Nudging consumer debtors towards better payment behaviours

With household debt on the rise, companies offering consumer credit will need to be smarter about collecting payments. Here’s how companies can improve collections by adopting a more behavioural based collection strategy.

This is the third in our series on Order to Cash opportunities for UK businesses. You may also like the others in our series:
Is your credit function ready for the challenge ahead?, and Assessing the impact of GDPR on debt management.

Why don’t customers pay?

First, it's worth noting that the majority of people pay their dues, broadly, on time. But for the rest, it’s possible changes of circumstances or just the everyday squeeze on cash means they may be short on funds, they may dispute the debt, forget to pay or actively avoid paying.

Debtors will often have to make choices about which bills get paid. They may prioritise services they want, rather than those they need. They will make decisions based on their own circumstances. But despite knowing it won’t go away, people in debt are likely to:

• avoid engaging with creditors
• ignore reminders
• put off making decisions.

Companies currently manage this by applying pressure through repeated and escalating contact via letter, phone and sometimes doorstep visits. These techniques are applied using broad risk based collection strategies.  Some may have a few collections paths, some are more complex. However, these strategies may be limited if they don’t leverage what motivates customers to pay. For example, traditional collections processes may flex the content, timing and contact points based on risk, but the substance of each communication is broadly similar.  Typically, the content is process based, for example “if you don’t pay we’ll take legal action…” or “we’ll refer you to a debt collection agency”. But what does that actually mean to the customer? The consequence is unclear, or does not target that customer’s circumstances

What can companies do to maximise collection rates?

Put simply, collections needs to deliver meaningful consequence to those that are avoiding payment. Customers that can’t pay need a different approach, which we cover separately. To make consequences meaningful, we need to consider what motivates customers to pay. The main motivations can be distilled down to five:

1. Fear of losing access - “will I be disconnected or be unable to get future credit?”
2. Fear of financial penalty - “will it cost me more money?”
3. Fear of damage to reputation - “what will people think about me?”
4. Sense of social responsibility - “if I don’t pay, will someone else have to pay for me?”
5. Unwillingness to endure the ‘pain’ or inconvenience of having to rebuff ‘endless’ collection contacts.

Behavioural economics tells us that people are generally predictable. So if we know what they'll do and how they might react, we can design highly effective collection strategies. It's far better to articulate the consequences that you'll deliver and even better if these are meaningful to the debtor. In simple terms, don’t threaten to take away possessions that don’t exist!

How can tailored collections help?

Tailored collections determine the most appropriate collection and recovery path for each segment of debtor and align collections activity and messaging to maximise impact. There are three elements:

1. behavioural segmentation of customers - to enable messaging to be finely tuned to the above levers
2. fine tuning of the process and tone of messaging according to the customer’s propensity to pay
3. behavioural nudges to ensure that communications are read and actioned by more people.
   
   

These three components combine to increase the effectiveness of collections and improve efficiency. This means companies can collect more cash for less cost with fewer write offs.

For more information on implementing tailored collection strategies that deliver significant improvements in collections, as well as substantial arrears recovery please contact Niall Cooter or Stephen Tebbett.