Digital-First Collections Means Thinking Like a Marketer

The numbers speak for themselves because digital-first collections counts when it comes to tackling late-paying accounts

by Bruce Curry

November 23, 2021

As households continuing to grapple with finances, lenders that offer the right combinations of digital-first customer support will experience the benefits, including improved repayments, debt resolution, longer-term customer loyalty and greater market share.

By concentrating on effective customer engagement, lenders will also ensure that they are better aligned with regulatory requirements. As the impacts of the pandemic continue to play out, regulators are heaping ever-more emphasis on fair outcomes and doubling-down on lenders deemed to be harassing late-payers.

Marketing Mindset

Those emerging from the pandemic in a stronger position will continue to require assistance with future borrowing and investing. But with pressured margins, it makes sense to pursue value-creation with a marketing mindset that typically follows digital-first solutions.

The most effective marketeers profile their customers, fit product to profile, time the offering and seek a channel that enables smooth take-up alongside appropriate real-time online validation. They look to get an early understanding of the potential lifetime value of the customer, with a clear relevance of the offering, at minimal cost or customer irritation.

The best collectors profile their customers, fit collections solutions to profiles, time the engagement and seek a channel that enables straightforward automated resolution, again with appropriate real-time validation. They seek to retain the potential lifetime value of the customer, clearly evidenced by the right outcomes at a minimal cost, while also securing a high-level of satisfaction.

It's an area covered in detail during a recent Digital-First Collections Strategy webinar co-presented with McKinsey partner Matt Higginson.

Meeting Minimum Expectations

Sentiment hinges on collaboration and transparency, by offering customers every opportunity to find a mutually acceptable solution. Debt moratoria, light-touch communications and tailored messaging are now a minimum expectation. But irrespective of compliance, there are a mass of strategic and operational reasons to modernise customer assistance by adopting a long-term collaborative and nurturing mindset. Because in all likelihood it's a route to significant revenue value.

Customers are clearly more comfortable than ever using digital channels. As a result, lenders that provide smarter, interactive and more personalised services are in a win-win situation and are likely to out-perform legacy-blighted peers. Some will see reductions in nonperforming loans (NPLs) of up 25% alongside lower risk and significant improvements in customer engagement. In fact, some lenders noted a five-fold cut in average repayment times.

Opposites Attract

Despite marketing and collections being at polar opposites of the credit life cycle, they certainly have a lot in common. The main area of difference is the impact of getting it wrong. For marketing, it’s a lost sale. For collections, it’s a failure to collect credited funds. One holds a cost equivalent to 10% of sale value - the missed potential margin. The other holds a potential loss of between 25% and 100% - if there’s a failure to drive the right result within the first 30 days following a missed payment.

Arguably, collections should never be less equipped than marketing, but crucially, should think like a marketeer! For a deep-dive into the subject, watch the free Digital-First Collections Strategy webinar co-presented with global consulting giant McKinsey.

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This is largely because they have trade lines that have been open longer, which leads to higher scores (assuming the trade lines are in good standing and all other things equal). The most credit savvy among you will remember that length of credit history accounts for roughly 15% of the overall <a href="http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx" target="_blank">FICO® Score calculation</a>. But for younger consumers, it isn’t too helpful to say, “just wait until you are 50 years old, and that will fix things!” Thus, I decided to dive deeper with our analysis, including looking at the credit behavioural characteristics of younger consumers with high FICO® Scores. In this analysis, I looked at credit characteristics for the two highest score bands, 750-799 and 800-850, which have about 16% and 23% of the population, respectively. I further broke this down by looking at the characteristics of the youngest 15% in each group, which occurs at age 29 for the 750-799 group and 43 for the 800-850. We used FICO® Score 9 for our analysis, and examined typical variables of the categories that go into the make-up of the score. <a href="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png"><img class="alignnone size-full wp-image-29367" src="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png" alt="fico-score-high-achiever-table" width="715" height="747" /></a> Since there’s a lot to dissect in this chart, I’ll highlight a few findings that struck me: <ul> <li>Credit history. Higher scores are undoubtedly associated with a longer time on file. What’s striking is the higher average time on file for the 800+ group, both overall and for revolving accounts (the most common trade line). Clearly, it helps to start credit use early in life – but that’s not the sole determining factor for high scoring. The younger cohorts in both the 800+ and 750-799 groups have time on file medians significantly less than their older counterparts.</li> <li>New credit. High credit scorers do, in fact, pursue new credit. We see little variation in months since last trade line opening and last inquiry among all groups observed.</li> <li>Pay on time. As you might expect, the further in the past the delinquency, the higher the score – and that’s if a delinquency ever happened. 95% of the 800+ people and 72% of the 750-799 group have never been delinquent, which is a striking contrast to the 57% for the total population. The percentages for the younger groups are even higher, especially so for the 750-799ers. Collection items are also scarce for these high scorers. While 23% of the national population have collection items greater than $99, the figures are only 0.5% for the 800+ group and 3% for the 750-799 group. It is clear that, in conjunction with starting a credit file early, paying on time is a key trait of the FICO® Score high achiever.</li> <li>Balance and utilization. Finally, we look at how credit is being used, focusing on revolving product use. (Since most people only have one mortgage or one auto loan, variation in instalment product figures is minimal and driven by payment history, which is near perfect for high scorers, as we’ve seen.) FICO® Score high achievers tend to have more open revolving accounts. While the % active trades and utilization are generally lower, by no means do high scorers avoid the use of credit products. What drives the difference here is the amount of available revolving credit utilized. The 800+ group is roughly 1/4 of the national median, both in total and on their highest utilized card; they also have lower balances and more cards. The 750-799 group is more active and higher utilized, but still only at 2/3 of the national figures. The young 750-799 group compensate with lower revolving balances and, as a result, lower utilization, which is in line with what we see for the 800+ group.</li> <li>Benchmarks. I’d like to point out that while this study provides good benchmarks of the typical credit traits of the FICO® Score high achiever, individual credit profiles will vary widely. And keep in mind that when we sort groups of consumers as a whole by different behaviours, some results may look superficially odd. For example, the 800+ band has a longer median average open account time (128 months) than average revolving months on file (140 months).</li> </ul> So, what do we conclude? A huge takeaway is that high scorers don’t have too much in the way of serious delinquencies and negative public record data. In most respects, the young 800+ people are like their peer group. They really only differ markedly in their shorter credit history and higher non-mortgage balance, both of which are a function of life stage. Our results show that you don’t have to be a credit product hermit; these high scorers have more credit cards. The takeaway is to start credit activity early and maintain well-managed and moderate usage. In many ways, the young 750-799 people are more interesting because their age profile is much younger. Their credit characteristics differ more from their peer group, particularly in terms of length of credit history. They compensate by having almost pristine credit records and lower balances. Ultimately, 39% of US consumers are FICO® Score high achievers, which they accomplish by following common-sense credit practices. It ain’t rocket science!

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