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Part 3 Reducing operational and overhead costs starts with the automation of tasks that would otherwise be performed by a human resource. By leveraging an advanced segmentation approach, it is possible to better identify accounts that will not require collector intervention. While automation is not a new concept to collections, significant benefits of modern systems include: • enabling more functions to be automated; • effectiveness of the automated functions to be validated; and • more changes made per year versus legacy systems. Fixing a bad phone number: The old way To illustrate effective automation, let’s use an example where an account is found to have a bad phone number. A common approach to this problem might be for the outbound collector to route the account to a skip specialist who can perform research. This often has the receiving party starting the process after the nightly batch process has transferred the account across departments. If a phone number is found, the account may be manually routed back to an outbound queue and if not, a no-contact letter may be generated. Additionally, there are tasks that need to be performed such as noting accounts that consume a collector’s time. Fixing a bad phone number: The new way A more efficient and cost-effective approach would be for the employee identifying the need for a new number to click a pre-defined button to let the collections system know of the issue. The system could then automatically call out to an external data source to: • collect the new number; • repopulate the appropriate field; • reroute the account back to the most appropriate outbound queue; • log a history of all automated functions performed, and • do all of this within just a few seconds! If the appropriate number cannot be located, the system would know which letter to send and then route the account to the most appropriate holding queue. Reducing operational costs After automation, the operational costs are further reduced by identifying which actions can be effectively replaced by lower-cost options that yield the same results, or even eliminating actions that present no substantial value. For example, why make a call when a letter will suffice? And what happens if we subsequently replace that letter with a text message or take no action at all? Intelligent features of modern systems such as champion/challenger testing can be employed to support a continuous learning process that increases the financial benefits of automation as experience and knowledge is gained. As new automation is introduced and validated as beneficial, other improvement theories can be tested and subsequently abandoned or adopted. Considering the possible impact of automation and action reductions on cost savings let’s assume that three dial attempts are made on the average delinquent account in the first 30 days at a cost of 25 cents each and on the fourth attempt there is a right party contact, which costs an additional $2.50 (assuming the talk time is five minutes). Adding one letter at 75 cents, we have a total cost to collect of $4.00 before the account hits 31 days past due. With 250,000 customers entering collections each month, we can save $200,000 each month in the early stage alone with just a 20 percent improvement. This result could easily be achieved by reducing talk time and eliminating unnecessary actions or unproductive call attempts. Annually that adds up to approximately $2.5 million dollars in savings, in this example. Champion/challenger tests, as well as, the improved functionality of modern systems can also be extended beyond the in-house work stream. Evaluating and comparing external agencies can significantly improve agency performance as well as enable the lender to better manage placement costs. For example, if a lender allocates 1,000 accounts to an external agency each month, with an average balance of $3,000, the total dollars allocated annually is $36 million. If 22 percent of the debt is collected and a 25 percent commission is charged, the net to the lender is nearly $6 million. Improving that return by a mere 4 percent through better allocation strategies, which is a conservative goal, we add another million to the bottom line each year. By factoring in the ability of next generation collections systems to automate most aspects of the placement process itself, including recalling accounts, we further improve efficiencies, free up valuable resources and allow management greater control of the process. Additional benefits of functionally rich modern systems also enable management to grant external resources various levels of remote access to the collections systems to better monitor activities and ensure that transactional data is properly captured. In addition to granting external agencies remote access, modern collections systems can also enable collectors to work from home-based workstations to further reduce operational costs. Many industry analysts see this as an emerging trend over the next few years, particularly when productivity can be monitored in real-time. My next blog will continue the discussion on the benefits of next generation collections systems and will provide details on improved change management processes.  

Market risk and credit risk are different. The bank can offset market risk by purchasing interest rate swaps or other interest rate derivatives. 

 I’ve talked (sorry, blogged) previously about taking a risk-based approach to reconciling initial Red Flag Rule conditions in your applications, transactions, or accounts.  In short, that risk-based approach incorporates a more holistic view of a consumer in determining overall risk associated with that identity.  This risk can be assessed via an authentication score, alternate data sources and/or verification results.  I also want to point out the potential value of knowledge-based authentication (a.k.a. out-of-wallet questions) in providing an extra level of confidence in progressing a consumer transaction or application in light of an initially detected Red Flag condition. In Experian’s Fraud and Identity Solutions business, we have some clients who are effectively embedding the use of knowledge-based authentication into their overall Red Flags Identity Theft Prevention Program.  In doing so, they are able to identify the majority of higher risk conditions and transactions and positively authenticate those initiating consumers via a series of interactive questions designed to be more easily answered by a legitimate individual -- and more difficult for a fraudster.  Using knowledge-based authentication can provide the following values to your overall process: 1. Consistency: Utilizing a hosted and standard process can reduce potential subjectivity in decisioning.  Subjectivity is not a friend to examiners or to your bottom line. 2. Measurability: Question performance and reporting allows for ongoing monitoring and optimization of decisioning strategies.  Plus, examiners will appreciate the metrics. 3. Customer Experience: This is a buzzword these days for sure.  Better to place a customer through a handful of interactive questions, than to ask them to fax in documentation --or to take part in a face-to-face authentication. 4. Cost: See the three values above…Plus, a typical knowledge-based authentication session may well be more cost effective from an FTE/manual review perspective. Now, keep in mind that the use of knowledge-based authentication is certainly a process that should be approved by your internal compliance and legal teams for use in your Red Flags Identity Theft Prevention Program.  That said, with sound decisioning strategies based on authentication question performance in combination with overall authentication results and scores, you can be well-positioned to positively progress the vast majority of consumers into profitable accounts and transactions without incurring undue costs.

ROE vs ROA | Return on Equity (ROE) is generally net income divided by equity, while Return on Assets (ROA) is net income divided by average assets.