Choosing Collection Software: A Buyer's Guide

Published in The Professional's Publisher

For years, banks were good guys when it came to collecting past-due payments. When a customer was late, the bank would simply type and send a standard letter. If the customer still didn't pay up, the bank would send another letter and then another.

That polite approach may work when economic times are good, but amid the current recession and rise in unemployment, smart banks are looking for alternative collection strategies to bring in the money.

Too late for probability ratings

One alternative is automated collection systems, software that kicks in when accounts are past due and it is too late to rely on probability ratings, notes Eric J. Christeson, chairman and CEO of Dynamic Interface Systems Corp. (DISC), a well-known supplier of PC-based loan servicing software.

Loan origination policies and credit screenings go just so far in reducing problem loans, says Christeson. And in recessionary times, credit reports may not accurately reflect an applicant's ability to repay. Once that loan is approved, the bank's loan management system is the only control it has over delinquencies and defaults. Says Christeson:

"The collector's principal job is to talk to debtors. Anything that distracts from this doesn't get the job done".

A new generation of systems

The latest generation of automated systems is designed to simplify loan collection and quickly bring nonpaying customers up to speed. By automating what has traditionally been a manual process, collectors and collection managers become more productive, explains Christeson.

For example, DISC's software module, COLLECTOR, which is used with the company's LOANLEDGER software, has been particularly useful for lenders that are servicing more than 300 loans and must cope with overdue accounts.

On the collection side, features include an automatic dial-up function, tickler reports, and a special inquiry screen that contains varied information, including payment history, amount owed, property details, and data on any co-borrowers. The system can also report loans by street location - a feature that enables collectors to map out their field efforts for collecting on past-due accounts. An unlimited automated notepad captures comments, promises, and legal notes.

Armed with this backup information, the collector simply auto dials the customer, calls the relevant information to the screen, and works to schedule payout's, partial payments, and late fees. The system also doubles as a management reporting tool, providing the collection manager with information such as the number of calls collectors have placed, length and results of calls, and the number of unanswered calls.

Buyers' guidelines

Choosing collection software can be as tricky as hiring a new employee. To minimize the risks, Christeson offers readers some valuable user tips for selecting collection software that gets results:

Conduct a needs analysis

The size and personality of the entire loan portfolio will drive the type of software the operations manager selects. Talk with the user group. Focus on what kind of a collection problem the bank has and where that problem is. For example, a portfolio of 40,000 loans, each of which is less than $10,000, and with a significant number of delinquencies, is a prime candidate for automation. On the other hand, a portfolio of ten $40 million loans may require a more hands-on approach to collections.

Consider the software alternatives in relation to the personality of the portfolio

Select a system that reflects the personality of the portfolio base and the severity of the problem. The key is to choose an approach that will elicit a positive response from non payers without alienating the bank's market base. An unemployed customer who is behind in payments is far more likely to make a payment in response to a personal telephone call from a collector the day after the account moves to delinquent status than to respond to a form letter. Guilt is an important factor in the collection process. But the longer the customer is past due, the less effective guilt becomes.

Install an expandable system

Make sure the chosen system can handle and grow with the bank's work load.

If possible, select the software program before the hardware. Most collection software can run on a variety of personal computer, mainframe. and local area network systems. Although the largest mainframe programs offer more power and more storage, effective PC-based systems are also available. Explore all the alternatives.

Choose short-term, cost-justified solutions for both software and hardware

Collection systems open up revenue-generating opportunities that can cost-justify collection systems. Once the system is installed, employees can be assigned to more productive tasks such as making collection calls. In addition, over time the lost interest on every delinquent account adds up. Just a one-day delay in payment on a $1 billion portfolio is significant. Collection systems can speed up the collection process and bring in the money, enough money, in fact, to justify the cost of the system.

Involve the right people in the decision process

Operations managers will need to use all their management skills to get senior management to back the project. Involve the person to whom the user group reports in the decision. In the long run, it will be that person's responsibility to make sure that the user group is properly trained and motivated to use the new system.