In a prior post, Why banks’ digital strategy must include self-service collections, the concept of delinquency mitigation was introduced:

Delinquency mitigation is a holistic approach to understanding the customer’s situation and determining the actions that will help reduce bad debt expense and retain the customer.

Delinquency mitigation includes the traditional activity of collections groups: daily cash collection. But there’s a much greater opportunity than that. Financial institutions should take steps to reduce subsequent delinquencies while preserving valuable customer relationships.

Delinquency mitigation systematically uses the payment and collections arsenal

Creditors have an array of options to improve their customers’ payments, and to reduce bad debt expense. Here are a few examples.

Payment reminders: With payments required by a specific date each month, alerts remind the customer to make the payment. In our experience, customer enrollment in payment reminders is hit or miss. And we have not found systematic approaches to increasing enrollment for collections customers.

Autopay: Autopay’s premise is this: You’re going to make a payment anyway, why not eliminate the possibility you’ll forget to do so? Autopay is right for situations where the customer has a stable financial situation.

Payment deferrals and forbearance: Sometimes relief from current payments is required. It’s a tough decision to make, but its an acknowledgement of the customer’s current reality. Sure, you can focus on getting a payment and moving on. But is that the best way to mitigate future delinquencies?

Payment modifications: With a change in financial situation, the previously committed monthly payment amount may be hard to make every month for a customer. Reducing the amount owed and lengthening the payment period may be appropriate.

Balance reductions: If the reality is that the customer’s situation makes full repayment unrealistic, a financial institution can maximize the amount recovered by proactively adjusting the amount and getting ahead of other creditors.

For many creditors, these measures are applied in an ad hoc fashion. They are reactive to live engagement between a collections staffer and a customer who is delinquent. This approach ends up leaving money on the table.

Delinquency mitigation programs focus on the next best action

To implement delinquency mitigation, a tailored approach is required. Understanding the customer’s situation and providing the right options will reduce bad debt and aid retention. To give a concrete example of this, see the diagram below. It shows the situations for two different personas: Distractions Challenged and Financially Challenged.

The personas reflect actual data collected during consumers’ engagement with BackOnTrack^TM. Here are brief descriptions of both.

Distractions Challenged: Generally a busy sort of person. Likely has interests that occupy their time, to the exclusion of mundane tasks, making them distracted. This person has means and feels they have control to manage their financial health. They’ll benefit from support in staying current on their bills.

Financially Challenged: This person has hit a rough patch. Cash flow into their household has been disrupted, in this case by job loss. Their household is financially fragile, with little margin for error. They feel little control over their ability to work through their situation. This person needs a helpful way forward.

In one of our data sets, we have actual results for these two personas. The table below shows the serious delinquency rates (90+ DPD), 4-11 months after completing BackOnTrack. These are customers who did BackOnTrack when they were in the opening stage of delinquency, 1-29 DPD.

Remember, these are customers who have entered the earliest stage of delinquency, the 1-29 DPD bucket. Unlike customers in later delinquency buckets, the fate of these customers is harder to predict. At least, it’s harder without additional information. But in this case, we do have additional information, collected during these customers’ engagement with BackOnTrack.

In the table you can see that the Financially Challenged serious delinquency rate of 34.4% is nearly 7 times higher than that of the Distractions Challenged (p-value <0.00001). In a collections system, these customers would come across as equivalent. They would receive the same treatment, although their payment performance diverges in the months that follow. There is a tremendous opportunity to proactively address their situations differently early on. Delinquency mitigation relies on data and predictive analytics to promote the next best action to a delinquent customer. For example:

• The Distractions Challenged individual benefits from enrolling in payment aids: payment reminders and autopay. These tools are targeted to the cause of the issue for this customer: being distracted.
• The Financially Challenged customer is telling their financial institution in fairly stark terms that they’re hurting. Emphasizing options like payment deferrals and payment plans make sense, to give them time to recover. This approach is a collaborative one, geared to reduce the chances of the customer becoming yet another writeoff.

Through the combination of digital channels, data collection, and real-time analytics, delinquency mitigation is the next step forward in addressing collections customers. Click here to find out how BackOnTrack enables a holistic approach to delinquency, reducing bad debt expense and helping to retain customers.

Signup to be notified when we’ve posted a new article to the Scorenomics Blog!