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When Browbeating Does Not Work
by Sara Wedeman, PH.D.

Adjusting Debt Collection to the New Reality of Consumer Credit

Is It Me or Did the Earth Just Move?

What do you do when your world changes, when the bedrock of your business, the “constants” you counted on, are suddenly and inexplicably in flux? As a manager, you may attempt to approach the situation rationally, using the skills and knowledge upon which you have come to rely. As a human being, the experience may resonate at a deeper level, demanding more intensive scrutiny of your basic understanding of your business, and the dynamics of your markets. Andy Grove of Intel has described such moments as “strategic inflection points,” where existing ways of doing business no longer “work.” At a strategic inflection point, the organization faces a new competitive logic, where the once-reliable constants are shattered and new ones emerge. The changing realities of the market are in turn misinterpreted, based on the very real “human factors” of managers' denial. If the organization is unable or unwilling to question its basic assumptions, and to shift along with the market, a strategic inflection point can ultimately become fatal.

We believe that the credit card industry is in the midst of such a shift. How providers choose to understand this shift, and what they choose to do about it, may well differentiate the winners from the losers.

The Problem: Unprecedented Rise in Nonpayment and Bankruptcy

How quickly things change. Consumer credit cards, once a source of easy profitability, are not looking so good any more. Over the past three years, credit card providers have been hit with a marked increase in defaults on payment, which have risen from an average of two - three percent of portfolios to almost 7 percent over the past 18 months (Punch, 1996). These may occur either in the form of simple nonpayment or declaration of personal bankruptcy. The problem appears to be substantial, and a troubling departure from past history, where payment rates improved during times of economic prosperity. This has created huge losses industrywide. Citibank, for example, recently reported a loss rate of 5.4 percent on its U.S. credit card accounts (Klee, 1997).

As a result, many providers are beefing up collections staffs and tightening credit standards. However, if that is all they are doing, they are missing the boat.

We have spent the past year researching the issue of nonpayment in the credit card industry. Our research suggests that more revolutionary change is needed. It is a fundamental shift in the way the problem is understood, based on the changing relationship between credit card providers and their customers, as well as on the increasingly differentiated segments making up the customer base.

The Brave New World of Credit Card Use

That we are living in a new and perplexing world of credit is evidenced not only by the high nonpayment rate, but also by the increasing penalties charged to people who pay off their entire balance monthly and thus are not "using" the cards the way creditors would like. We thus observe the following paradox:

Some people are using cards for financing of a type that was previously performed by commercial banks. Accounts carrying heavy balances are potentially highly lucrative if the risk can be effectively managed, yet these individuals are being treated with increasing antipathy by providers.

Others are paying off their balances in full every month, as is widely advocated by advisors in the “personal finance” arena. Credit card companies are “cracking down” on these individuals as well.

Until companies grasp the complexities of the new reality, they will continue to alienate one set of customers (penalizing them for using the cards as seems perfectly legal to do), who will surely switch suppliers. Simultaneously, they will terrorize and estrange the highly profitable customers who maintain high balances and make small monthly payments (using the cards as companies dream they should be used). Rather than responding with the corporate equivalent of rage and punishment, providers will find greater profit if they focus on seeking, assisting and keeping customers; applying their already highly developed strategic marketing abilities in novel ways.

The Past is Not Prologue: A Call for New Models

Everything we have seen suggests that the old “steady state” of two-three percent nonpayment will not return. It is unclear what the new “steady state” will be, if there is one at all. Yet, it is clear that credit providers must think about their customers in new and creative ways to succeed in this environment. We believe the “winners” in the new world of credit will model their approach to collections on the best run marketing and sales organizations, not on other collections shops.

One Size Does Not Fit All

Historically, those who paid slowly or not at all have been dumped in one big category and basically treated as “deadbeats.” While lavishing time, attention and resources on account acquisition, companies treat customers in trouble with an often cavalier, “one-size-fits-all” approach.

How Delinquent Customers Are Treated: Alike and with Disrespect

Industrywide, there is no evidence that anything other than the most rudimentary segmentation has been conducted. Customers experiencing payment problems are treated as if they were essentially alike and morally flawed. Most frequently, authoritarian methods are used. These are not necessarily the kinds of heavy-handed and abusive tactics that resulted in the passage of the Fair Debt Collection Practices Act. Rather, they are tactics reflective of a general attitude that could best be described as disrespectful.

Emphasis on Volume Works Against Developing Relationships that Can "Cure" Accounts

The functional model for much of current collections practice is a Taylorian factory. In the desire to contact as many delinquent customers as is humanly possible, collection practices include limiting "talk time," putting collectors on automatic dialing systems that are then ratcheted up to the maximum level, and assigning numerous collectors to "work" a set of accounts. This is done to increase the total number of contacts made, but works against the development of any kind of personal rapport, and, as we learned when interviewing customers, this rapport is vital in motivating customers to "choose" one creditor over another when making decisions about how to allocate scarce funds.

What "Drives" Customer-unfriendly Policies?

No one likes it when customers do not pay their bills. However, creditors often misinterpret or globalize the causes, resulting in behavior toward customers that makes matters worse, both for them and the customers. For example, some feel that the customers are stealing from the bank; they are psychopaths, they just do not care, they want to get free money. In fact, our research found that most people want to make good on their promises. Often, they are ashamed to find themselves in this predicament and their embarrassment causes them to behave defensively.

The profile of people struggling with debt has also changed. In the past, people who ran into trouble with credit were often less educated, less well off and were in occupations with variable or seasonal income. There are now new categories stemming from the plethora of card offers, broader markets, new forums for card use and changing attitudes towards credit.

What Happens When You Do Collections Right?

It is possible to approach collections differently, and with better results. A wonderful example, at least until accounting irregularities ended its successful run, was Commercial Financial Services, Inc. (CFS). By taking a more “customer-friendly” approach to collections, the company was able to dramatically improve the performance of severely delinquent portfolios. In spite of this company's problems, the point remains: many delinquent customers want to bring their accounts current and, if treated right, will do so. Recently there have been reports of some companies hiring social service workers to help delinquent customers cope more effectively with the problems in living that are so often at the heart of the issue (Yardley, 1999).

While most collection organizations suffer from limited investment in technology, training and people, CFS lavished resources on these areas. New employees were carefully screened and received extensive training, far above industry averages. Because it owned the accounts (while banks are required by law to write off any debt that is over 180 days past due) the company was free to “work” them for years, and to cut deals with individuals as appropriate. Most importantly, the attitude from the top of the house was decidedly different. The owner of the company, William R. Bartmann, had been the object of collections efforts himself. When his oil-field pipe company collapsed in 1986, he found himself $1 million in debt. He had empathy for delinquent customers, and it showed in the way CFS customers were treated-with respect. Noted Bartmann, “You've got to be sympathetic; you've got to listen with your heart as well as your head (Zellner and Zweig, 1997).” While Mr. Bartmann may have had shortcomings in the business management arena, he certainly had a handle on the vitally important “people” side of the collections business.

What We Know About People Who Do Not Pay

Our research suggests that the sources of nonpayment are both varied and subtle. As previously mentioned, some contend that the growing number of bankruptcies and delinquent accounts are the result of changing attitudes toward money and credit. They argue that many consumers, especially young consumers, experience less shame around financial difficulty than did consumers in the past. This lack of shame or guilt, they argue, is what leads these consumers to spend frivolously without regard for their ability to repay. Some even argue that this is a primary cause for the recent upsurge in personal bankruptcy filings. The results of our research suggest the reality is not so simple or morally absolute.

According to the Journal of Financial Planning (O'Neill, 1995), people with credit problems consistently report feelings of shame and guilt. Many also note heightened anxiety and a feeling of being “imprisoned.” Debtors of all types typically hide their debts from friends and family members out of embarrassment. Some, particularly those who have filed for bankruptcy, report losing friends, business associates and even spouses as a result. Such reactions have led most knowledgeable observers to conclude that it is not a lack of regard for the system that leads to nonpayment and bankruptcy.

In interviewing individuals who had at any point struggled with problem debt we learned that for many, adverse life events played a role in creating their financial crises. There was also a notable incidence of young people getting in over their heads before they had even graduated from college.

In some cases, there was more to the story. For a number of respondents, denial appeared to be a critical psychological defense. For example, one respondent professed no concern about credit card debts that almost totaled his annual income. Some others were unrealistic in thinking about their repayment prospects-"I owe a lot of money but I'm starting a home-based business and that should take care of it." This is an interesting parallel to the denial of executives, who have not yet acknowledged the changes underway in their industry.

One of the most striking findings in our small sample research was the high incidence of microbusinesses, with revenues well under $1 million annually. Of those who owned microbusinesses, all but one was using personal credit to fund the business. In a number of cases, fluctuations in income and outflow from the business were almost entirely responsible for the person's consumer credit problems.

While all agreed that people should pay their debts, there was remarkable consistency of sentiment about how to treat people who are struggling. Collectors who are polite, considerate and "treat me like a person" get better results. Companies whose collectors are rude, disrespectful and abusive are relegated to a much lower position on the priority list. Companies would do well to remember that they are "selling" repaying them rather than their competitors, since typically customers in trouble are receiving many collections calls.

Many of the so-called efficiency measures actually backfire. For instance, automatic phone dialers, where customers pick up the phone to be told, "Please hold for the next available operator," are for most, no more than an invitation to hang up the phone.

Taken together, these findings underline the complex challenges that financial institutions face in collecting from these individuals.

Toward a New Approach

Account acquisition is fun, glamorous and exciting. Collection of delinquent accounts would hardly meet that description. For decades, the credit card industry has benefited from a low, steady and predictable rate of nonpayment. However, the past two years have seen a dramatic, and we believe, fundamental change.

We believe that many card companies have boxed themselves in, in a game whose rules are continually changing, either because they have not grasped the magnitude of the change or because they are unable to adjust. By adopting a volume-driven, one-size-fits-all approach, they are actually leaving money on the table from people who are more predisposed to pay and maintain lucrative balances.

“Smart” firms must treat this as one opportunity: selling their product also involves keeping their customers, and that means that for a portion of those customers, ensuring that payment can be worked out so that the relationship is not lost. Key elements of successful relationship management include the following:

Segmentation: All debtors are not alike. As with the rest of the market, there are "segments" within the group that run into trouble with credit. The most effective approaches to collection will be tailored to reflect the concerns and priorities of particular segments.

Establish Trusting Relationships: A credit card is an assumption of trust-albeit based on a range of criteria that presume “creditworthiness.” By the same token, in choosing which debts to repay, consumers in trouble will be more likely to pay those companies with whom they have established a bond of trust. Companies will ultimately benefit from efforts designed to build this bond with customers.

Money as Emotional Currency: Help People Build Better Behavior-Many have observed that discussion of money is “the last taboo.” Most people develop their behavior and attitudes about money by observing “economic role models,” usually in their family settings. Approaches that provide education to counteract flawed “economic socialization” may be helpful to both customers and credit providers.

Enhance Customer Communication, Offer Targeted Education: People struggling with problem debt are typically not knowledgeable about the nonprofit Consumer Credit Counseling Service or are reluctant to “surrender control” to another. By offering both information and help, companies could deliver a valuable service while boosting their own image in an industry that is currently attracting a lot of less than favorable commentary.

Develop Strategies for Dealing with Microbusinesses: The prevalence of microbusinesses whose liquidity needs are being met using consumer credit and the financial consequences of this practice, are sufficient to warrant closer attention. For instance, it may make sense to monitor accounts showing relevant characteristics for any increased likelihood of charge off or bankruptcy.

Invest in All Phases of the Relationship, Not Just the “Front End”: The financial rewards of this approach can be impressive-but they are not free. To achieve dramatically superior results, things must be done differently. This includes adopting a new and more empathic attitude toward customers and collectors, while allocating the human, technical, financial and educational resources needed to do things right.

If You Can't Fix It, Sell It: If a company cannot or will not adjust to the new world of credit, it should divest the entire collection process. When collections is done wrong, it poisons the company, drains money and achieves nothing but bad will all around. Selling the operation to someone who does it “right” may be the healthiest and most productive thing to do.

Rethink the Approach to Collections, from Top to Bottom: Just as the industry must grasp the fundamental changes in the credit card market, it must completely rethink the way in which the collections is staffed, trained and rewarded. This begins with the design of organizations and should be reflected in the management of the function at all levels.

This is particularly true for front-line workers. Collecting from delinquent customers is demanding work. Collectors are frequently ill equipped to manage the intensity of the customer “encounter.” This work is far more demanding, both intellectually and emotionally, than most are prepared to handle. In the absence of careful attention to the training, support and guidance of these employees, it is too easy for callous, disrespectful behavior toward customers to flourish.

Yet, the promise is immense. Instead of dumping “problem” customers in one big “losers” bucket, winners in the new world of credit will find they have much to gain by treating them as individuals, and as partners.


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