Letter Strategies — Part 3

In this series of tips, we will review best practices concerning the use of letters in collections strategies. In the previous tip we examined the recommended frequency and timing of letters that are sent to delinquent customers.

In this tip we will examine some of the selection criteria that should be used for collections letters strategies.

In the basic, ‘one size fits all’ collections letters strategies, organisations send a generic 1-cycle, 2-cycle, 3-cycle collections letter on pre-defined dates to all accounts. This approach clearly has its limitations as customers do not receive letters that are specific or appropriate to their collections situation. For example, there is a big difference between an account that is 1-cycle, has been with the credit grantor for 2 months, has short paid and is 35% over limit and an account that has been with the organisation for 15 years and is delinquent for the first time, with a balance of only $45.

In order to improve on this and create targeted communications, letters should be varied, in order to be more applicable to the accounts’ status. This is best achieved by using selection criteria to vary the type and tone of the letter. The types of selection criteria that can be used in collections letters strategies include:

• Delinquency
  This is standard practice, but organisations should also consider combining the level of delinquency with other criteria. Thus in addition to 1-cycle, 2-cycle and 3-cycle letters segmentation criteria can be implemented to create 1-cycle medium risk, 2-cycle high risk, 3-cycle low risk etc.
• Balance
  Accounts should also be segmented by balance, in order to receive specific balance-related letters. This would include very small balance accounts, which are below the organisations policy for sending letters to, (these will only receive a statement), and small balance accounts, which based on the company’s policies, are only going to receive a letter and no additional collections actions. Average balance and very high balance accounts should also be segmented. The average balance accounts will be further segmented by risk, PTP status etc. For very high balance accounts, it is typical to send specific letters from a collections supervisor.
• Behaviour Score/Risk Proxy
  Accounts should be segmented by their level of risk, which is best predicted by a behaviour score or if one is not available then a risk proxy should be used. Examples of risk proxies include the number of times that an account has been delinquent in a past period, the highest level of delinquency ever reached by the account, and so forth. By splitting accounts into c. 5 risk bands for 1 and 2 cycles of delinquency and c. 3 risk bands for 3+ delinquent levels, different letters, with different, more appropriate tones can be sent to each group of accounts.

This list of selection criteria to consider for collections letters strategies is not exhaustive and in the next Tip of the Month, additional 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.