How do you collect more of the money you lend?
Everybody who borrows from you intends to pay you back. Some simply don’t. The idea is not to eliminate delinquent borrowers. It’s impossible so any attempt is futile. The idea is to manage it and keep it well controlled. Profit in spite of delinquencies. Banks know this well. They write-off billions in losses while celebrating billions in profits. The two are not mutually exclusive.
But we’re not trying to `be like banks now are we? A big part of what has given rise to microlending and alternative lending models around the world is the fact that banks, largely through their tight lending qualification practices, have kept billions away from opportunity. Now isn’t it ironic that so many microlenders model their collection practices after the very banks?
So, how do we get there? We need fresh thinking.
What about collections in the digital era? So much has changed…but not that much with collections. Much of our collections activities are heavily biased to the telephone as it was 20 years ago. The over-reliance on emails is a direct outgrowth of the direct mails that were initially used in the 70’s and 80’s.. Both ignore how persons really connect with each other today and where their Personal Brand Pressure Points may exist. Personal Brand Pressure Points (PBpp) are vulnerable places of noticeable impact to the social brand experience of an individual or an organization when activated, according to longtime Personal Brand Guru Michael Carter at LeapAgents PBpp has to be part of your collections strategy in this era. More on PBpp later.
How do you manage delinquencies so that you can still be profitable in this new era? Several strategies could help you keep delinquencies manageable and give you a healthier portfolio of loans. Some of these strategies may require tweaking in order to be applicable in your particular business.
01 Loans Start Bad, they don’t become Bad
With hindsight all the reasons why you shouldn’t have made a loan becomes clear and apparent. It’s because you are now able to see the specific behaviors that caused the loan to fail. The real learning only happens when we start seeing the patterns of delinquencies. Yes, there are observable patterns.
Observation is half the equation, the other side involves application of what is learned from observation. This part is sometimes quite difficult procedurally and culturally. We like to listen to people without ever seeing them. Here at LoanCirrus we engage with tons of trial users each month. Not all trial users are serious about LoanCirrus. One of the ways we triage opportunities so we can allocate appropriate time to serious prospects is to become very keen observers of what people DO. I think it’s a similar challenge faced by you in your lending business.
In my experience people are the sum of what they do. Observe enough behaviours and patterns begin to emerge. Remember, capacity to repay is never more important than the Character of the borrower.:
- Who is this borrower? No, not what is their name and address – that does not tell you who they are. In fact, learn to see your prospective borrower as nameless entities as you begin to process them. Yes, I am aware that I may get criticized for supporting an anonymous loan application process. After the person has become a customer you can turn on the personal charm but while you are assessing them the less extraneous information you have the better. Extra information will only serve to make your decisioning process more murky.
- Examine what they have done, Who do they currently owe? What is the purpose of the debt? The purpose for debt is sometimes more instructive than the amount of the debt itself.
- How have they met their existing obligations? Learn as much as you can about how they have paid their bills. Ask around. Instead of calling the cousin for a ‘reference’, call the Landlord or the consumer finance company.
- Do the 3 degree test: Your borrower should be no more than 3 degrees separated from someone of high community standards to whom you can ask a simple question: Would you lend this person money? The answer must be a quick YES. Every adult should have a referenceable relationship with at least one of the following: A Teacher, A Doctor, An Attorney, A Village or Community Leader or an established business person.
02 Collections begins at Hello
Best in breed collections strategies recognize that everything that happens after greeting the prospect is about collections. Many lenders focus too much on customer acquisition and not enough on real customer assessment. Every question about the borrower should be asked from the perspective of collections. Here are some early signs often missed:
|What you Ask…||What it should mean…|
|Where do you live?||How accessible to Collectors?|
|Do you have a phone?||How reachable is the borrower?|
|Are you married or living with someone else?||How accessible are you?
Additional Contacts that will help us locate you.
Marriage may also indicate stability. Requires probing.
|How long at residence, employment, school, etc.?||May indicate borrower maturity
May indicate borrower commitment.
May demonstrate stability
|Who/what are you responsible for?||Many dependents always affects affordability.
Indicates maturity and responsibility.
03 Press the right buttons
Sometimes it seems like borrowers have left the planet. But they are still here among us. They’re just hiding from you…but you can get them to show…and to pay with these strategies and tactics.
- Develop a Collections Plan
- Clearly and specifically define every step of your collection process.
Be sure to cover at least these 4 areas:
Before Late – Strategies to apply before loan is late
Late – What to do once loan becomes late.
Delinquency – define when a loan becomes delinquent.
Default – Define when loans default and what you will do.
Develop communications scripts and templates.
- Communications should escalate in tone and language. Be clear about when the change occurs and ensure that the tone is appropriate for the stage the borrower is in. A borrower who is 2 days late should never get the same message as someone who is 2 pay cycles late. Remember: most of your late borrowers are going to borrow from you again and you should lend to them but price-in their past tardiness. (more on pricing in a future article)
- Clear call to actions. “You’re late” is not the same as “please pay your overdue amount of $100 at the nearest Post Office to account #123. Please do that now?”
- Assume that everything you write and say will be in the public domain. Bad customers now have tools to animate and distribute mischief with great efficiency. This is another reason why you should avoid ad hoc, non-scripted communications.
Get the right people on the team.
- I am amazed at how many lenders cheat themselves out of tons of cash simply because they fail to hire a dedicated Collections person or team. Lenders will spend money to recruit what they think are the best ‘salespeople’ but will ask the Receptionist to make collections calls.
- I have found that truly exceptional collections persons possess the following skills and traits:
- Honesty and Trustworthiness. This is true for everyone who works in a lending business but a lot of fraud can happen with Collections, especially in small, startup businesses.
- An Entrepreneurial mind: Collecting money is a core entrepreneurial activity and is most effectively executed by someone who understands business. Secondly, your collections person should be incentivized with performance based compensation.
- Above average communications: This does not mean you need persons who like to talk. In fact, too much talking may hurt collections efforts. We are looking for persons who understand that great communications begins with good listening. Once you’ve listened you need persons who can deliver clear, unambiguous verbal messages.
- Tone and Gender becomes important considerations but there are many variables to consider. The old thinking that a stern, serious male voice is most effective in collecting money is not necessarily so and may require testing inside your business. Great collections personnel understand that your brand is an important part of how they speak to and about customers…even those that are late.
- Observant and Analytical: Would your collections person make a good Detective with your local Police Department? Can they spot an implausible story? Are they naturally curious?
Inspect and measure the right things.
Effective collections is not simply about activity. It is about results.
See a full list of KPIs here.
My Top 5:
- How much of what is owed is being collected?
- What is being collected by age of arrears?
- Which Agent is collecting what?
- Average time to collect?
- Promise To Pay Ratio
- Use Data to Drive Collections
In Collections as in most things, knowledge gives you power…and sometimes, leverage. The more you know about your borrower the more effective you will be at collections.
- References: I have had many discussions with Lenders about why they ask borrowers for references. Most do it as part of their initial assessment to determine credit worthiness. If you are using references like this, you should consider a different approach. References are really only effective as a Collections tool. It provides proximal pressure on the borrower because you can contact persons who know him or her and likely their whereabouts.
- Social Friends: If you can call a borrower’s friend on the phone, is it also ok to Troll the borrower’s friends online? Is it ok to apply social pressure? How can this be done without harming your own brand? (upcoming article on Social Lending). This is where Personal Brand Pressure Points (PBpp) comes in.
- PBpp: We are living in the era of Personal Brands. Social channels such as Instagram, Facebook and YouTube allow everyday persons to shape, define and develop powerful brand images. You should know about your borrower’s brand profile and use it in your collections strategy. Here is one way to do it: Require every approved borrower, as a condition of the loan approval to accept you into their social network. This will solve your first issue – access. Now that you have access, you now have unprecedented power to observe and to engage and apply pressure. The borrower you can’t reach is still posting and commenting in Facebook, Instagram and WhatsApp. Be part of the conversation.
04 Applying it to your Business
If your collections activities are not looped back into your lending and credit assessment
process then you are missing a really important opportunity to exponentially improve your collections.
Carve out a small budget for someone to analyze delinquency patterns in your business. If you have 50 or more loans in your portfolio you should start now. The more loans, the more critical that this is done.
Make it easy for borrowers to repay their loans. Sometimes inconvenience results in a higher Portfolio At Risk (PAR) than is necessary. Good Lending Management Platforms like LoanCirrus will allow you to use and manage multiple payment channels. Give your borrowers as many ways to pay you. Even if you incur small transaction costs, increased collections will easily offset those costs.