Issue Credit Wisely

Risk management has evolved into a careful balancing act between customer satisfaction and prudent financial management. In the past, many energy, water, and telecommunications companies routinely collected security deposits from all customers—risk mitigation at the expense of customer satisfaction. Credit scoring and modeling have helped companies 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.

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.

The Ascent Group conducts research to uncover the most effective techniques and strategies for improving collection performance and reducing uncollectible debt. Our research explores how companies are balancing the cost of collection to reduce uncollectible debt 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 examine the technologies that have retooled credit and collection processes for maximum effectiveness and efficiency.

What do we find?

Only one-third 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 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. Online Utility Exchange offers utilities a combination of services to address Red Flag rules as well as credit scoring.

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.

Continue to evaluate account credit over the life of the account to make sure you have adequate deposit coverage—increase security deposits as accounts become more risky and require more collection treatment.

Other findings will be explored in future posts. In the mean time, you can download our white paper for a summary of the research.