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One of the key questions facing lenders and creditors now that the economic bubble has burst is how can they ease the damage to their portfolios? One solution is to break down the remaining data silos in their organization to grant sharing of customer information across all departments, and thus provide a better picture of the risk associated with all customers.
Too often the marketing department will solicit a delinquent customer with an offer for a loan, equity line or credit card because they are unaware how the customer has responded to collection efforts.
For example, the marketing group for a large bank sends out a pre-approved credit card offer to a customer who is delinquent on the mortgage, not knowing that the customer is behind because of a job loss, even though that information has been relayed to collections.
The customer accepts the offer and uses the card to pay household expenses, such as groceries and utility bills, eventually reaching his or her credit limit. The customer then starts missing payments on the card balance, while still missing payments on the mortgage.
The account goes into collections but the manager does not know that the delinquent cardholder and the person with the same name who is delinquent on the mortgage are the same person.
Subsequently, two separate, competing treatment strategies are created and the customer is bombarded with calls and dunning letters that they ignore. The collection department ends up footing the bill for duplicate recovery efforts unknowingly set in motion.
"Coordinating customer data across all departments and customer touch points is becoming more important, especially in these tough economic times, because it can help collection managers set appropriate treatment strategies for customers delinquent on multiple accounts," says Trevor Rubel, senior vice president of product at Greenwood Village, Colo.-based First Data Information Services.
It also can keep the marketing group from offering a delinquent customer more credit as collection managers can proactively notify marketers when a customer has moved to the next stage of delinquency and provide that debtor's risk score for settling his or her debt.
"By sharing data between all departments, marketing and collections can determine the potential downstream risk level of new offers to delinquent customers," says Rubel.
Nevertheless, breaking down data silos remains a major task for many lenders and creditors, and even the third-party collection agencies they hire.
"Historically, every division in a bank or financial institution was set up as a separate unit with its own operating platform that put their technology in a silo," says Lynne Labrador, senior director, risk management solutions at Minneapolis-based Fair Isaac Corp.
Many companies do not have the budgets to replace their technical infrastructure. To overcome this barrier, application and platform providers such as Fair Isaac, TransUnion and First Data are building platform-agnostic applications that open the door to siloed operating platforms and enable data from across the enterprise to flow in and out.
These so-called plug-and-play applications are appealing because they reduce internal IT costs to restructure existing platforms. "A lot of financial institutions want to ease or eliminate the internal IT issues around data integration, which can be very complex," says Scott Carter, group vice president of the collections vertical at TransUnion. "A lot of companies don't want to dedicate IT staff to the task or incur high setup costs."
TransUnion builds many applications in partnership with third parties, such as Austin Logistics Inc., Ontario Systems and CR Software, that are familiar with the integration issues end users face and that have the expertise to minimize integration issues in the design process.
"The starting point for us is to look at how the application is to be used and then find a technology partner that can pull together all the data needed in an easy-to-use format and address any potential integration issues," says Carter. "It is important to consider the complexity of integration issues up front because end users want fast implementation."
Two examples of TransUnion's collaborative efforts to create plug-and-play applications are Strategy Builder, which uses business logic to segment delinquent accounts and assign appropriate treatment strategies, and Collection Prioritization Engine (CPE), which combines multiple recovery models and credit characteristics to help lenders and collection managers identify which accounts ought to be worked to maximize recoveries.
"Creating applications with flexibility when it comes to configuration provides additional value to end users," says Tom Miller, senior vice president of cooperate development for Austin, Texas-based Austin Logistics.
When selecting an off-the-shelf aggregation application, lenders need to look at the data sources they want to pool, whether those sources reside in-house or with a third party such as a credit bureau or transaction processor, and whether the application is compatible with in-house scoring models, according to Rubel.
Other considerations include whether the application can be accessed through a Web browser and how extensible the application is for future upgrades. "Extensibility and Web access are becoming important features," says Rubel.
Still, the heart of such applications is their ability to aggregate customer data in a way that collection managers can develop more effective treatment strategies and bring greater efficiencies to customer interactions and other operational issues.
Vytas Kisielius, CEO at Newark, Del.-based Collections Marketing Center, a provider of collections technology, says aggregating customer data can help the lender determine if it makes fiscal sense for each department to write separate treatment strategies.
The issue becomes: How does the lender credit the funds recovered equally to each department if the debtor settles for less than 100%? "If the lender is getting out of the auto loan business, it may make more sense to allocate more of the recovered funds to the home equity side of the business to improve performance in that department, or vice versa," he says.
Aggregate data also can be used to measure the value of the customer relationship and develop treatment strategies. Some customers may have sloppy payment habits that can influence their risk profile, but are not chronically delinquent. They may have other loans the lender deems more valuable when it comes to generating interest income.
It is in the lender's best interest then to create treatment strategies that consider such variables. "The last thing any lender wants is a treatment strategy that rubs a customer who frequently pays late, but pays, the wrong way," says Fair Isaac's Labrador. "If that happens the customer may decide to bring the delinquent account current, close it and other accounts they may have, and then take their business to a competitor."
In addition to providing analytics, Fair Isaac will consult with customers to develop a technology plan for implementing applications that unlock data silos and enable data aggregation.
Financial Pressure
The sputtering economy is adding to the burden faced by customers with excellent payment habits and low risk profiles, but who are struggling to pay bills.
Before 2008, lenders could offer these customers a bridge loan to consolidate debts and lower their monthly payments, but the option is fast becoming less practical in this economy. Instead, lenders must measure the value of their customer relationships across all departments and reach out accordingly, says Labrador.
Another way to use data aggregation to gain insights into customer behavior and prevent delinquencies is to pull in account transaction data.
Credit card data is the best source of transaction data, since it tells the card issuer where the cardholder is shopping. If a cardholder shifts their card use away from discretionary spending to purchase groceries, gasoline and pay bills, they might be under financial strain.
"Once the information has been analyzed, rules can be put in place around behavior patterns that prompt certain actions to prevent a possible delinquency," says First Data's Rubel. "The data can also be used to create and test potential treatment strategies based on projected scenarios that may lead to delinquencies."
The latter is critical because once a customer becomes delinquent, many of the existing first response strategies are likely to be out-of-date given that so many consumers are falling prey to the recession so fast that most lenders cannot get their arms around the situation, says Collection Marketing Center's Kisielius.
Building and testing simulated treatment strategies also can help collection managers determine how many agents are needed to work the campaign and the tools they will need.
Looking ahead, collection experts foresee data aggregation applications being used to project recovery rates, the likelihood a debtor will be contacted through specific communication channels and enable collection managers to make adjustments to their campaigns in real-time.
"There is a lot of rich account and consumer data available that can be tapped to create treatment strategies," says Austin Logistics' Miller. "What lenders and collection managers need are the tools to unlock it and someone to show them how to make the best use of it."
That day has arrived.
