Collections in consumer lending
Published on: 2024-08-10 18:35:48
In consumer lending, collections covers the actions a lender’s internal team or external agencies take to recover payment on overdue accounts. Channels include SMS, in-app messages, phone calls, letters, emails, on-site visits, and, when needed, legal action. The goal is straightforward: recover the balance quickly, compliantly, and with minimal churn.
Collections usually moves through defined stages:
- Pre-collection
- Soft collections
- Early collections
- Late collections
- Legal collections
Typical timing by stage
The stage depends on the number of days before or after the due date.
Pre-collections usually runs 0-3 days before the repayment date. At this point, lenders target accounts with a high predicted risk of late payment.
Soft collections refers to accounts that are past due because of technical payment issues, not a real credit default. Common windows are 1-5, 1-10, or 1-14 days past due.
Early collections begins once an account stays delinquent beyond the soft window. This is often 14-60 days past due.
Late collections usually starts at 61+ days delinquent. This stage ends when the loan becomes a non-performing loan.
Legal collections usually begins after an account is classified as non-performing.
Exact cutoffs vary by a lender’s collections and debt recovery policy.
In-house collections or outsourced?
In-house collections means the lender’s own team manages delinquent accounts. Many lenders also outsource some stages to third-party agencies.
The benefits of in-house teams include tighter cost control and stronger brand control. Outsourcing usually involves a contingency fee, which is a percentage of recovered amounts.
In-house teams know the customer base and product rules. They can tailor contact strategies and reduce complaints compared with generic, aggressive tactics.
The downsides are mostly about scale. Hiring for peak periods and carrying idle capacity during slower periods both raise costs.
Because of cost-to-collect, lenders often handle pre-collection, soft, and early stages in-house. Later stages are often outsourced.
Some lenders also outsource early stages because of capacity limits or to benchmark in-house performance.
What are some common collection strategies?
Typical strategies in consumer lending include instant messages, phone calls, letters, emails, and visits.
Instant messages are widely used for quick reminders, payment links, and short updates. They help set expectations and confirm arrangements.
Phone calls remain common for discussing ability to pay, resolving disputes, and setting payment plans. They work well for verifying intent and timing.
Letters and visits are more formal steps that signal escalation. Letters also notify customers when an account is assigned to a collection agency or sold to another party.
Email is a lighter-touch channel used mainly for reminders, statements, and status updates.
What are some common mistakes made in collections?
Failing to assess the customer’s ability and willingness to pay. This leads to poor strategy selection and lower cure rates.
Weak documentation of customer communications. Gaps in records slow recovery and make audits and disputes harder to manage.
Excessive contact frequency. This creates complaint risk, regulatory action, fines, and reputational damage.
What are some common challenges in collections?
Common challenges in collections include:
- Selecting the right channel and message for each borrower
- Balancing firm and soft tactics
- Documenting all communications with the debtor
- Knowing when to pass an account to a third-party collection agency
- Minimizing regulatory risk
- Ensuring compliance with applicable laws and regulations
What are some common solutions to collections challenges?
Automate segmentation, scoring, and prioritization using scheduled batch processing or a decision engine with explainable decision logic.
Use a customer relationship management (CRM) system to track all borrower communications and outcomes.
Cap the number of phone calls and messages per debtor and enforce quiet hours.
Use a third-party collection agency for hard-to-collect accounts once internal strategies are exhausted.
Define policies and procedures, train teams, and maintain audit trails to ensure compliance with applicable laws and regulations.
Conclusion
Collections is a structured process that starts with light-touch reminders and escalates based on delinquency, risk, and policy. The right approach depends on a borrower’s ability to pay and on compliance requirements.
If recovery stalls, outsourcing later stages may make sense. Automation with clear, auditable decision logic can reduce cost-to-collect and improve consistency and compliance.
