Almost all finance and banking organisations have now mastered the basics of CRM (Customer Relationship Management), but because of the state of the economy and social changes, we now need to move to DRM – Debtor Relationship Management, says Elliot Howard, Director of software solutions specialist Sopra Group.
In the same way marketers learnt that bombarding customers with spam is expensive, ineffectual and counterproductive, banks, building societies and financial services companies that insist on endlessly chasing delinquent customers with letters and calls have seen credit losses reach new highs. As debt continues to be an issue for UK customers, it’s becoming increasingly clear that financial institutions need to be just as targeted and flexible in their debt collection processes as in their customer outreach.
The good news is that some innovative banks and financial organisations have started benefiting from such a forward-looking collection management approach and are deriving huge benefits from it. Not all financial services firms have yet reached the same point as these pioneers however. A survey* we commissioned this year found only a half of the financial services organisations polled described their segmentation profiling as “fully optimised”; and 9% admitted their system needs a complete overhaul in this respect. The inability to analyse debtor profiles is another related focus of concern. Almost a third of financial services companies admitting there is definite room for improvement when it comes to understanding the real behaviour profile of their customers – especially at that crucial gap after the sale has been made and before any problems begin.
Asked to name the greatest challenge in debt collection in the next twelve months, the response that came back from the survey was the difficulty in actually recovering debt. That’s a problem compounded by the recessionary pressures the country is under. One insurance company respondent sums it up: “The steady increase in burdens of debt as a result of the financial crisis.”
Improved analytics can help organisations in that position to best test new contact and risk mitigation strategies, as these strategies require robust data to support change. If organisations can do this, it gives them a means of intervening appropriately at an earlier stage. Taken a small step further, your organisation’s new ability to differentiate between ‘good’ and ‘bad’ or more risky customers means you can apply different treatments and terms to different customer demographics, based on their propensity to default.
For instance, it could be that certain postcodes prove to be an indicator of risk. If this bears out, this information could become an immediate flag for action. Or perhaps there is a high level of delinquency on a certain mortgage or finance product being financed; this might indicate a need to review similar customer profiles and assign resources to proactively manage them.
The point is that anticipation of problems will always give you options. Effective use of analytics – the ability to dig down into data and spot important patterns as a way of providing what you need to do about them – is about managing risk rather than having to react to it after the fact.
Holistic view of indebtedness
If you want to try and head a customer off from defaulting on their credit card or on their mortgage payments, you need to know about that customer’s other financial commitments – their personal loan, that risky joint loan with someone else, where they are with their student loans, on-going payments on their car and so on. In other words, you want the ability to have a consolidated view of the customer or potential debtor so as to provide a really tailored, helpful service. The data analysis therefore leads to a better relationship with the debtor and gives an insight into how best to manage this.
The evidence is mounting that without analytical functionality, organisations have difficulty seeing their whole exposure with a given customer.
The potential contribution of analytics doesn’t stop there. If you are an organisation with a collections systems, you will have an asset-financing requirement as well. Analytics and the resultant relationship with the debtor can be a key enabler here again. After all, the biggest cost an organisation always has is customer acquisition, e.g. doing credit checks, underwriting, etc. So once acquired, you want to make sure to try and retain them.
You know this as a consumer yourself. If you are coming to the end of your three-year mortgage agreement, chances are you are going to be looking in the market. The supplier should want to entice you at that point to either to continue on that particular agreement or arrange another period of finance or move to some other new, profitable arrangement. There are broader business benefits – risk can be contained yet more flexibility extended to customers who spend well. More strategically, providers can offer preferential terms to ‘safer’ customers, differentiating themselves in the process and encouraging these customers to spend more. The alternative is to be passive and vulnerable and watch as customer accounts all go red at once.
Modern analytics can really help with these types of scenarios so you as a financial product vendor can proactively cross sell, up-sell and proactively manage any default situations. Analytics and workflow are the key enablers to put in place a strategy here, in other words.
Understanding the difference between a ‘customer’ and a ‘problem’
As that tough Autumn Statement made clear, our economy remains static and we face an uncertain period of on-going constriction. As a result, defence of your market share and improving your bottom line may depend upon further efficiency gains. Organisations need to focus on the real behaviour of their customers and the behaviour of those that have defaulted.
Debtor relationship management is your best way of doing that – ensuring that those individuals that have unfortunately over-extended themselves but have every intention of making good their loan are properly looked after, or identifying clearly what cases are hopeless from your point of view.
Once activity can be better targeted, collections departments find they are better able to maximise their resources, expending less effort, yet recouping more payments. Ultimately, the smart way to collect is about learning not just how to collect, but how to avoid or manage the risk of that collection.
Getting that right – knowing the real difference between a valuable customer and unprofitable debtor – could be the extra edge you need to manage your way through the next few years of tough trading and into sustainable, long-term success.
The writer is the UK Director of Sopra Software Solutions (www.sopragroup.co.uk), a provider of industry-leading credit collection management platforms and mortgage solutions
The survey on the state of the UK collections business is available, free, at http://www.sopragroup.co.uk/creditresearch2012