Banks today are turning attention to their collections departments to improve efficiencies. Small and big banks alike are faced with non-paying customers, but their methodology and resources devoted to tackling the problem may vary. A personal touch, alongside useful data, technology and analytic linking can prove to be the key in turning the collections function into a competitive advantage.

Many small banks are still concerned that they either cannot afford or do not have the internal resources to be able to use many of the automated and time-saving collections strategies and services used by the larger banks. LexisNexis® Risk Solutions has observed that when small banks invest in the collections function, more dollars are collected, which begins to impact profitability.

In LexisNexis Risk Solutions on-going Q&A series, Linda Straub Jones, director of collections compliance at LexisNexis Risk Solutions sat down with Brian Riley, of Mercator Advisory Group, to discuss 2018 first-party collections trends for small- and mid-sized banks.

Linda Straub Jones, LexisNexis Risk Solutions: Brian, I've talked to a wide range of banks and their collection departments, and I'm still seeing a big difference in how banks handle collections. Share your thoughts on what a first-party collections department looks like today in a big bank. What are some of the lessons small- and mid-sized banks can learn from the big banks?

Brian Riley, Mercator Advisory Group: Similarities exists, but they certainly vary in scale.  First-party collections is a communications-intense area and it requires trained collectors on work stations to service accounts. There comes a time in the lifecycle of an account -- and it should be determined through a scoring process -- when a bank starts to initiate personal contact with a customer. That's where people-skills come into play. A collections department's first objective is to parse out the reason for a delinquency, which is critical in dealing with the customer. Typically, this is supported by an online system, although there can be differences, depending on the bank. 

Scoring is very important because it allows the collections function to develop a strategy to break joint accounts into very granular units. As a collections professional, you can then decide at which point you begin to use automated technology to reach out to customers, what your dunning strategy should be, and to what extent you should have bucketed workflows to deal with these common problems.

This affects large and small banks -- if you're looking at what's in collections at a given time, it could be 10 percent of a bank's receivable in a normal business cycle. 

Straub Jones: One common complaint we hear from our first-party collections customers is collector turnover, and poaching of good collectors. That high turnover will impact productivity, so it is important for collections professionals and staff to remember that collections is part of the customer experience. Data and technology can ease that process. How can small- to mid-sized banks retain their collections staff?

Riley: People sometimes view collections as a less attractive area to work in. The tasks can be somewhat mundane and repetitive, and that wears employees after a while. There are certainly people who just get job burnout.

However, well-run organizations will have good training processes in place, and will hire the right people on the front end. Something that typically works in retaining employees is having obvious and notable corporate progressions, hiring and then promoting from within. That's very important. You also want to reward employees for accomplishments, no matter how small. One of the great things about collections is that you can really measure performance. It's like baseball. There are so many metrics that you can manage, whether it's contact rate, effectiveness rate or promise rate. It is also very important for collections functions to have the right data and technology, so that people can do their jobs as efficiently as possible. Just making sure that a collections professional has the right party contact is critical.

Straub Jones: We've heard over and over that small banks are struggling to grow their business.  What is your advice, specifically for these small and mid-sized collections departments, on how they can grow their business? Are there certain key areas that they should focus on?

Riley: One of the big challenges when you look at the large versus smaller institutions that the whole credit card business is an economy of scale to play. If you look at the U.S. market, there are about 4,000 card issuers. But of those 4,000 card issuers, it's the top 10 that control 80 percent. So, you have all the other small banks in the United States chasing the remaining 20 percent of volume.

The question is, where can you build a huge infrastructure that can bring in people to manage the accounts? If I'm a big bank dealing in "Main Street America," I can hire large amounts of collectors and put up huge operations in areas like Tampa, Florida or Sioux Falls, South Dakota. But how can a smaller operation compete on that scale?

A large bank has the ability, with these hordes of collectors, to get in fast on the customer and be one of the first callers they have collecting on unpaid debts. Unless the smaller bank is able to get in at the same time, they might just be following the secondary money that a customer has. 

So, there are ways in which automation comes into play. If you look at the platforms that are out there, they offer a good springboard from which many of the smaller collections operations can compete. While they certainly don't have the same scale, the playing field can be leveled -- not just in collections but through the whole credit cycle with an account.

Straub Jones:  In many banks I've seen that the collections department is set off to the side, almost alone on an island. We help small and mid-sized banks strategically align the collections function with the rest of their business through the combination of data, technology and machine learning. What are you seeing and hearing?

Riley: No doubt, collections should be viewed as an important lending function. It's not just the clean-up department. Over the years, the collections industry has done a lot of self-improvement work and learned quite a bit about itself. One of the best approaches I have seen is to look into the accounts that aren't being paid, see what the team missed, where the opportunity is and where the cost is. A well-thought collections strategy is a must-have, whether you are a big bank or a small to mid-sized bank, that takes into account the whole end-to-end process in terms of how a customer is treated, before we say an account is lost.

Straub Jones: One common theme I hear when I talk to banks is that they are all spending more money on compliance activities in response to changing regulations. As we head into 2018, and look back at 2017, quite a bit has happened with regulations, law suits and settlements. What, in your opinion, was the biggest focus in 2017 for first-party collections?

Riley: I think on the first-party side there has been a great deal of focus, and a sensitivity to protecting customer data. That is becoming more important than ever, as we've seen with corporate cyber breaches.

The integrity of data has become more important as well. The tables have been turned substantially by the Fair Debt Collection Practices Act and other rules saying, "if you're going to send something out for collection, it has to be pristine, and you have to be able to have valid data on it." Of course, you have the regulations on treatment that come into play, which vary by federal, state and local markets.

So, overall, I'd say the increased awareness of data vulnerabilities was an important step for the collections industry to take in 2017, and that will certainly lead us in 2018 with a stronger footing on the issue.

Straub Jones: Thanks so much, Brian, for your insights on first-party collections. As we approach the New Year, it's of paramount importance that we look back on what has worked – and what hasn't – in collections and make changes accordingly. I think one misconception in our small to medium-sized banking customers is that they are too small to invest in some of the data automation that the bigger banks participate in. But that's simply not true – most data companies have programs in place geared toward smaller businesses. It's just a matter of knowing to ask for those programs. Small- and mid-sized banks can learn a lot from their larger counterparts, and now is a great time to put action plans for 2018 in place.