Champion-Challenging Letter Strategies

In this series of tips, we will review best practices around Champion-Challenger testing of letters in collections strategies.

For organisations with sophisticated account management systems, testing and monitoring the effectiveness of different letters is conducted through Champion-Challenger testing. This is the process of selecting two statistically random sets of accounts and then performing different actions on the control (Champion) and test (Challenger) groups. Any difference in results must then be due to the different collections actions that were performed.

In Champion-Challenger testing of letter strategies, the following tests are recommended:

Letter Frequency
Just as it is important to test letter timing, it is also vital to test the concept of letter frequency. Some ‘old style’ collections managers advocate a letter strategy of ‘the more the merrier’, with the ‘gut feel’ being that if an account receives more than one letter per month, then it is more likely to pay.

This Champion strategy needs to be tested across all groups of delinquent accounts as results may vary by account segment. In particular the organisation needs to monitor improved collections results compared to increased costs of multiple letters and negative customer service perceptions.

It is quite common to find that strategies which include multiple letters in a month are most successful if they pinpoint specific accounts. Typical candidates for frequent letters would be high risk accounts, (i.e. low behaviour score), accounts at high levels of delinquency and First Payment Defaults.

It is not recommended that low risk accounts, (i.e. high behaviour scores), small balances or accounts with Promise To Pays, receive more than one letter per billing cycle.
Letter Tone
Just as it is recommended that organisations test letter frequency and timing, it is also best practice to test letter tones. All collections letters should be customised so that there is an appropriate tone and content matched to the level of delinquency, risk band, account status and so forth.

It is then possible to test what the customer reactions are to various changes in tones between letters. For example, does a harder tone letter sent to customers who previously received a medium tone letter produce better collections results? What is the impact on customer service complaints and attrition rates?

Champion-Challenger testing and monitoring of the appropriate measurements will provide invaluable feedback as to which tones of letters provide the optimum results for each group of accounts that are tested.

The next Tip of the Month article will examine additional tests that are recommended for Champion-Challenger testing of letter strategies.

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.