Identifying the optimum collections strategy through the use of champion-challenger analytical tools
The speed at which the credit crisis is developing into a global recession has resulted in many collections operations struggling to cope with such a dramatic change in economic and borrower dynamics.
While it is recognised that the best customer acquisition risk management strategies need to be constantly reviewed and amended to ensure that they are performing optimally, the same process is not being applied to collections strategies. ''Now, more than ever, collections success depends on the ability of organisations to ensure that at any given time, the most optimum strategy for each debtor is being applied."
The key is to develop test and learn methodologies that enable new strategies or treatment paths to be tested in real time with no impact to ongoing collections activity. This allows any downside risk of change to be minimised whilst allowing for the upside benefits to be determined using factual evidence.
What is champion-challenger testing?
Champion-challenger is terminology used to describe the way in which the
existing collections strategy, known as the champion, is routinely tested against an
alternative approach known as the challenger. To ensure accuracy, the challenger
should be tested in a live environment but controlled to avoid financial loss. Thus
the challenger is developed and designed using recent customer information and
implemented on a small, statistically robust sample with the results closely
monitored.
If the challenger strategy is shown to outperform the existing or champion strategy, the challenger strategy can then be rolled out to a much larger proportion of the portfolio for further validation, or may even become the next ‘champion’ strategy on the majority of the portfolio. It is equally important that the successful new strategy be deployed quickly so as to maximise benefits, whilst allowing for the design and implementation of the next challenger in line.
This constant search for improvement in process is critical in the current
deteriorating environment, where a borrower’s circumstance may change
significantly, causing them to react and behave differently to varying contact
strategies. Adapting strategies regularly also prevents debtors from “learning” the
standard collection process and avoiding timely settlement.
The six key considerations for champion-challenger testing
In order to successfully develop a robust development process there are several
separate stages that need to be addressed:
1. Planning which includes selection of the target process, documenting the
expected financial benefits and operational considerations of its introduction.
2. Review the strategies to be challenged and explore current weaknesses
3. Design the challenger strategy and select the sample size and risk level
4. Implement the champion/challenger test
5. Monitor metrics and compare challenger group to control group
6. Assessment of results and promotion of challenger if appropriate
Business case study
The benefits of a focussed collections business review can be significant.
In this case study, a large retail bank that had been using decision engine technology for several years (Probe SM) reviewed their collections process and identified that re-engineering their action and timings might be beneficial. A challenger therefore was developed to segment their base on a more appropriate manner but also to refocus the actions and timings to maximise customer impact. The business review looked at each step throughout the strategy and examined whether actions being taken were effective. The initial review compared against previous experience and the amendments to actions taken with a view toward more automation as well as improvement in payments received.
The overall results led to improvements throughout the delinquency cycle.
As an illustration the diagram below represents a single homogenous group of customers and their cure rates throughout the cycle, examined in line with the actions taken. The observed fall off in cure rates between day 3 and 13 was typical for self-cure rates observed on medium risk customers. In view of this, the first action taken on day 3 had little impact on the customer’s propensity to respond. The second action did have a significant and prolonged impact on the cure rate, whilst the third did show some impact but was too near the month end to sustain prolonged impact. The actions were reviewed with action 1 being removed, action 2 moved forward in the sequence to around day 8 and the third action being moved to day 20. The changes in the scenario led to advanced cash flow, fewer actions and an overall improvement in cure rate.
The collection status quo is no longer acceptable
As many countries slide into their first recession since the early 1990s, growing
numbers of consumers are experiencing unemployment and restricted access to
credit for the first time. Payment behaviour will be unpredictable and highly likely to
change as conditions get worse.
The collections status quo is no longer acceptable. For credit grantors, the need to
establish a culture of continuous collections improvement has never been more
necessary.
Modern collections systems are already providing many organizations with more
sophisticated default management capabilities such as highly granular
segmentation, individual collection strategies and better agency management.
The inclusion of champion–challenger test and learn techniques will improve a collection team’s performance and agility further still. At very little cost and risk, new strategies that more accurately reflect the changing customer landscape can be trialled in a controlled manner but with the advantage of using real data from real customers. The subsequent rapid replacement of old strategies by the new successful challengers will accelerate debtor rehabilitation and/ or mitigate losses by writing off un-collectable debt sooner.
The benefits are tangible and significant; reduced cost to collect, improved cash flow and reduced bad debt provision which all contribute to better profitability, an imperative of every business.
Mark Keyworth
Principal Consultant
Decision Analytics
Experian
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