Low Delinquent Amount Accounts

Last month we discussed tips to manage small balance arrears. In this month's Tip we consider how to effectively manage low delinquent amount accounts. This is a different account condition to small balances, as only the arrears amount is considered low, not necessarily the account balance. Typically, low delinquent amount accounts are customers that have aged into delinquency after having paid less than the requested instalment.

The challenge for collections managers is how to effectively manage low delinquent amount accounts. This entails combating attrition by maintaining customer service for 'good' early stage accounts, whilst minimising subsequent write-off losses. The following tips are used by leading consumer lenders to reduce the number of low delinquent amount accounts:

• Define a payment tolerance percentage
  By setting a payment tolerance level, the instances of short-payments will be reduced. A payment tolerance is typically set as a percentage of the payment requested. As an example, a tolerance of 95% means that a payment of at least 95% of the instalment value is required for the account to be considered up-to-date (i.e. not age into delinquency).
  
  A payment tolerance percentage of less than 100% means that short-paying accounts will be considered up-to-date even though they have paid less than the full instalment. The small arrears amount is typically stored, but the account will not be considered as delinquent. In sophisticated account processing systems, this functionality is standard and parameterised.
  
  
• Identify and address reasons for short-payments
  The reasons why customers short pay their accounts should be investigated and analysed. Short-payments may be due to customer service issues pertaining to fees or charges. A customer may be reluctant to pay late fees where a late payment was posted by the organisation. In some instances customers may be unaware of additional fees, such as insurance, and are only aware of the monthly instalment due. Statement design is thus an important driver of minimising short-payments.
  
  A lender may consider reversing the fees or charges where the customer is not at fault or where a genuine error was made. The processing system should therefore enable fee reversal, balance correction and delinquency correction.
  
  
• Define a low value arrears collections threshold
  Some institutions have a minimum delinquent amount threshold. This defines the minimum delinquent amount that an account can enter collections for and is typically stated as a nominal value. For example, a threshold of $25 means that an account will only be flagged for collections actions if the arrears value is greater than or equal to $25.

Watch this space for the next PIC Solutions Tip of the Month!

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.