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© 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac.

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Presentation on theme: "© 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac."— Presentation transcript:

1 © 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. Fundamentals Collections and Recoveries Daniel Melo Senior Director, Fair Isaac Advisors FICO

2 Agenda © 2014 Fair Isaac Corporation. Confidential. ► High Level Overview: Collections and Recoveries ► Risk Management vs. Operational Emphasis ► Operational Policy Issues for Collections ► Tactics for Collections Improvement 2

3 © 2014 Fair Isaac Corporation. Confidential. Key Concerns within the Collections and Recoveries Function 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 Client ProspectsClient Customers ActionsReactions Precision Marketing Customer Origination Customer Management Customer Collections External Data Internal Data Obtain payments? Allocate resource? Channel & contact strategy? Treatment strategy? Debt placement? Debt sale? Agency strategy? Collector skills? Legal/insolvent/ repo accounts? Workflow? Incentives? 3

4 © 2014 Fair Isaac Corporation. Confidential. 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 ► Implications for volume impacts Collections Strategy ► Implications for staffing model, training ► Conservative? ► Average? ► Aggressive? 4

5 © 2014 Fair Isaac Corporation. Confidential. ► 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 Collections Goal: to Work to Bring Delinquent Customers Back into Good Credit Standing 5

6 © 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

7 © 2014 Fair Isaac Corporation. Confidential. Impact of growth on coincident indicators—“Denominator Effect” Historic portfolio risk level is a function of: ► 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 % Net Bad Debt = Net Bad Debt/Portfolio Outstandings Variables that drive the % Net Bad Debt include: ► Number of involuntary closures ► Balance amount per involuntary closures ► Number of voluntary closures—churn ► The inherent risk of the portfolio as a result of acquisition policies and procedures ► The efficacy of the subsequent account management actions 7

8 © 2014 Fair Isaac Corporation. Confidential. Preventing accounts from rolling to write-off or charge-off status 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 Delinquent Collections Focus Determines Treatment Approach ► More intense efforts as account becomes more seriously delinquent ► Little “give” in payment demands to return account to contractual good standing 8

9 © 2014 Fair Isaac Corporation. Confidential. Collections requires a strong operational focus Collections must manage varying volumes ► Workflow and case management approaches ► Scripting and treatment scenarios not unlike customer service Collections: The Risk—Operations Hybrid Collections has a very high turn-over ► Market for skilled collectors very competitive ► Constant need for re-training new recruits ► Overtime ► Cross-training ► Outsourcing ► Treatment prioritization 9

10 © 2014 Fair Isaac Corporation. Confidential. Training: Incentives ► Role playing to help staff adjust to higher volumes or less sophisticated populations entering delinquency Collections: The Risk—Operations Hybrid 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 ► Be careful what you ask for… 10

11 © 2014 Fair Isaac Corporation. Confidential. ► Can alienate good customers ► Can get a jump on risky accounts ► Medium Risk: customer service call ► High Risk: more intense early approach ► Can reduce collection costs by avoiding contact with “self cures” ► Use analytics to target riskiest accounts/customers Early Stage Collections 11

12 © 2014 Fair Isaac Corporation. Confidential. Custom Collections Score Usage:Collections Tells You: Per credit grantor: Expected collection amount Likelihood that an account will roll Dollars at risk of rolling Likelihood of charging off Identify early outs Based On: Analysis of historical master file and collection performance information Decisions Supported: Early-stage and late-stage collections treatment definition Type Of Model/ Score: Self-learning custom Delivery:ASP Systems Used Within: FICO ® Debt Manager™ solution; FICO ® TRIAD ® Customer Manager; FICO ® Blaze Advisor ® business rules management system; other well-known commercial or proprietary systems 12

13 © 2014 Fair Isaac Corporation. Confidential. ► Customers able to “hide” via mobile phones, contact preferences ► Calls, letters universally used ► SMS text messaging, 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 Collections and Communication Challenges 13

14 © 2014 Fair Isaac Corporation. Confidential. ► 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 payment arrangement Collection Expectations 14

15 © 2014 Fair Isaac Corporation. Confidential. ► 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 Timelines and Treatment 15

16 © 2014 Fair Isaac Corporation. Confidential. ► 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 collections—avoid premium? ► Other options—settlement, debt sale Recoveries 16

17 © 2014 Fair Isaac Corporation. Confidential. Agency Assignment Debt SalesLocal Debt Markets Vary Making Use of Local Debt Markets ► Non-uniform array of specialty agencies ► More aggressive placement use ► Analytically driven ► Earlier placement ► Multiple agency assignment ► Multiple agency assignment used to drive increased returns ► Stronger MIS ► Use of placement optimization ► Outsourcing to cut costs and increase coverage ► Not evenly developed ► Credit crunch slowing development ► Debt purchase appetites down 17

18 © 2014 Fair Isaac Corporation. Confidential. Custom Recovery Score Usage:Recovery/post charge-off Tells You: Supports keep/sell/place/attorney decision; prioritize according to expected collection amount; optimize agency placement Based On: Analysis of historical master file and recovery performance information Decisions Supported: Keep/sell/place/attorney decision Type Of Model/ Score: Self-learning custom Delivery:ASP Systems Used Within: FICO ® Debt Manager™ solution, other recovery software; FICO ® Blaze Advisor ® business rules management system 18

19 © 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) 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% Illustration of Year 1 Roll Rate 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 MonthTotal% CurrentCurrent 0 to 1 Flow % 30 Day 1 to 2 Flow % 60 Day 2 to 3 Flow % 90 Day 3 to 4 Flow 120 Day 4 to Charge Offs Flow to Charge Offs Actuals % 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% 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% 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, % 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% ,017 1,040 1,053 1,308 1,056 1,125 1,

20 © 2014 Fair Isaac Corporation. Confidential. ► System down time above historic levels ► Change in collector performance to reduce talk time ► System conversion ► Physical site changes ► Unpopular/ineffective management or supervision style ► Inappropriate incentive program(s) ► Weather, natural disaster or manmade disaster that could have delayed payment transmission or damaged communication infrastructure When Interpreting Results, Consider if These Conditions Were Present 20

21 © 2014 Fair Isaac Corporation. Confidential. ► 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 Tracking—Lessons Learned 21

22 © 2014 Fair Isaac Corporation. Confidential. Delinquency Bucket/Performance Stage Where Impacts Are Typically Strongest C/OBK EconomyMMMMHH Payment ProcessingHLL--- New Account QualityHLLL-- Queuing-HLL-- Collection-MHHHH Bankruptcy Law Change -----H 22

23 © 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. Daniel Melo Phone Thank You!

24 © 2014 Fair Isaac Corporation. Confidential. Learn More at FICO World Related Sessions ► Credit Boot Camp: Game On! How to Make Banking Training Fun ► Collection Platform Success in a Transitioning Economy ► The New Normal: Adopting and Adapting to Drive Growth Products in Solution Center ► FICO ® Debt Manager™ solution ► FICO ® PlacementsPlus ® service ► FICO ® Collection Scores ► FICONet ® service ► FICO ® Engagement Analyzer ► P&L Insight Service Experts at FICO World ► Bruce Curry ► Miguel Cabezas ► Alecia Jacobs ► Mary Dupont ► Juan Carlos Lopez White Papers Online ► Eight Steps to Collection and Recovery Excellence ► Can your Collections Team Support Your New Compliance Framework Blogs ►

25 © 2014 Fair Isaac Corporation. Confidential. Please rate this session online Daniel Melo 25


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