All posts by Paul Desaulniers

“Who Moved My Cheese?” Perhaps you've heard of this popular book, released in 1998. If you haven't, it's a quick read and one that describes four fictional characters - two mice and two "little people" - on their quest to hunt for cheese. On their journey, they have to assess their routines and consider change - that word that makes so many of us uncomfortable. I bring this up because it is no secret that the consumer has changed dramatically over the years. Technology, the need for personalization, the demand for speed. Yes, the consumer has changed for sure, and everyone seems to recognize this but collections professionals. Look at any financial institution and you will hear and see leaders talking about and executing on digital acquisition and account management strategies. After all, digital is the medium that consumers desire when interacting with their financial service providers. Marketers know this and most have adapted, but when it comes to collections, the industry seems to be fixated on utilizing the tactics of the past. Today, collectors largely rely on calling consumers and sending out dunning letters. Right Party Contact rates continue to decline, and with 50 percent of consumers lacking land lines, the contact rates are only going to get worse. I say all this because if you want to see success, you must change. Offering your past-due customers a digital experience will not only increase your collections performance and recoveries, but simultaneously improve your customer experience and reduce costs. This is a huge opportunity if collectors would just embrace a digital collections strategy. And let me note that having a payment portal is not a digital collections strategy. If that was the case, digital marketers would be done with just a simple website, and then they can wish their consumers will land on the site. A digital collections experience is much more. Why stay stuck in the past?  Change is good, let someone else look for that old cheese.

Every portfolio has a set of delinquent customers who do not make their payments on time. Truth. Every lender wants to collect on those payments. Truth. But will you really ever be able to recover all of those delinquent funds? Sadly, no. Still, financial institutions often treat all delinquent customers equally, working the account the same and assuming eventually they’ll get their funds. The sentiment to recover is good, but a lot of collection resources are wasted on customers who are difficult or impossible to recover. The good news? There is a better way. Predictive analytics can help optimize the allocation of collection resources by identifying the most effective accounts to prioritize to your best collectors, do not contact and proceed to legal actions to significantly increase the recovery of dollars, and at the same time reduce collection costs. I had the opportunity to recently present at the annual Debt Buyer Association’s International Conference and chat with my peers about this very topic. We asked the room, “How many of you are using scoring to determine how to work your collection accounts?” The response was 50/50, revealing many of these well-intentioned collectors are working themselves too hard, and likely not getting the desired returns. Before you dive into your collections work, you need to respond to two questions: Which accounts am I going to work first? How am I going to work those accounts? This is where scoring enters the scene. A scoring model is a statistical algorithm that assigns a numerical expression based on known information to predict an unknown future outcome. You can then use segmentation to group individuals with others that show the same behavior characteristics and rank order groups for collection strategies. In short, you allow the score to dictate the collection efforts and slope your expenses based on the propensity and expected amount of the consumer to pay. This will inform you on: What type, if any, skip trace tactic you should use? If you should purchase additional data? What intensity you should work the account? With scoring, you will see different performances on different debts. If you have 100 accounts you are collecting on, you’ll then want to find the accounts where you will have the greatest likelihood to collect, and collect the most dollars. I like to say, “You can’t get blood from a stone.” Well the same holds true for certain accounts in your collections pile. Try all you like, but you’ll never recoup those dollars, or the dollars you do recoup will be minimal. With a scoring strategy, you can establish your “hit list” and find the most attractive accounts to collect on, and also match your most profitable accounts with your best collectors. My message to anyone managing a collections portfolio can be summed up in three key messages. You need to use scoring in your business to optimize resources and increase profits. The better data that goes into your model will net you better performance results. Get a compliance infrastructure in place so you can ensure you are collecting the right way and stay out of trouble. The beauty of scores is they tell you what to do. It will help you best match resources to the most profitable accounts, and work smarter, not harder. That’s the power of scoring.

As thought leaders in every industry make predictions for what 2016 will bring, I’m guessing there will be a few constants. New couples will marry. Some couples, sadly, will divorce. Young and old will move – some into first homes – others downsizing or making moves cross-country for work. And waves of individuals will clamor to the latest devices – a new iPhone7, perhaps. The Apple rumors are already flying. Yes, no big surprises, right? But, do you know what all of these very standard life events have in common? These transitions often result in shifts in consumer data, sometimes making people more difficult to track and contact. New last names, new addresses, new phone numbers. Suddenly, the consumer data that companies and lenders have on file are dated, and when it comes time to reach out to these individuals, it’s a challenge to connect. But that is just the beginning. The Federal Communications Commission (FCC) is increasing its efforts to register consumer complaints and taking aggressive actions to stop companies from making unsolicited phone calls. And the penalties are steep. Fines per individual infraction can be anywhere from $500 to $1,500. Companies have been delivered hefty penalties in the thousands, and in some cases millions, of dollars, over the past few years. All have questions and are seeking to understand how they must adjust their policies and call practices. Now those multiple attempts to call and find a consumer can cost you – big time. No more “shotgun” approaches to identifying and using phones. It’s simply too risky. The Telephone Consumer Protection Act (TCPA), enforced by the FCC, has been around since 1991, but regulations have been closely scrutinized over the past year since the FCC announced a new ruling last summer to clarify hot topics. In their July paper, they aim to communicate the definition of an “auto-dialer,” consent-to-call rules, how to address the reassignment of cell phone numbers, and the new requirement for “one call” without liability. In short, the Declaratory Ruling has opened the door to even greater liability under the TCPA, leaving companies who place outbound customer calls at-risk for compliance violations. Some are projecting the TCPA rules will continue to become even more expansive in 2016, so companies must really assess their call strategies and put best practices in place to increase right-party contact rates. Suggestions include: Identify landline and cell phones for TCPA compliance with dialer campaigns Focus on right- and wrong-party contact to improve customer service Score phones or apply cut-off scores based on the confidence of the number or match Scrub often for updated or verified information Establish a process to identify ported phones Determine when and how often you dial cell phones Provide consumers user-friendly mechanisms– such as texting “STOP” or “UNSUBSCRIBE” – to opt-out of receiving TCPA-covered communications. Review the policies and practices of third-party vendors to ensure they are not sending communications violating the TCPA With the huge advancements in mobile technology and the ever-changing digital landscape, it’s challenging to keep up, but regulators are cracking down on violations, and a slew of lawyers are ready to file on behalf of unhappy consumers dialed one-too-many times. Beyond a best-practice review, tools and systems are available to identify the right number for those moving and changing consumers. And I’m sure we can all agree, those life events will continue to happen in 2016. Marriages, divorces, moves, new devices. They’re coming. As a result, it’s necessary to track the resulting changes to consumer data. Only then will you have a shot at avoiding negative customer experiences and fines.

Part 2:  Common myths about credit risk scores and how to educate consumers In light of what I've heard in the marketplace through the years, I wanted to provide some information to help 'debunk' some common myths about credit scores. Myth: There is only one credit score Reality: There are multiple credit scores that lenders can use to evaluate consumer credit worthiness. As noted in a recent New York Times article, there are 49 FICO score models. Make sure your customers know that an underwriting decision is based on more than just a credit score—multiple factors are evaluated to make a lending decision. The most important thing a consumer can do is ensure their credit report is accurate. Myth:  The probability of default remains constant for a credit score over time Reality:  The probability of default can shift dramatically based on macro-economic conditions. In 2005, a score of 700 in any given model, may have had a probability of default of 2 percent, while in 2009, the same score could have had a probability of default of 8 percent. This underscores the value of conducting an annual validation of the credit model you are using to ensure your institution is making the most accurate lending decisions based on your risk tolerance.  One of the benefits of utilizing the VantageScore model, is that VantageScore Solutions, LLC, produces an annual validation so you can ensure your institution is adjusting your strategies to meet changing economic conditions.   Myth:  If the underlying credit report is the same at each credit reporting company, I will have the same score at each company Reality:  Traditional credit scoring models are completely different at each credit reporting company, which leads to vastly different scores or probabilities of default based on the same information. As a risk manager, this is very frustrating, as I may not understand which score most accurately assess the consumer’s probability of default. The only model that is the same across all credit reporting agencies is the VantageScore model, where this is a patented feature that ensures the lender receives a consistent score (probability of default) across all bureau platforms. I hope these brief examples help clear up some confusion about credit scores. In Part 3 of this series, I will outline how to evaluate the risk of traditionally unscoreable consumers. If you have any thoughts or experiences from a lending perspective, please feel free to share them below.   Courtesy Why You Have 49 Different FICO Scores in the August 27, 2012 issue of the New York Times

In this three-part series, Everything you wanted to know about credit risk scores, but were afraid to ask, I will provide a high level overview of: What a credit risk score predicts; Common myths about credit risk scores and how to educate consumers; and finally, Scoring traditionally un-scoreable consumers   Part I: So what exactly does a credit risk score predict? A credit risk score predicts the probability that a consumer will become 90 days past due or greater on any given account over the next 24 months. A three digit risk score relates to probability; or in some circles, probability of default. An example of the probability of default: For a consumer who has a VantageScore credit score of 900, there is a 0.21% chance they will have a 90 day or greater past due occurrence in the next 24 months or odds of 2 out of 1,000 consumers A consumer with a VantageScore credit score of 560 will have a 35% chance they will have a 90 day or greater past due occurrence in the next 24 months or odds of 350 out of 1,000 consumers This concept comes to life in light of changes being made on the regulatory front from the FDIC in the new proposed large bank pricing rule, which will change the way large lenders define and calculate risk for their FDIC Deposit Insurance Assessment. One of the key changes is that the traditional three-digit credit score used to set its risk threshold will be replaced with “probability of default” (PD) metric.  Based on the proposed rule, the new definition for a higher risk loan is one that has a 20% or higher probability of defaulting in two years.     The new rule has a number of wide-ranging implications. It will impact a lender’s FDIC assessment and will allow them to uniformly and easily assess risk regardless of their use of proprietary or generic credit risk scoring modes.  In part 2, I will dispel some common consumer myths about credit scores and how lenders can provide credit education to their customers.