Champion-Challenging Letter Strategies

In this series of tips, we will review best practices for Champion-Challenger testing letters in collections strategies. It is recommended that an organisation develops a minimum of 35-50 different collections letters, which subsequently need to be tested and monitored for results.

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 differences 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 Timing
Too many collections departments use a broad brush approach to letter timing and this ‘one size fits all’ strategy has many failings. It is best practice not to send all letters to all accounts at the same time. Thus the old-style collections practice of sending the 1-cycle letter on the 15th of each month and the 2-cycle letter on the 10th of each month needs to be challenged and improved upon.

The concept of ‘centring and tilting’ should be implemented, whereby if the organisation’s Champion strategy is to send letters to 1-cycle accounts on the 15th of the month, then the tilting included in the Challenger strategy will be to accelerate letters for some accounts and decelerate or eliminate letters for others. This tilting is driven by risk and the timing of letters can now be matched to much finer segments of accounts to include letters at 5, 10, 15, 20 and 25 days, with an additional group of accounts not receiving any letters at all.

Once the concept of centring and tilting has been proven within an organisation, then the next set of testing will be around the appropriate timing for the appropriate group of accounts. For example, should the very high risk customers be sent a letter at 1 day delinquent, rather than at 5 days? There are customer service considerations to be catered for in all letter timing tests, but also the impact on collections results and profitability is of major importance.

Accelerated issuance of letters may lead to improved collections figures; on the other hand it may alienate customers who then close their accounts. These two key measurements can be monitored within a Champion-Challenger testing environment and once the test has been conducted for a minimum period, which is typically 12 months, conclusions can be made.

Another important measurement in the timing of letters is profitability. Sending letters on an accelerated basis may increase collections results, but the overall cost of sending letters earlier may not justify the improved figures. The earlier the timing of the letters, the more letters will be sent, as fewer accounts will have cured.

Sending letters too early, especially to low risk accounts, can also be a waste of money as by the time the letter has been received by the customer, they may have already self-cured. In these cases, the accelerated letter has been a waste of time and money and it may have even created ill-will with the lower risk customers.

Some organisations have gone to the extreme of testing ‘call only’ collections strategies, whereby no letters are generated at all to customers who are contactable. The test concepts have been around what the savings in letter costs are over the reduced collections results.

Future Tip of the Month articles 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.