Transcript Title of Presentation

Fundamentals
Collections and Recoveries
Daniel Melo
Senior Director, Fair Isaac Advisors
FICO
© 2014 Fair Isaac Corporation. Confidential.
This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent.
Agenda
►High
Level Overview: Collections and
Recoveries
►Risk
Management vs. Operational
Emphasis
►Operational
►Tactics
2
Policy Issues for Collections
for Collections Improvement
© 2014 Fair Isaac Corporation. Confidential.
Key Concerns within the Collections and
Recoveries Function
Customer
Origination
Customer
Management
Allocating resources for collection function
Defining strategy for pursuit of delinquencies
Staffing, training, developing collector skills
Defining treatment strategies for delinquencies,
insolvencies
Assigning accounts to agents, attorneys
Defining strategy for debt sale
Determining Workflow system
Determining incentive structure
Data
Data
External
Data
Precision
Marketing
Internal
Data
Reactions
© 2014 Fair Isaac Corporation. Confidential.
Obtain payments?
Allocate resource?
Channel & contact
strategy?
Treatment strategy?
Debt placement?
Debt sale?
Agency strategy?
Collector skills?
Legal/insolvent/ repo
accounts?
Workflow? Incentives?
Actions
Client Prospects
3
Customer
Collections
Client Customers
Target Segment, Economic and Market Conditions,
Collections Approach Drive Policy, Staffing and Volume
Profile of The Target Segment
► Implications
for credit policy and risk
profile of the past due customer
►
►
Payment Insurance & Card Protection?
Online statements and communication
preference?
► Behavior scoring?
► Credit limit strategy?
► Attrition scoring?
Economic and Market Conditions
Collections Strategy
► Implications
► Implications
for volume impacts
►
►
►
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© 2014 Fair Isaac Corporation. Confidential.
for staffing model, training
Conservative?
Average?
Aggressive?
Collections Goal: to Work to Bring Delinquent
Customers Back into Good Credit Standing
► Collections
approaches seek to obtain payment of delinquent balances and
prevent losses
► Appropriate
collections strategy performs a customer service function, bringing
customers back to good standing and retaining their business loyalty
► Tactics
can include internal collections, agency outplacement, settlement and
debt sale
5
© 2014 Fair Isaac Corporation. Confidential.
Bad Debt
► An
internal financial analysis-driven definition of a
non-performing asset
► Uncollectible
► Automatic
at a certain stage of delinquency
►
Bankcard must write off at 180 days delinquent in US, for example
► For other jurisdictions, Bad Debt may be declared when Basel II
considers the account in default—typically 90 days delinquent
► Accelerated
for other types of delinquency—bankruptcy,
death, other—at time of notice
► Fraud recognition
► Unsubstantiated adjustments—adjustments to satisfy
6
© 2014 Fair Isaac Corporation. Confidential.
% Net Bad Debt = Net Bad Debt/Portfolio
Outstandings
Impact of growth on coincident indicators—“Denominator Effect”
► Revenue
continually increasing if rate of net bad debt grows more slowly,
NBD rate may decrease
► Revenue decreasing may cause NBD to increase if dropping faster than
bad debt or if bad debt is growing
Variables that drive the % Net Bad Debt include:
► Number
of involuntary closures
► Balance amount per involuntary closures
► Number of voluntary closures—churn
Historic portfolio risk level is a function of:
► The
inherent risk of the portfolio as a result of acquisition policies and procedures
► The efficacy of the subsequent account management actions
7
© 2014 Fair Isaac Corporation. Confidential.
Delinquent Collections Focus Determines
Treatment Approach
Preventing accounts from rolling to write-off or charge-off status
► More
intense efforts as account becomes more seriously delinquent
► Little “give” in payment demands to return account to contractual good standing
Collecting maximum potential payment
► Negotiation
and openness to deferments, settlements
► Use of early agency assignment, multiple-collection agency approaches to maximize money
collected thereby minimizing overall loss
8
© 2014 Fair Isaac Corporation. Confidential.
Collections: The Risk—Operations Hybrid
Collections requires a strong operational focus
► Workflow
and case management approaches
► Scripting and treatment scenarios not unlike customer service
Collections has a very high turn-over
► Market
for skilled collectors very competitive
► Constant need for re-training new recruits
Collections must manage varying volumes
► Overtime
► Cross-training
► Outsourcing
► Treatment
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prioritization
© 2014 Fair Isaac Corporation. Confidential.
Collections: The Risk—Operations Hybrid
Training:
► Role
playing to help staff adjust to higher volumes or less
sophisticated populations entering delinquency
Interactions:
► Focused
on solving problems and being respectful to the
customer
► Obtaining situational facts and responding accordingly
► Use deferments, settlements, etc., recommending counseling
► “Sell” unprofitable account segments
► Tone and severity of call scripts and collection letters made
consistent
Incentives
► Be
10
careful what you ask for…
© 2014 Fair Isaac Corporation. Confidential.
Early Stage Collections
► Can
alienate good customers
► Can
get a jump on risky accounts
► Medium
Risk: customer service call
► High Risk: more intense early approach
► Can
►
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reduce collection costs by avoiding contact with “self cures”
Use analytics to target riskiest accounts/customers
© 2014 Fair Isaac Corporation. Confidential.
Custom Collections Score
Usage:
Tells You:
Based On:
Decisions
Supported:
Type Of Model/
Score:
Delivery:
Systems Used
Within:
12
Collections
Per credit grantor:
Expected collection amount
Likelihood that an account will roll
Dollars at risk of rolling
Likelihood of charging off
Identify early outs
Analysis of historical master file and collection
performance information
Early-stage and late-stage collections treatment definition
Self-learning custom
ASP
FICO® Debt Manager™ solution; FICO® TRIAD® Customer Manager; FICO® Blaze
Advisor® business rules management system; other well-known commercial or
proprietary systems
© 2014 Fair Isaac Corporation. Confidential.
Collections and Communication Challenges
► Customers
able to “hide” via mobile phones, e-mail
contact preferences
► Calls,
letters universally used
► SMS text messaging, e-mail contact, contact with cell phones
increasingly seen, especially in Europe
► Anonymity
of internet payment portals proving very
attractive to debtors
► Higher
payment amounts
► Higher rate of kept promises
► Lower collection cost
13
© 2014 Fair Isaac Corporation. Confidential.
Collection Expectations
► Get
the customer’s attention
► You
have about 7 seconds to control the flow
of the discussion
► Assess
their situation, ability to pay
► Assess
the reasons for delinquency
► Establish
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payment arrangement
© 2014 Fair Isaac Corporation. Confidential.
Timelines and Treatment
► Contact
timelines—should vary by segment based upon cost/benefit
of the treatment:
► New
versus established
► High versus low risk
► High versus low revenue
► First pay default
► If
making outbound contact that will generate inbound volume, insure
adequate staffing and hours of operations to handle return calls
► Otherwise
waste investment in outbound effort
► Test use of toll-free vs. toll-charge inbound numbers
15
© 2014 Fair Isaac Corporation. Confidential.
Recoveries
► The
account is charged-off—but it’s still an asset!
► Tools
to recover:
► Final
scoring—refines strategy
► Custom recovery scores—assist in prioritization, resource allocation
► Outside collection agencies—multiple
► Primary—incentives?
► Secondary
► Tertiary
► Internal
► Other
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collections—avoid premium?
options—settlement, debt sale
© 2014 Fair Isaac Corporation. Confidential.
Making Use of Local Debt Markets
Local Debt Markets Vary
► Non-uniform
array of specialty agencies
► More aggressive placement use
► Analytically
driven
► Earlier placement
► Multiple agency assignment
Agency Assignment
► Multiple
agency assignment used to drive
increased returns
► Stronger MIS
► Use of placement optimization
► Outsourcing to cut costs and increase
coverage
17
© 2014 Fair Isaac Corporation. Confidential.
Debt Sales
►
Not evenly developed
► Credit crunch slowing development
► Debt purchase appetites down
Custom Recovery Score
Usage:
Tells You:
Based On:
Decisions
Supported:
Type Of Model/
Score:
Delivery:
Systems Used
Within:
18
Recovery/post charge-off
Supports keep/sell/place/attorney decision; prioritize according to expected
collection amount; optimize agency placement
Analysis of historical master file and recovery
performance information
Keep/sell/place/attorney decision
Self-learning custom
ASP
FICO® Debt Manager™ solution, other recovery software; FICO® Blaze Advisor®
business rules management system
© 2014 Fair Isaac Corporation. Confidential.
Rolling Rate Analysis May be Most Familiar Report
Used for Collection Planning and Success Evaluation
#1 Roll Rate ($000s)—Illustrated Bankcard Calculation
(Calculated results are influenced by rounding)
Actuals
Month
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Total
37,416
38,265
42,233
44,474
46,843
47,585
48,978
49,412
48,934
47,512
47,696
47,495
49,296
49,039
48,572
47,823
% Current
Current
82.7%
79.7%
82.5%
84.6%
81.7%
84.1%
82.2%
79.5%
82.7%
79.0%
80.5%
75.6%
79.2%
78.3%
78.2%
78.0%
0 to 1
Flow %
17.1%
20.6%
19.2%
15.7%
18.5%
15.3%
17.1%
20.1%
16.1%
18.7%
17.9%
22.8%
19.5%
19.0%
19.0%
19.0%
30 Day
1 to 2
Flow %
5,092
6,355
5,857
5,478
7,004
5,871
6,855
8,099
6,316
7,557
6,698
8,741
7,018
7,397
7,297
7,195
12.5%
12.2%
11.0%
9.5%
12.0%
10.6%
13.4%
13.0%
11.3%
16.1%
13.8%
15.7%
15.0%
15.1%
15.2%
15.1%
60 Day
549
621
696
556
659
742
785
896
916
1,017
1,040
1,053
1,308
1,056
1,125
1,099
2 to 3
Flow %
90 Day
241
245
259
265
261
299
335
358
374
468
523
557
548
680
549
584
3 to 4
Flow
120 Day
159
163
169
179
190
192
229
250
262
267
362
412
425
418
521
420
4 to
Charge
Offs
Flow
to Charge
Offs
59
68
70
7
80
72
91
91
84
129
115
148
125
199
215
224
Illustration of Year 1 Roll Rate
37,416 x 82.7% ® 30,923 x 20.6% ® 6,355 x 11.0% ® 696 x 38.1% ® 265 x 71.8% ® 190 x 37.8% ® 72 Annualized gross charge-off lagged = 2.31%
19
© 2014 Fair Isaac Corporation. Confidential.
When Interpreting Results, Consider if These
Conditions Were Present
► System
down time above historic levels
► Change
in collector performance to reduce talk time
► System
conversion
► Physical
site changes
► Unpopular/ineffective
► Inappropriate
management or supervision style
incentive program(s)
► Weather,
natural disaster or manmade disaster that could have delayed payment
transmission or damaged communication infrastructure
20
© 2014 Fair Isaac Corporation. Confidential.
Tracking—Lessons Learned
► Management
actions may affect roll rate;
► Changes
in risk operations/collection management contact strategies
► Changes in collection operations effectiveness
► Changes in acquisition strategies may result in new populations performing differently
then prior observed populations
► Other
factors that can increase roll rate:
► Failure
to replace management in a timely fashion
► Reduced effectiveness in new employee training
► Increase in the management to staff ratio beyond historic levels
► Failure to re-energize collector incentive programs
21
© 2014 Fair Isaac Corporation. Confidential.
Where Impacts Are Typically Strongest
Delinquency Bucket/Performance Stage
22
0-1
1-2
2-3
3-4
4-C/O
BK
Economy
M
M
M
M
H
H
Payment Processing
H
L
L
-
-
-
New Account Quality
H
L
L
L
-
-
Queuing
-
H
L
L
-
-
Collection
-
M
H
H
H
H
Bankruptcy Law Change
-
-
-
-
-
H
© 2014 Fair Isaac Corporation. Confidential.
Thank You!
Daniel Melo
[email protected]
Phone
© 2014 Fair Isaac Corporation. Confidential.
This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent.
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Daniel Melo
[email protected]
25
© 2014 Fair Isaac Corporation. Confidential.