»» insights

Better Collections Performance

in a Time of Crisis
Collectors are deploying collections scoring to
realize a rapid ROI in a time of intense pressure

Number 11— December 2008

Rapid growth in loan and credit card delinquencies has collections organizations under pressure and
taking measures to increase capacity to handle the extra volume. The efficiencies gained in recent
years through improved automation and well-designed strategies may not be enough to meet this
challenge. In some cases, creditors may even be forced to take measures that raise volume worked
at the expense of other key performance measures such as cost, collected amount and attrition.

The present economic crisis doesn’t have to result in less efficient collections organizations, however.
By adopting collections scoring, creditors can successfully meet the volume challenge, while also
continuing to move their other key performance indicators upward.

This paper explores:

•  How collection scores improve collection strategies

This paper describes the specific improvements •  Score use in early-stage collections
that FICO® Collection Scores can provide
•  Score use in late-stage collections
in early- and late-stage delinquency
•  A quick way to deploy scoring
management, and provides an example of
•  The economics of collection scores
rapid return on investment.

www.fico.com Make every decision countTM

Better Collections Performance in a Time of Crisis

»» insights
»» Now is the right time In this time of economic stress, collections departments are struggling to cope with rising volumes
to raise performance and risk levels. While handling the increased volume, their operations are still being held account-
able for other key performance indicators, including cost, collected amount and attrition.
to the next level
Unfortunately, some of the measures collections organizations may need to take in order to add
capacity could move them away from the efficiencies gained in recent years through improved
automation and well-designed strategies. For instance, adding collectors improves volume, but
given the learning curves for new hires, collected amounts per contact may drop while attrition rates
resulting from poorly handled contacts may rise. More outsourcing can be helpful, but being able to
pinpoint which accounts to keep and which to outsource is critical to the bottom line. And although
the stakes are higher than ever for these decisions, there’s less time than ever to make them.

There is a way creditors can improve their ability to manage today’s rising workloads while continu-
ing to move toward ever greater efficiency. By adding ready-to-use analytics to their collections
strategies, creditors can immediately sharpen segmentation of delinquent accounts and targeting of
treatments. Knowing which early-stage accounts are likely to roll and how much late-stage accounts are
likely to pay, they can focus resources where they will produce the best results and biggest impact.
Scoring can also improve the utilization of resources added through additional hiring or outsourcing,
by guiding collector assignments and agency outplacement strategies.

FICO® Collection Scores are a suite of predictive models that forecast the behavior of delinquent
early-stage and late-stage accounts. The scores, which analyze master file data elements commonly
available in any collection system, can be deployed quickly on portfolios of any size. Creditors can
generally expect a 15-20% improvement in strategy effectiveness compared to judgmental segmen-
tation of accounts.

This paper discusses how FICO Collection Scores improve collections strategies. It describes the
specific improvements scoring enables in early- and late-stage delinquency management, and
provides an example of rapid return on investment.

Figure 1: Rising delinquency rates in the US

6
Credit card loans Consumer loans Residential loans
Mortgages 90+ days
5 Increase
Decrease
DELINQUENCY RATE

2 Bank cards 60+ days

Increase
Decrease
1

0
2004 2005 2006 2007 2008
YEAR
Delinquencies are rising across most loan types. Almost 3/4ths of counties across the country had higher
delinquency rates in the first quarter of 2008 compared to the
same period the previous year.
Source: The Federal Reserve Bank

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Better Collections Performance in a Time of Crisis

»» insights
»» Collection scores To handle large volumes of delinquencies efficiently, whether with current staff or an expanded
improve collection set of resources, collections organizations must work smarter, choosing carefully where to put
their efforts.
strategies
Fortunately, most creditors today have progressed beyond a “one size fits all” approach to collections.
Many already use some type of collections or behavior score to segment delinquent accounts in
order to determine when they will enter the collections process, with higher-risk accounts entering
sooner than lower-risk ones. Few creditors, however, have taken the next step of using scoring after
entry, throughout their collections strategies, to determine which accounts to work, and how and
when to contact them, for maximum results.

Scoring is extremely beneficial when used throughout the collections process, because it provides
increased insight into risk and analytic precision for making very complex decisions such as:

•  Given the number of calls that can be made in a day, how should calls be allocated to accounts?
•  Which accounts should be assigned to the best collectors?
•  How much money should be spent locating this customer?
•  Should this inbound call be routed to the IVR or to a collector?
•  What settlement rate should be offered to this account?
•  How much should be spent on letters?
•  Which accounts should be placed with a collection agency, and when?
•  How much should I pay my agency to collect pre-charge-off accounts?
This improved decisioning enables collections operations to boost the rate of return from the
amount of effort expended. As shown in Figure 2, creditors can use this improvement to successfully
manage rising delinquency volumes, and do so in a flexible manner that suits their business.

Creditor A can’t afford to expand its collections

operations, so with rising delinquency volumes, it
reduces the percentage of delinquent accounts
Figure 2: Working smarter being worked. But thanks to collections scoring, the
percentage of collectable dollars achieved—a key
100%
performance metric—remains steady.

Creditor B expands staffing and outsourcing in

order to continue working the same percentage of
% OF COLLECTABLE DOLLARS

75% B
A delinquent accounts even as volumes rise.
Collections scoring enables the organization to
increase the percentage of collectable dollars it is
50%
Current collections strategy achieving, which more than compensates for the
increased collections expense.
Score-enabled performance
improvements
25% A Working lower % of accounts In both cases, collection scoring is helping to focus
B Working same % of accounts efforts where they will deliver the best results and
biggest impact. Let’s look at first early-stage, then
late-stage delinquencies, to see how it works.
0% 25% 50% 75% 100%
% OF ACCOUNTS WORKED

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Better Collections Performance in a Time of Crisis

»» insights
»» Early-stage score- For early-stage delinquencies, focusing resources where they deliver the best results and biggest
enabled improvements impact means:

1. Avoiding expenditure on likely to self-cure accounts

2. Accelerating action (by experienced collectors) on high-risk, likely to roll accounts

Today most collections strategies are based on general risk measures such as time delinquent
and delinquent balance. Such approaches are insufficient to focus resources where they are most
needed. They result in collections costs that may no longer be affordable by creditors, and they are
producing diminishing results in the current credit environment.

Collections activity may be concentrated, for example, on accounts that have been delinquent the
longest. In a stressed economy, however, fewer accounts previously considered low-risk because
they have been delinquent a short time may be able to self-cure. The creditor who allows a delin-
quency to reach 60 or 90 days runs the risk of making contact with the customer well after other
creditors. On the other hand, some accounts considered high-risk because they are several cycles
overdue may still self-cure. Treating them too soon or too harshly could result in the loss of valuable
customers who carry significant balances.

Another common collections strategy—assigning treatments with the goal of achieving the highest
promise-to-pay rate—is even more inefficient. It focuses collections resources on customers who are
not only most likely to make payment promises, but also to self-cure. In a time of rising delinquency
volume, when every contact ought to count—that is, to prevent rolling or otherwise produce a posi-
tive change in customer behavior—this activity is wasted.

The key to better focusing resources and improving results in early-stage collections is knowing
which accounts are likely to roll and which aren’t. FICO® Collections Scores provide that insight. The
scoring suite includes scores for loans and credit cards that predict respectively which 1-cycle and
2-cycle delinquent accounts are likely to roll to 3 cycles.

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Better Collections Performance in a Time of Crisis

»» insights
As shown in Figure 3, these scores are an additional dimension of risk assessment, which can be
used with existing measures to improve segmentation precision. The table to the left shows a typical
early-stage collections strategy, where the creditor is focusing its resources on the high-balance
accounts that have been delinquent the longest. The impact of FICO® Collection Scores is shown in
the table on the right. Scoring enables the creditor to create more risk segments and assign a wider
variety of treatments.

Figure 3: Sharpening segmentation

Sample early-stage collections strategy
No collections scoring With collections scoring
Delinquent Days delinquent Delinquent Collection Days delinquent
balance 1 5 10 20 30 balance Score 1 5 10 20 30
<625
< $1000 < $1000 625 to 680
680+
<625
$1000 to $1000 to
$5000 $5000 625 to 680
680+
<625
$5000+ $5000+ 625 to 680
680+

Key High risk: Call Medium risk: Call Low risk: Call Very low risk: Lowest risk:
(Most experienced (If capacity allows; Send letter Allow to self-cure
collectors) if not, send letter) (Monitor for change in risk)

Knowing which accounts are most likely to roll (low scores), creditors can:

•  Act early to prevent indebtedness from growing.

•  C
 oncentrate their best efforts on those accounts with the greatest potential to generate sig-
nificant losses. Create strategy rules that direct these accounts into the queues of experienced
collectors, who might otherwise be focused exclusively on delinquencies of longer duration.
•  R
 eassign accounts to different segments for accelerated treatment when the account’s score
decreases, indicating a significant increase in risk of rolling.
Knowing which accounts are least likely to roll (high scores), creditors can save the expense of
contacting and avoid the risk of annoying customers who will probably pay without additional
inducement. That frees up resources to handle the increasing numbers of delinquent accounts that
do need prompt action.

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Better Collections Performance in a Time of Crisis

»» insights
Overall, being able to more precisely determine risk level enables creditors to allocate resources
efficiently—spending the least amount necessary to achieve the desired result. Medium-risk delinquen-
cies, for instance, needn’t be treated with high-cost phone calls; they can be handled with less
expensive methods such as emails, letters or statement messages.

Figure 4: Higher performance in early-stage collections strategies

Score-enabled change Impact on key performance indicators

Stop treating early-stage accounts
likely to self-cure
Treat roll-likely high-risk accounts sooner; Collected
Assign them to most skilled collectors
Volume Resources previously spent on accounts that would have cured without contact
are available to handle increasing numbers of delinquencies
Cost Savings from reduced numbers of calls and letters
Attrition Allowing accounts unlikely to roll the opportunity to self-correct eliminates
friction that can cause customers to churn
Increase likelihood of collecting from delinquent accounts before other
Amount creditors do
Assignment to most experienced, skilled collectors increases collection amounts
Attrition Treatment by more experienced collectors increases opportunity to retain
roll-likely valuable accounts

»» Late-stage score- For late-stage delinquencies, focusing resources where they deliver the best results means mak-
enabled improvements ing wise decisions about when to spend money and where to assign accounts. Three important
principles are:

1. Allocating additional costs only where it is likely to produce an adequate return on investment
2. Keeping most-likely-to-pay high-potential accounts in-house
3. Outsourcing unlikely-to-pay accounts sooner

In the current economic environment, increasing numbers of accounts are reaching late stages
of delinquency and the velocity of bad debt entering the portfolio pipeline is accelerating. This
situation poses a serious cost management problem for collections organizations. Because trying to
collect on late-stage delinquencies can be expensive—requiring outlays for phone calls, skip tracing
services and external data—creditors must make smart decisions about which accounts to pursue.

FICO® Collection Scores for credit cards include a late-stage score that predicts the percent of balance
that will be collected on a 3+ delinquent account over the next six months. Accounts with higher scores
are more likely to pay than accounts with lower scores. Creditors can therefore use the score to
create strategies that allow costly activities such as skip tracing to be performed only on those
accounts likely to be worth the expense.

Many creditors have in recent years turned to early-out strategies to control collections expense,
and the trend is increasing as delinquency volumes rise. But these outsourcing decisions should
be made based on the value of the account—if not, the collections organization may be throwing
away revenue.

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Better Collections Performance in a Time of Crisis

»» insights
The table below shows an example of how FICO late-stage scores can help collections organiza-
tions make smart decisions about which accounts to outsource and which to keep. It shows the
numbers of late-stage accounts in a sample delinquency portfolio at specific account balance
and scoring ranges.

The accounts with the lowest scores are the least likely to pay. The creditor might choose to out-
source those with significant balances without delay, avoiding further internal expenditures. At the
same time, the creditor could keep accounts with high balances and high repayment potential
(highlighted segments) in-house and focus its best collectors on them. Moreover, the productivity
of experienced collectors will likely be even higher because they have at hand an accurate, objec-
tive projection of how much they’re likely to obtain from each account they’re working.

Figure 5: Keeping the right accounts in-house

Strategy: Keep high-value accounts (high balance + high likelihood of paying)

Account Balance

Cycle 3 late-stage
<$500 $500–1499 $1500–2499 $2500–3499 $3500–4999 $5000+ Total
collection score
< 220 400 305 395 80 45 35 1,260
220-234 225 230 360 75 50 45 985
235-249 200 330 560 100 95 60 1,345
250-264 175 460 840 225 100 80 1,880
265-279 85 500 1,300 410 145 105 2,545
280-294 35 415 1,570 545 290 140 2,995
295-309 15 145 1,350 750 475 255 2,990
310-324 10 25 850 775 610 390 2,660
325-339 5 10 300 560 625 395 1,895
340+ 1 4 70 230 580 560 1,445
Total 1,151 2,424 7,595 3,750 3,015 2,065 20,000

Higher performance in late-stage collections strategies

Score-enabled change Impact on key performance indicators
Spend money only where it is likely to produce an Cost Eliminate unnecessary purchases of external data and services
adequate return on investment

Keep pay-likely accounts with highest projected repayment Collected Maximize return on investment from collections
amounts in-house while outsourcing less likely/less Amount
valuable accounts

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Better Collections Performance in a Time of Crisis

»» insights
»» Quick score deployment Creditors can easily bring the precision of analytics-based decisioning into their collections
operations. FICO® Collection Scores are deployable through a scoring engine compatible with
most collection systems; they can also be deployed directly into collections strategies through the
FICO® Debt Manager™ 7 solution. Using Debt Manager’s graphical RouteMaster strategy design tool,
business users simply drag and drop collection score requests from a library of preconfigured and
user-created elements into their workflows. Existing Router functionality allows users to sequence
events to segment delinquent accounts by score. They can combine collection scores with other
risk data, calculations and scores, with no need for IT assistance.

Figure 6: Dragging and dropping collections scores

»» Rapid and FICO Collections Scores not only help creditors manage rising delinquency volumes while main-
continued ROI taining or even raising their performance metrics, they drive bottom-line improvements. By using
scoring throughout the collections process to work both early-stage and late-stage delinquencies
smarter, creditors can very quickly begin to reduce the number of delinquencies that result in
significant write-off losses.

A very conservative projection of just a 1% improvement in charge-off rate could lead to millions
in annual savings, as shown below. For lenders who have never used scores before, even for entry
strategies, the improvement will be even larger.

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Better Collections Performance in a Time of Crisis

»» insights
Creditors can also boost their ROI from collection
scoring over time. Collections organizations with
the FICO® Debt Manager™ solution, for instance, can
Figure 7: Return on Investment Example
use graphical tools to quickly adjust score cutoffs
Number of active accounts on file 2,000,000 and modify collections workflows and treatments.
They can compare various strategies, measuring
Cycle 1 accounts
relative effectiveness in champion-challenger con-
% of accounts entering one-cycle delinquency per month 4% tests (controlled tests within random, statistically
Number of accounts entering one-cycle delinquency per month 80,000 significant production populations). New “challeng-
Average balance per one-cycle delinquent account $3,000 er” strategies that outperform existing strategies can
be promoted to “champion” status and immedi-
Total portfolio balance entering one-cycle delinquency per month $240,000,000
ately rolled out across delinquency portfolios. By
Charge-offs performing successive champion-challenger tests,
Total charged-off amount per month $24,000,000 creditors learn which collections actions produce
(assuming 10% of one-cycle accounts charged off )
the best results in their specific portfolios at various
Reduction in monthly charge-off amount due to FICO® Collection $240,000 score bands. They gain an objective, consistent
Scores (assuming 1% reduction, or 9.9%, of one-cycle accounts charged off )
mechanism for continued improvement as well as
One year expected reduction in charge-off amount $2,880,000
ongoing evaluation of strategy effectiveness in a
changing economic environment.

»» Conclusion At a time when many collections organizations are facing unprecedented volumes of delinquencies
along with resource constraints, FICO® Collection Scores are a rapid, easy way to accomplish more
by working smarter. Scoring helps collections increase efficiency amid growing workloads because
they pinpoint where to focus early-stage and late-stage collections treatments to produce the best
results and biggest impacts. They leverage human expertise, enabling both the collectors making
the contacts and the managers creating the collections strategies to perform at higher levels. As a
result, volume isn’t the only key performance indicator that rises to new levels; collections organiza-
tions can continue improving other metrics such as cost, collected amount and attrition, metrics
that directly contribute to the company’s bottom line and financial strength.

To get the most out of collections scores, careful consideration should be given to how analytics
are applied within your operation. FICO business consultants have decades of knowledge gathered
from managing their own collections shops, as well as consulting with dozens of lenders around the
world. We have developed proven methods that can increase the productivity of all aspects of your
collections operations, including how best to deploy collections scores. Items such as dialer man-
agement, identifying the right key performance indicators to track, and adjusting the strategies to
leverage scores are just a few examples where FICO consulting can find ways to lower costs, manage
increases in volumes, and increase collections for our clients.

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