First Payment Defaulters

In the two previous tips, we reviewed best practices for managing first payment defaulters, (FPD’s), in both emerging and developed credit markets. In this tip, we will examine additional considerations when collecting on FPD’s in all markets.

As FPD’s represent customers who have failed to make their very first payment, they can be considered to be a high credit risk. This will be true for the majority of FPD’s, however it is also important not to ‘paint all FPD accounts with the same brush.’ The following types of accounts also need to be considered and managed when designing strategies for FPD collections.

Incorrect Mailing Address
An FPD can sometimes be the result of incorrect data capture by the credit grantor. This is particularly common for companies that offer instant or in-store credit, where turnaround times are particularly critical.
FPD collections strategies need to bear this in mind when dealing with these customers, as in this instance, the FPD situation has been created by the credit issuer. Inappropriate treatment at this early stage of the customer life cycle can lead to poor customer service and negative perceptions.

Ways to identify potential mailing address problems include using a returned mail flag on the customer’s account and also identifying instant credit accounts with a specific indicator. Accounts with these two flags can then be segmented for specific treatment.
Incorrect Direct Debit Set-ups
In some organisations, one of the major causes of FPD’s is incorrect set-up of the customers’ initial direct debit, (also known as a debit order). In this situation, the customer has become an FPD for no fault of their own and so great care needs to be taken to minimise any negative customer service issues.

Ways to minimise negative customer perceptions include: segmenting out all FPD’s with a direct debit and conducting customer-service style calls to verify if all of the direct debit details are correct. If the details have been incorrectly captured, then they can be rectified and all late fees and associated charges reversed immediately. If the returned direct debit is actually the result of non-sufficient funds, then the customer needs to be educated. In addition, the direct debit amount can be amended if it has been set up for the full balance, so that the customer only has to pay the minimum payment, which is more affordable.

Obviously, the optimum situation is to have a zero-failure rate due to incorrect data capture and organisations that focus on improving the data quality of direct debits benefit from lower collections costs and improved customer service.

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.