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Recovery and collection strategies, processes and programs can enable businesses to reduce their collection costs and improve debt recovery levels while retaining potentially good clients.
As interest rates eventually rise along with levels of household and business debt, the ability to recover debt will become an important credit risk management capability for companies.
We believe that companies should look at differentiating debtors and defining their collection strategies according to a debtor’s profile. While obtaining loan repayment is crucial, treating clients appropriately can be more rewarding in terms of future revenue streams. Here is what we recommend:
Change the way debts are monitored and collected by adopting analytics and statistics-based processes, along with tools and techniques such as segmentation models to create client profiles.
Reduce collection costs, increase earnings and lower the cost of future sales by gaining a detailed understanding of clients who fall behind on payments and identify the best way to initiate negotiations.
Global economic growth has been limited since 2008. The combination of high unemployment rates, high levels of government debt and overall economic uncertainty has been difficult to overcome, even for some developed economies.
Consumer default rates, which tend to be closely related to economic conditions, often grow during economic downturns, adding more pressure on companies’ profitability. In order to mitigate losses, companies find themselves having to improve their credit and collection practices. In many cases, this means an increase in contact rate which can put more pressure on debtors.
We have identified three maturity stages in collections and client recovery:
Debt collection: This is the most basic stage of the collection and recovery cycle. Businesses that find themselves in this stage use the same collection techniques across the entire portfolio of overdue loans, with little or no effort made to differentiate between different types of clients.
Credit recovery: The main emphasis during this stage is to maximize collections effectively. The recovery strategies used are dependent upon the nature of the client. Collections are not automatically initiated for each overdue bill. Rather, they are undertaken from a client perspective by analyzing overdue bills and taking into account the client history and potential future revenue stream.
Client recovery: This is the most advanced form of collections capabilities, seen in only a few companies. To avoid contract cancellation and possible loss of clients, the collection process is managed from a client’s perspective. The goal is to initiate the right actions and make the right offers to clients based upon their risk profiles. Analytical strategies are deployed to accelerate loan recovery and for better negotiations.
In a collection and recovery program, analytics can help accelerate the recovery of outstanding debts and set the proper level of interaction between the lender and the client during the negotiation process.
By using scoring and segmentation predictive models, the lender can reduce operational expenditures, preserve the client relationship and increase recovery rates. Analytics can also be used to monitor the client’s risk profile, a process initiated the moment the client contracts for the goods or services purchased.
Using analytics and the early warning process in a comprehensive, interrelated manner can enable the development of targeted strategies customized for each client profile. Collection activities are then intensified based upon the type and level of client relationship, as well as the probability of debt recovery.
December 20, 2013
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