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Balancing Risk & Customer Satisfaction
An extract from Credit & Collection Practices 2008, a new research report published by the Ascent Group, Inc.
The current U.S. economic downturn is challenging many consumers, business, and service providers. Americans are finding it more and more difficult to pay for basic purchases, forcing many to choose between the bills they can and cannot pay. As a result, public and private sector companies are seeing a rise in delinquency rates, default, and fraud; many are predicting a 10 to 15 percent increase in uncollectible debt this year.
Additionally, inflation and rising gasoline prices are making it more costly for companies to collect. Gasoline prices, as everyone is well aware, have risen drastically in the last year (46 percent), increasing field collection and enforcement costs. The increase in delinquencies and defaults is stressing existing collection workforces, forcing companies to decide between hiring on more staff or finding ways to prioritize the work while limiting risk.
As a result, many companies are taking a closer look at their collections process to try to deal with the increased workload and at the same time minimize the impact of the changing economy. Many companies are turning to credit modeling to help manage risk more effectively and identify potential fraud earlier. Additionally, companies are pursuing solutions that will help them to be more proactive in filtering out bad debt without compromising the high level of service that has become standard for many industries.
Risk management has evolved into a careful balancing act between customer satisfaction and prudent financial management. In the past, some companies routinely collected deposits from all customers—risk mitigation at the expense of customer satisfaction. Credit scoring and modeling have helped companies better balance risk and satisfaction, objectively identifying the accounts that require a deposit and those that do not. It’s a win-win for companies and customers.
Risk modeling can be used throughout the customer’s relationship with the company. Risk analysis can be applied to active accounts, determining the need to send late payment reminders or discontinue service, or even to prioritize callers in queue. It can also be applied to inactive accounts, to determine the most appropriate follow-up based on account payment behaviors, thereby increasing recoveries.
By minimizing credit related risk up-front and throughout the account life cycle, managers can reduce operating costs and significantly improve profitability. They can also actively look to expand their service offerings to customers and increase customer satisfaction, secure in the knowledge that doing so will not cost the company and shareholders millions in increased uncollectible funds.
Improving Collection Performance
One of the biggest collection hurdles for utilities is the existence of mandatory winter service disconnection restrictions for non-payment customers. Regulatory moratoriums and restrictions limit the collection activity that a company can conduct during a specified time period. A great deal of catch up must be accomplished after the winter moratoriums are lifted.
Benchmarking Study Findings & Observations
The Ascent Group initiated credit and collection benchmarking research during the second quarter of 2008 to uncover the most effective techniques and strategies for improving collection performance and reducing uncollectibles. The research explored how companies are balancing the cost of collection to reduce uncollectibles and improve the bottom line. Topics investigated included both collection treatment as well as the credit policies that have been established to support collection efforts. We also examined the technologies that have retooled credit and collection processes for maximum effectiveness and efficiency.
Issue Credit Wisely
Only thirty-three percent of participants routinely use an external credit bureau to score consumers applying for service—to determine the need for a security deposit. Credit scoring can help companies better balance risk and customer satisfaction—appropriately identifying the accounts that require a deposit and those that do not. Take advantage of this technology, it’s a win-win situation for companies and customers.
In addition to traditional Beacon scoring, Equifax offers credit scoring based on utility payment behavior. This energy score is a better predictor of energy customer payment behavior, increasing the likelihood that deposits will be secured for the appropriate accounts.
In addition to scoring, many companies are actively participating in industry credit exchanges, such as the National Consumer Telecom & Utilities Exchange. The National Consumer Telecom & Utilities Exchange is a collection of utilities and telecommunications companies that have formed a common “database” of bad debts and new customer sign-ups. Participants are notified when information is available about a new applicant or uncollectible account. Investigate joining an industry credit exchange to further fine-tune your credit issuance process.
Consistency is Key
Consistency is key when it comes to collections. Customers will “shop around” for the best terms and arrangements. It is essential to clearly define credit terms and provide tools to help representatives identify and determine the appropriate credit-risk category for callers. Clearly defined and followed credit guidelines will minimize the shopping.
Make sure you provide the training, techniques, and tools to help representatives offer consistent credit terms when negotiating with customers. Not only will this minimize “representative shopping” it will reduce agent stress and increase confidence.
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