Letter Strategies — Part 4

In this series of tips, we will review best practices concerning the use of letters in collections strategies. In the previous tip we examined some of the selection criteria that should be used for collections letters strategies. In this tip we will review additional selection criteria that can be used to vary the type and tone of collections letters.

The additional types of data that can be used as selection criteria for collections letters strategies include:

• First Payment Defaults (FPD’s)
  These accounts should always be segmented for specific collections letters, with the tone varied by each level of delinquency. The definition of what constitutes an FPD is often confused by organisations. In this article the definition that is used is a delinquent account that has never received any payment whatsoever. Obviously these accounts can represent a high level of credit or fraud risk and so it is vital that they receive specific letters, which refer to the FPD status. Organisations often create a harsh tone for FPD letters, which can be a mistake, as it cannot be taken fro granted that all of these accounts are high credit and fraud risk customers. There will also be customers in this segment that have had their direct debits returned or cheques unpaid, due to bank error.

• Months on Books (MOB)
  Accounts should also be segmented by length of relationship with the credit grantor. Typically this segmentation is to split out new accounts from established accounts and a break of c. 4-6 months is typical. Accounts that are new to the company, but are delinquent, should be segmented for specific letters, which are typically educational in nature. This segmentation should be for 1 and 2-cyle new accounts after which, at 3-cycles and onwards, the accounts should be treated by other segmentation criteria, such as balance and risk. A number of organisations also segment out ‘loyal’ customers that with been with the organisation for a number of years. This should be avoided in a collections strategy and the ‘old-time’ customers should be segmented by the standard risk criteria for letters.

• Short Pays
  These are customers that have made a payment but it is below the minimum payment amount required to cure the account from collections. Thus these accounts are still delinquent, but they should get a ‘thank you but please try again’ type of letter, tailored for each level of delinquency.

This list of selection criteria to consider for collections letters strategies is not conclusive and in the next Tip of the Month, final segmentation criteria will be examined.

Stephen J. Leonard is Managing Director of PIC Solutions, the largest customer management solutions company based in the Southern Hemisphere. He has over 15 years of risk management experience in the banking and consulting industries at Chase Manhattan Bank and Fair Isaac International. He holds an AS (State University of New York), BA (University of Toronto), MBA (Adelphi University – School of Banking, New York) and is a member of the UK and South African Institutes of Credit Management.