Debt Collection: Best Practices for Businesses to Consider
The global landscape of debt recovery is inextricably tied to the ebbs and flows of the world economy. The ripple effects on large and small businesses are still evident as we navigate the aftermath of unprecedented events like the COVID-19 pandemic.
Moreover, evolving economic conditions invariably lead to shifts in lending and recovery regulations, necessitating that institutions stay agile in their debt collection strategies, ensuring both effectiveness and compliance.
By understanding the root cause of a payment delay, a business is better equipped to collaborate with its customers. This not only showcases the business's dedication to fostering positive relationships but also ensures that solutions are tailored to the debtor's financial situation.
Taking this position goes a long way towards improving the likelihood of recovering any outstanding amounts owed.
A survey by McKinsey revealed that lenders' reliance on traditional contact strategies, i.e. phone calls, letters, and voicemail, often mismatches the communication preferences of the growing digital-first customer segment.
While lenders typically resort to outbound phone calls and letters, especially in later delinquencies, many delinquent customers prefer to be contacted primarily through digital channels like email and text messages.
This discrepancy in communication preference is significant, especially when considering that the "digital-first" segment was found to be 12 percent more likely to make a payment when contacted through their preferred digital channel in early delinquency. This likelihood even rises to 30 percent in late delinquency.
Companies can engage with digital first customers by providing:
This allows businesses to take a much more individualised approach to debt collection and significantly improve resource allocation and debt collection outcomes.
Customers can be segmented into the following groups:
I. Demographic segmentation
This segment is based on factors such as income and occupation.
A client's income level provides essential insights into their repayment capabilities. Depending on these levels, businesses can tailor specific payment plans that resonate with the debtor's financial capacity.
For instance, high-income earners might be inclined towards lump-sum settlements, whereas those with modest incomes might benefit from stretched payment plans.
Finally, a customer's occupation can hint at their payment tendencies. Freelancers might need flexible plans owing to their unpredictable income, while government employees with stable incomes favour regular deductions.
II. Behavioural segmentation
Behavioural segmentation delves deep into the patterns and tendencies exhibited by customers in their previous interactions. By scrutinising these past behaviours, companies can anticipate possible future actions and tailor their strategies accordingly.
For instance, clients who have consistently made late payments could be placed in a 'frequent late-payer' segment. This could prompt the company to initiate earlier payment reminders for this particular group.
Similarly, a client with a history of prompt payments might be recognised and rewarded to foster loyalty and encourage continued punctuality. Such insights, derived from behavioural segmentation, empower companies to address potential issues and optimise their customer engagement strategies proactively.
IV. Value-At-Risk (VAR) segmentation
At its core, value-at-risk (VAR) segmentation provides businesses with a strategic lens to categorise customers based on the outstanding amounts they owe. By doing so, companies can better allocate their resources and tailor their debt collection strategy.
When businesses understand the monetary value at risk with each debtor, they can prioritise their efforts to minimise potential financial pitfalls in the event of a default. Companies can reduce the potential damage to their bottom line by focusing on higher-risk accounts.
This is especially pertinent in the banking sector, where high-value debtors aren't just about the money they owe; they often represent lucrative and longstanding relationships.
Ensuring a balanced and understanding approach to debt recovery with these customers is crucial, as it not only aids in debt collection but also retains a valuable business relationship for the institution.
At Collectius, we pride ourselves on going beyond mere transactional interactions; we prioritise understanding the intricate reasons behind each debt.
In addition, we also purchase non-performing loan (NPL) portfolios from clients. This allows you to free up liquidity and outsource the challenge of debt collection to us.
Most importantly, we are also 100% compliant with all governmental regulations, ensuring our partnerships are built on trust and legality. Feel free to contact our friendly customer service team to learn more about our range of debt management solutions.
Moreover, evolving economic conditions invariably lead to shifts in lending and recovery regulations, necessitating that institutions stay agile in their debt collection strategies, ensuring both effectiveness and compliance.
Best Practices for Debt Recovery
1. Early Intervention
Proactive engagement helps companies identify and address underlying issues that are causing a customer to delay payment. Some examples include:- Regular Payment Status Monitoring: Implementing automated systems to promptly flag any late or missed payments, ensuring that potential issues are detected as soon as they arise.
- Using Business Intelligence Reports: Leveraging BI tools and analytics to gain insights into payment trends, customer behaviours, and potential risk areas. This data-driven approach allows businesses to preemptively identify potential defaulters and strategize their intervention methods accordingly.
- Flexible Payment Solutions: Offering multiple payment methods, like bank transfers, online payments, or even mobile wallet options, to cater to the diverse preferences and capacities of customers.
- Early Settlement Offers: Proposing discounted settlements for customers willing to clear their dues before the stipulated period, incentivizing early payments.
By understanding the root cause of a payment delay, a business is better equipped to collaborate with its customers. This not only showcases the business's dedication to fostering positive relationships but also ensures that solutions are tailored to the debtor's financial situation.
Taking this position goes a long way towards improving the likelihood of recovering any outstanding amounts owed.
2. Engaging with Digital First Customers
Digital-first customers prefer online and app-based platforms for their interactions and transactions. They take action on their own time and respond best to alerts and notifications on their devices.A survey by McKinsey revealed that lenders' reliance on traditional contact strategies, i.e. phone calls, letters, and voicemail, often mismatches the communication preferences of the growing digital-first customer segment.
While lenders typically resort to outbound phone calls and letters, especially in later delinquencies, many delinquent customers prefer to be contacted primarily through digital channels like email and text messages.
This discrepancy in communication preference is significant, especially when considering that the "digital-first" segment was found to be 12 percent more likely to make a payment when contacted through their preferred digital channel in early delinquency. This likelihood even rises to 30 percent in late delinquency.
Companies can engage with digital first customers by providing:
- Integrated Digital Platforms: Offer a seamless online experience across multiple digital platforms, including mobile apps, online banking, and responsive websites. These platforms should allow customers to manage their accounts, view their transaction history, set up automated payments, and make payments online
- Optimised Messaging: Shift away from generic or passive-aggressive notices. Instead, use empathetic and tailored digital messages that resonate with the customer's situation. This includes sending alerts that are specific to a client's needs, ensuring they don’t feel spammed or targeted by phishing attempts.
3. Segmentation
Segmentation is one of the most valuable tools for facilitating better collections. It divides customers into separate groups based on static or dynamic factors.This allows businesses to take a much more individualised approach to debt collection and significantly improve resource allocation and debt collection outcomes.
Customers can be segmented into the following groups:
I. Demographic segmentation
This segment is based on factors such as income and occupation.
A client's income level provides essential insights into their repayment capabilities. Depending on these levels, businesses can tailor specific payment plans that resonate with the debtor's financial capacity.
For instance, high-income earners might be inclined towards lump-sum settlements, whereas those with modest incomes might benefit from stretched payment plans.
Finally, a customer's occupation can hint at their payment tendencies. Freelancers might need flexible plans owing to their unpredictable income, while government employees with stable incomes favour regular deductions.
II. Behavioural segmentation
Behavioural segmentation delves deep into the patterns and tendencies exhibited by customers in their previous interactions. By scrutinising these past behaviours, companies can anticipate possible future actions and tailor their strategies accordingly.
For instance, clients who have consistently made late payments could be placed in a 'frequent late-payer' segment. This could prompt the company to initiate earlier payment reminders for this particular group.
Similarly, a client with a history of prompt payments might be recognised and rewarded to foster loyalty and encourage continued punctuality. Such insights, derived from behavioural segmentation, empower companies to address potential issues and optimise their customer engagement strategies proactively.
IV. Value-At-Risk (VAR) segmentation
At its core, value-at-risk (VAR) segmentation provides businesses with a strategic lens to categorise customers based on the outstanding amounts they owe. By doing so, companies can better allocate their resources and tailor their debt collection strategy.
When businesses understand the monetary value at risk with each debtor, they can prioritise their efforts to minimise potential financial pitfalls in the event of a default. Companies can reduce the potential damage to their bottom line by focusing on higher-risk accounts.
This is especially pertinent in the banking sector, where high-value debtors aren't just about the money they owe; they often represent lucrative and longstanding relationships.
Ensuring a balanced and understanding approach to debt recovery with these customers is crucial, as it not only aids in debt collection but also retains a valuable business relationship for the institution.
Collectius: Your Go-To Debt Management Solution
Despite having the best credit management and debt collection strategies, there remains an element of risk for any business. And in today’s uncertain economic conditions, this is a genuine possibility. This is when it becomes essential to have a trusted partner like Collectius, who can facilitate the repayment of what’s owed to you.At Collectius, we pride ourselves on going beyond mere transactional interactions; we prioritise understanding the intricate reasons behind each debt.
In addition, we also purchase non-performing loan (NPL) portfolios from clients. This allows you to free up liquidity and outsource the challenge of debt collection to us.
Most importantly, we are also 100% compliant with all governmental regulations, ensuring our partnerships are built on trust and legality. Feel free to contact our friendly customer service team to learn more about our range of debt management solutions.