Debt collection tech gets a “personal” upgrade for COVID-19 and beyond

Debt collection is arguably one of the most difficult and unpleasant aspects of the credit industry, for just about everyone involved. Indeed, despite the fact that both collectors and debtors wish to resolve their debt issues, collection recoveries often fall far short from being successful.

Personalisation that allows the collector and debtor to work together in a cooperative and productive way, will inevitably help to build mutual trust

That may be slowly changing, however. Recent advancements using new behavioural data can help stakeholders to better understand the nature of the collection scenario, personalise customer communications, and make significant improvements to the outcome and overall collection experience.

In most cases, debt occurs due to unforeseen temporary events, such as a loss (or delay) of expected income, an increase in expenses, or just bad planning – all of which make it difficult for the debtor to make timely credit payments.

Although the primary underlying reason for non-repayment is a lack of funds, it is nevertheless also the case that many people have the ability to repay at least part of their debt, if they are willing to change some of their financial behaviours. For example, curbing one’s monthly expenses, or perhaps even selling one’s assets or equities. Doing so is easier said than done, however, and the solution steps that can be taken are not always obvious to the debtor. That is why the collection strategy is of central importance.

Rethinking collection strategy and personality

A collection strategy is essentially the approach taken by a credit issuer or collection agency to recover overdue payments. Collection strategies aim to make the debt recovery process both effective and efficient, but often take a one-size-fits-all approach, led chiefly by warnings of punitive consequences and the urgency to repay.

Given the nature of such an approach, there is unfortunately a perceived inherent lack of empathy and mistrust in the interaction between the debtor and collection that hinders cooperation, and makes for an overall negative experience. It is no wonder that recovery rates by third party collectors average less than 10% (according to the ACA International white paper, “The Role of Third-Party Debt Collection in the US Economy”)! Moreover, a recent McKinsey survey found that 20% of debtors admitted to have withheld debt payments due to an upsetting experience with a collector.

These poor results notwithstanding, even when the outcome is successful in the short-term, a negative customer experience can have downstream consequences for the credit issuer. Take, for example, a responsible borrower with a temporary loss of income due to an illness, who falls behind on a few mortgage payments. Many customers in similar situations, are likely to successfully self-cure within a few months, and continue to make regular payments thereafter.

However, a negative or unsympathetic experience with a collection agent in a situation like that, may tempt some customers to seriously consider leaving their credit provider and taking their business elsewhere, once their payments are cleared. Lenders are well aware of this fact, and some try hard to make the collection experience as positive as possible, while also trying to recover their own losses. It’s a complex tradeoff to say the least.

Unfortunately, this year, that tradeoff just got more complex. COVID-19 has influenced both the prevalence of debt problems, as well as the difficulty to manage them. To be sure, consumer debt collections was already a remarkably frequent phenomenon, with more than one in four American consumers having a reported collections incident in their tradeline files, according to a recent study by the Consumer Financial Protection Bureau (CFPB).

In addition, many experts warn that due to COVID-19, payment delinquencies are likely to climb sharply, as government stimuli, payment moratoriums, and personal savings start to run out, all leading to an increase in debt collection incidents.

In addition to the expected financial losses due to increased defaults, managing the new volume of collection cases presents lenders with a real organisational challenge. For example, the wait times for credit card call centres are already up as much as 50% according to last year’s study by JD Power. And, of course, simply allocating additional resources, without taking seriously the perspective of the debtor, is not going to be an efficient approach. It is important to truly understand the personal challenges that consumers face when they come to repay their debt, and approach them in ways that are compatible with their own limitations, abilities, and personal motivations.

Getting personal with behavioural segmentation

The moment that we start looking at the abilities and motivations of people to repay their debts, and try to understand their challenges, it becomes obvious that different people have different challenges, and will respond differently to different approaches. Indeed, over a century of psychological research has shown us that individuals have different personal traits, preferences, and attitudes, which influence how they behave and interact with others. Debt collection is no different.

There is a good deal of variance in the way individuals respond to collection situations, and a lot of that is based on their personal characters. A person who is naturally impulsive, for example, might find it difficult to budget for long-term payments, may incorrectly choose to take on more debt temporarily, and could thus be counselled otherwise. Another person, on the other hand, who is responsible and careful, might be more likely to self-cure fairly quickly without much treatment. And still another person, who tends to be anxious or insecure, may choose to ignore payment deadlines, or not answer the phone when contacted by the bank, but might actually respond well to empathetic text messaging.

Therefore, tailoring communications to fit a person’s own personal disposition and preferences, can make for a more pleasant experience and a more successful outcome. In fact, according to one survey, three-quarters of customers said they would be more willing to pay their debts if the collection process was personalised. In this respect, a collection treatment can look more like a team effort, helping to change one’s priorities and cutting some spending in service of their debt.

Now it is true that collectors already realise the need to personalise interventions, and are often trained to adapt their approaches accordingly. However, their strategies are mainly based on traditional segmentation of customers into broad risk categories, related to their past transactional data and credit scores, and don’t really consider character related factors. Part of the reason for this is that to personalise collection processes, new data is needed for better segmentation.

Segmenting customers based on personality style is a relatively new idea, and is known as behavioural segmentation. Behavioural segmentation leverages psychological insights from what is understood about key personality traits and attitudes in order to tailor customer communications. There is evidence that such tailored communications work well for marketing, for example, whereby advertisements that appeal to an individual’s salient traits have been found to be significantly more effective. Specifically, extraverted people were found to appeal more so to products associated with sociability and activity, compared to introverts, who appeal more so to products associated with solitude and serenity. And it seems that personality can be informative for collections as well.

According to a McKinsey article, within each traditional risk segment, lenders and collectors can tap psychological aspects and build better customer profiles for greater recovery success. For example, knowing that a certain type of person is generally agreeable and values their relationships with others, means that they are more likely to respond positively to collection treatments that show empathy, and where mutual trust has been well established. They may also be more keen to cooperate if they understand that failure to pay will have repercussions for their guarantors who are relying on them.

In another example, a person who tends to be more carefree and less conscientious, may be less likely to cure on their own, and is a higher call priority, who could also benefit from early payment reminders, more frequent or smaller payments, and automated debits. According to a recent study by McKinsey, psychology-based interventions in collection strategies can lead to 20-30% increased recoveries.

Psychometrics and what’s next?

To measure abstract personality traits among customers, we can look to psychology, where one of the most reliable ways of doing so is using psychometrics. Psychometric solutions usually take the form of self-report questionnaires, where individuals are asked to rate the degree to which certain behavioural statements characterise them best. Algorithms are then applied to evaluate the person’s most salient traits, and treatments applied accordingly.

While the typically lengthy personality inventories are prohibitive for customer engagements, new advancements in psychometrics now allows for ultra-brief questionnaires that can be completed in as little as one to two minutes. In addition, questionnaires can be designed in ways that are resistant to gaming, where there are no right or wrong answers per se.

In terms of their administration, customers may be invited to complete online surveys post loan origination or upon early delinquency, and incentivised to do so with rewards points or add grace periods, for example.

Since personality traits are considered to be stable over time, lenders can leverage customers’ profiles for future communications as much as one or two years later.

Finally, researchers are now studying the use of social network data to infer some personality traits, where self-reports may not be feasible, and artificial intelligence (AI) technologies such as chatbots, for example, can humanise some of the automated communication processes for a more pleasant and personalised experience.

In all events, psychometric solutions such as these have the unique advantage of being easily implemented as complementary tools to lenders’ current collection strategies, where treatments can be tailored as a given lender sees fit. Such options are especially exciting today, as lenders eye new technologies to help them upgrade their collection strategies as a means to cope with the madness and uncertainty surrounding COVID-19.

And yet, there is a far bigger picture here that is potentially even more exciting to consider. Personalising collection strategies and customer communications in the ways we have described, can have a much more robust effect on customers’ behaviours in general, well beyond the resolution of any specific debt incident.

Specifically, personalisation that allows the collector and debtor to work together in a cooperative and productive way, will inevitably help to build mutual trust, and encourage customers to become more financially responsible, so that they can avoid future debt. And then, in time, perhaps we can imagine a ripple effect that contributes to the build of a more financially responsible society overall.

About the authors

Saul Fine an organisational psychologist, former university lecturer, and founder & CEO of a fintech start-up, Innovative Assessments.

Dan Ariely is the James B. Duke Professor of Psychology and Behavioural Economics at Duke University, and a NYT Bestselling author.

Tal Shapsa Heiman is a founding partner at Out of Line Ventures, a former senior macroeconomist in Barclays Bank and in Israel’s Ministry of Finance.