Tuesday, 25 March 2014

How can the debt industry reduce waste?

I’ve been thinking about waste.

As you probably know, the debt collection industry largely operates on a “no win no fee” basis, meaning creditors typically pay debt collection agencies a % commission when they collect money. This results in much talk about the “cost-to-collect” - but I’m left wondering about the cost to not collect. What about the costs incurred on all those accounts which don’t pay?

The truth is that the accounts that do pay, end up paying for those that don’t.

So, how does that work?

Debt collection agencies work out how much cost they will incur in working a portfolio of accounts, for letters, outbound dial attempts, inbound calls, payment processing and so on. On top of this an agency will add their profit margin. This is then divided by the number of accounts in the portfolio to get to an agency yield per account.

The agency will then calculate the likely total amount of collections and divide this by the number of accounts to arrive at a forecasted gross cash collection per account.
Divide forecast gross cash collections per account by the agency yield per account and you get the % commission

Here’s an illustration:

Agency yield per account       Agency commission          Gross collections per acct.
Agency costs £2.80                   Agency yield £4.00               Ave. balance £350.00
Agency margin £1.20                Colls per acct. £35.00           Liquidation 10%
Total  £4.00                               Commission rate 11%          Colls per acct. £35.00

So back to waste … I’ve been wondering just how much spend is wasted on accounts which don’t pay? Wouldn’t it be valuable to reduce the work on these accounts (fewer letters or dial attempts), or reinvest those costs on accounts more likely to pay? After all, we know all about the ‘low hanging fruit’ - accounts that pay fairly easily, but what about the fruit hanging halfway up the tree that, with a little extra shaking, will liquidate too?  If we invested extra activity on those accounts, which is funded by the reduction of spend on what is basically a rotten apple, could we shake more off the tree?  I think so.

So, how do we reduce waste?

Take customer queries for example. Queries are a prime area of wastage in the collections process.  Swift resolution of simple queries is known to deliver an uplift in cash collections, but queries are expensive to manage, delay resolution and are unhelpful to the customer.  By taking a close look at the query process – finding out the root-cause of the queries or understanding why the same queries re-occur – it is often possible to reduce the number of unnecessary customer queries being raised. Fewer queries mean lower costs.

I’ve realised that reducing waste and investing those savings in more productive activities is the key to more effective collections. All activity is becoming more expensive, and in some areas arguably less effective, so we need to look at how we uplift net collections (that’s after costs have been deducted) in a more intelligent way.  I believe that means understanding even more about the customer by using the data at our fingertips.  We know that Equifax understand this notion and use propensity scoring to eliminate waste.  They take a batch of accounts, and, using the vast amount of data that they hold, can pinpoint the accounts that will bear fruit and identify the rotten apples.  When we combine this information with TDX scorecards and segmentation we can offer our agencies an even fuller picture of their customers, which allows them to better tailor their strategies to the type of customer they have.

I’m also convinced this will also lead to a better experience for the customer  - a win all round!

By Charlotte Mather, Senior Insight Consultant, TDX Group

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