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15 February 2021
Last week, the FCA reported that 1 in 4 UK adults are at risk of falling into debt problems in 2021.
The report suggests there are now 27.7 million adults with "characteristics of vulnerability" such as poor health, low financial resilience or negative life events including Covid-19 job losses and redundancies.
The scale of the problem is unprecendented. That's why designing an effective strategy for customer segmentation is more important than ever - for creditors, for customers, for debt collection agencies and also for enforcement agents on the frontline.
So what will be the best way to segment unpaid debt in 2021? We caught up with Marco Pace at Arum Consultants to find out more.
What is customer segmentation and why is it important?
Segmentation is a way for creditors to set the best approach to engage with their customers, based on their customer’s situation. This is beneficial for two reasons:
Firstly, it allows us to identify those who are vulnerable because of low financial resilience, income loss, complex debt arrears and many other reasons which would make it counterproductive to seek payment plans. Instead, these cases should be given breathing space (forebearance) and also be referred to debt advice charities such as Citizens Advice or StepChange.
Secondly, we identify customers who hold no genuine reason not to pay their bills and invoices so we can place more focus on those when designing a collections strategy. Concentrating our focus on this segment not helps us to collect more debt overall but it also protects the creditor brand from reputational risk and those most vulnerable in a time of need.
Traditionally, segmentation has been managed by balance value and propensity to pay based on CRS data. Every company that I have worked with who have implemented segmentation have witnessed an uplift in performance.
However, the traditional and most commonly used segments need to evolve and expand in order to ensure that creditors continue to benefit from adopting the right approach for the right customer.
Those who continue to implement the one-size-fits-all approach will continue to witness no benefit, whilst this approach can only leave you open to customer dissatisfaction and potential complaints, not to mention the overall cost of wasted activity due excessive time spent of low balances or customers who may never pay.
There are a number of other ways to segment your portfolios, some of which can be based on internal data held from prior activity whilst other dimensions can be appended from data suppliers.
Both your internal and external teams can really benefit from designing letters and strategies which draw upon prior details such as previous disputes raised, first or numerous missed payments, age group or initial credit/risk score.
Postcode data can also be utilised based on temporary or long-term local issues, be it the rate of unemployment or any event such as local flooding where an empathetic approach may be required, so the enforcement and collection agents are ready with a responsible, proportionate and empathetic approach which ultimately proves so much more effective than a uniform solution.
It’s fair to say that firms adopt different approaches to customer segmentation. This is often based on their in-house expertise, internal capacity and the incentive structures that sit between the client, their customers, the enforcement agency and the agents themselves.
One option is to begin the process of segmentation at the customer take on stage once their credit risk process has been applied. This is where companies set the whole customer journey from the point of sale based on their credit risk score or balance.
This allows them to act upon high-risk customers quicker and more effectively, as well as potentially moving these to an external agency earlier in the process compared to a low risk low balance customer who they may allow to self-cure before pursuing.
This differs from a one-size-fits-all approach where everyone despite their credit/risk score will receive the same correspondence, the same level of activity and work through the same process timing which can reduce the opportunity to collect, or increase internal an external costs where payments may have been made anyway with minimal outbound effort.
Where no internal segmentation or scoring has been applied, creditors can use external agencies to do this for them, but it does speed up the process if internal activity is applied and agencies know exactly what they are working with from the outset.
There is also valuable data that the creditor will hold which the agency may not be able to access or know at the point of take on.
For example, on a motor finance shortfall debt, the reason why the customer no longer holds the vehicle could be crucial in how the agency engages with the customer. Was the vehicle voluntarily surrendered? Did the customer voluntarily terminate, or did the lender have to go to court to obtain a Right of Goods (ROG) order to enable the repossession.
The same can apply to final utility bills. Was the reason for the final bill a change of supplier, or change of tenancy? On business cases did a disconnection take place? Did the customer originally contract to the supply or were they classed as a deemed contract?
All the above can help the agencies segment and adopt the right approach which will reduce disputes and queries prior to then being able to negotiate payment.
The Covid-19 pandemic has underlined the importance of an effective segmentation strategy in the credit and collections sector. For example, as a result of the pandemic, many creditors should be considering segmentation by occupation.
That’s always something that people have asked for on application forms, but it’s really been underutilised as a dimension by which customers can be broken into meaningful segments as part of the collections process.
For example, we know that those in the hospitality, retail or travel industries have been hardest hit by the pandemic with a large number of redundancies and furloughed jobs in these sectors – that’s something we would want to identify during the collections process.
On the flip side, other sectors have flourished as a result of the pandemic. One example might be takeaways where revenues have increased during lockdown periods so you would anticipate these businesses would be more able to pay outstanding utility bills or business rates.
As such, segmentation by occupation and industry is likely to be important going forward. Furthermore, we know that as a result of Covid-19 there will be many people who are currently in arrears due to income loss who have never previously had debt problems.
For those matching this description, an effective segmentation strategy will be key. Whilst some of these people will be proactive, others may not engage as we know that there is still a stigma attached to debt that prevents people from coming forward.
Part of this problem is public perception. Too many people still picture bailiffs as tall, intimidating men who use bullying tactics to reclaim unpaid debt. Actually, these days the most effective debt collectors are usually resolving debt via telephone, SMS or modern digital technology before the problem reaches the doorstep.
There has been a great deal of progress on that front. However, I feel the industry still needs to work harder with both regulators and the third sector to shape the public perception of the trade and explain the value of debt collection to society as a whole.
In terms of segmentation what we may see is that the high propensity to pay segment may be split down further based on occupation, industry or various other factors. Equally, this same approach may be used for the low propensity to pay segment, so that tailored approaches can take precedence over a one-size-fits-all default process.
In both cases, segmentation will typically revolve the person's individual circumstances and the reasons for why they're in debt. At present, we tend to find this information out during the collections process, when in reality we need to find this out beforehand.
Not every debt collection agency or creditor will choose to adopt a segmented approach as it requires talent, commitment and ultimately resources to design and deliver this type of collections strategy.
However, in terms of customer focus it helps that agent on the phone or at the doorstep explain the reason why they are there in the first place.
For example, it you have a case where there has been a previous dispute, if you know previous payment history, the goods/services involved, the reason for default or a previous record of vulnerability you can progress to a negotiated resolution far quicker.
In the past I have seen different debt types in a single portfolio and the agents on the frontline have quite rightly asked for much more information from the creditor in order to resolve debt more effectively.
Find out more about our customer segmentation strategies for debt collection agencies.
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