit counselors through the National Association of Certified Credit Counselors, one of three certification organizations. Collectors must earn their certification in their first year with the firm, says Lisbin.
While the soft approach in the current economy might be the best choice for collectors and creditors, it is not always the easiest, adds Williams, at Money Management International.
At some point the collector is no longer trying to collect a debt but doing financial counseling. "A collector's job is to collect a bill that has not been paid as agreed," she says. "Do they have the time to provide comprehensive credit counseling when they are hired to collect a debt? I highly doubt it."
Collectors can be trained and certified by credit counseling certification groups, adds Marcus, with A New Horizon Credit Counseling.
If the soft approach fails and a collector learns the consumer has the ability to pay but simply chooses not to, then a traditional, more aggressive, approach is likely needed, adds McNamara. At that point, it might also be time to consider filing a lawsuit to recover the debt.
The industry's history suggests collectors should continue to tread carefully when relying on traditional collection methods.
The Better Business Bureau and Federal Trade Commission last year combined to log almost 100,000 complaints against collectors. CCR
