Letter Strategies — Part 2

In this series of tips, we will review best practices concerning the use of letters in collections strategies. In the previous tip we examined how to establish a best practices framework for letter strategies, in particular, recommending that all letters are re-written on an annual basis.

In this tip we will examine the recommended frequency and timing of letters that are sent to delinquent customers.

• Letter Frequency
  It is standard practice to recommend that customers receive no more than one letter per month. It has been established that merely bombarding customers with letters has a diminishing response rate and can even lead to the opposite reaction -customers get so angry they deliberately pay this debt last.

  For this reason, it is recommended that facilities enabling collectors to generate letters themselves be disabled, as frequently these collector issued letters get abused, particularly if collectors are on incentive schemes.

  Accordingly, only system-generated letters should be utilised, unless the purpose is for tracing, which does require some forms of manual contact methods.

  Even though the suggestion is that there is a one letter per billing cycle rule, it is also important that all material actions and changes to the status of the customers account are communicated. Thus each time a milestone is approaching regarding the delinquency, then this should be communicated.

  Typical actions and milestones include:

  • Negative reporting to credit bureaux
  • Permanent account blocking
  • Authorisations blocking
  • Handover to external agencies

   

• Letter Timing
  The timing of when letters are sent out is also vital. If letters are sent too close to cycle billing, then unnecessary costs may be incurred due to accounts self-curing in early stages of delinquency.

  In addition, it doesn’t make sense to send letters out so late that by the time they have been received, the account has cycled delinquent again.

  Typically, in established markets it is assumed that letters will be received within 5 business days and in emerging markets the figure can range from 10 business days and higher.

  In markets where customers often live from payroll to payroll, letters are often generated to coincide with when customers will be paid, so as to be at the ‘top of mind’ when there are available funds. This is straightforward if people are paid on a monthly basis, at the end of the month, but a lot harder if employees are paid weekly or bi-weekly.

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.