Improving Collections Efficiency Through Automation
by Paul Sharkady and Eric J. Christeson
This article is designed to help bankers who still track their delinquent loans with scribbled notes on index cards. The authors assert that such methods not only leave banks open to inaccuracies but also impede profitability.
For bankers looking to improve the way they track and collect delinquent loans, the authors recommend automation. By investing in the necessary software, banks can bolster collection efforts and enjoy healthy jolts to the bottom line. The article includes recommendations for evaluating software.
Most commercial lenders have a good idea of the number and amount of loan payments that are delinquent, but few have the tools to effectively collect. Collection performance is limited by the quality and accuracy of information provided by the loan management system. Yet, trying to keep the necessary information - loan balances, payment due dates, phone numbers, and notes - current and organized with a manual system is time-consuming and inefficient at best.
For a collections program to be profitable, lenders need to reduce administrative costs through organized collection departments with automated programs that emphasize speed and flexibility while providing collectors with more control.
Banks have been quick to embrace computer technology for loan origination, marketing, and asset management functions. Many financial institutions, however, entrust the collections function - a significant source of potential revenue - to archaic manual processes or third-party service vendors such as collection agencies.
Neither of these approaches gives users a measurement of the effectiveness of collections. Even mega banks with sophisticated investment portfolio and loan management computer systems often rely on index cards bearing scrawled notations to track delinquent accounts.
This trend is surprising because the best approach for reducing delinquencies and increasing recoveries is a two-pronged attack:
- Accurate tracking of problem accounts
- Productive telephone follow-up
Both responsibilities can be enhanced by automation.
With the current high rate of delinquencies and charge-offs, many commercial lenders realize that they have little control over loan delinquencies, whether managed in-house or by collection agencies. Furthermore, traditional recovery approaches, both in-house and by agencies are inadequate for today's commercial lending market.
An Automated Alternative
An alternative to the traditional send-a-letter collection method is an automated collection system. Because the index card and telephone method is labor-intensive and susceptible to errors, the cost of manual collections will continue to rise as portfolio and delinquency rates grow. Unless some form of automation is introduced, many banks will find it difficult to justify the additional overhead. Software technology has developed to the point that loan officers can no longer ignore its ability to reduce delinquencies in their commercial portfolios.
Loan origination policies and credit screenings are the first defense for avoiding problem loans. In a flat economy, credit reports do not always accurately reflect the client's repayment ability accurately. Once a loan is approved, the loan servicing system is the only control the bank has over delinquencies and defaults.
Advantages
The primary advantage of an in-house automated collection system is increased cash flow. Cutting days or weeks off the average collection time can make an important difference in a bank's financial health. Without automation, less time is available to work on problem loans and more loans must be prematurely sent to outside collection agencies, which may command up to 50% of the money collected and "cherry pick" the most collectible outstanding loans. Ironically, outside agencies report sizable productivity gains as a result of using automated systems. A survey by the American Collectors Association found that collectors using computerized systems handle more than twice as many accounts as those with manual systems. See Figure 1 for further details.
The traditional approach to increased delinquencies - hiring more collectors - is no longer feasible. The purpose of automation is to increase productivity, not payroll. This goal is achieved by providing collectors with control and immediate access to information such as payment history, amount owed, and previous contacts.
A Challenge
The challenge is finding cost-effective collection software to assist these efforts. Collection software should provide documentation that clearly records information, activity, and correspondence. Decision support reports are also needed.
Evaluating Software Programs
Unfortunately, collection software designed to handle the needs of commercial lenders is generally designed for mini and mainframe computers, both of which are prohibitively expensive for smaller commercial banks. But with the continuing growth and data capacity in personal computers (PC's) linked through local area networks (LAN's) and wide area networks (WAN's), more collection software is being designed for PC's.
Choosing collection software is comparable to hiring a new employee: both are somewhat of a gamble, but there are ways to minimize risks. Preparation for the integration of the new collection system is the key to success. Also, knowing what questions to ask and being aware of the potential pitfalls of automation will aid the selection process.
The purchase of an automated collection system can be facilitated by heeding the following recommendations:
- Conduct a needs analysis. Determine how work and documents flow through the loan servicing department now and how this process can be improved. Pinpoint the most important problems, and try to solve them first. Avoid the temptation to find an all-encompassing solution. It probably does not exist.
- Involve the right people in the decision process. Usually, collection systems are selected by upper management. Yet, most of the interaction with a collection system is done by collectors and collection managers. The collectors who will be working on the system should evaluate each software option and should keep in mind such productivity data as the number of calls placed in a certain time frame, the length and results of those calls, and the number of unanswered calls. Involving the collectors in the decision process promotes the idea of ownership. There is likely to be less criticism of a system that collectors helped select.
- Look for hidden costs. Establish a budget, and be prepared to identify extra costs for a selected system. Costs to consider include software upgrades and modifications, backup systems, and training.
- Choose short-term, cost-justified solutions for both hardware and software. Collection technology is moving too rapidly to commit to long-term solutions. For example, a minicomputer and corresponding software may be powerful; however, there are extremely high startup and training costs associated with this option.
- Select the software program before the hardware. Often software will operate on existing hardware, but the automation decision should not be based solely on the desire to reduce hardware costs. Finding a computer that is compatible with a specific software program is much easier than finding a program that addresses your needs and that is compatible with existing hardware. It is unwise to attempt to operate state-of-the-art software on obsolete or nonstandard hardware. Also, the software should operate on hardware that is readily available. Ask to see a demonstration of the selected software before acquiring it.
- Ensuring that the program is user-friendly. Possibly the most important feature to look for in collection software is a menu-driven format. Menu-driven software tells users (collectors) what to do in a step-by-step fashion, thereby reducing training costs. Look for on-screen help windows. Read the accompanying documentation. Collectors should be able to learn how to use the system and to train others to do so in a short period of time.
- Place a premium on flexibility and control. Ensure that the capability to tailor specific procedures exists. For example, perhaps you want to send letters at 15 and 30 days past due before calling a client, while a colleague wants to send one letter 10 days before telephone contact. The selected system should have the ability to accomplish either task. Modular programs that can be integrated with other software, such as loan origination or tracking programs, and that can operate on a LAN or WAN are desirable. The move to automated collection may instigate some operational difficulties at the outset, but consider the difficulties of having to change to yet another system in a few years because the software package could not grow with the loan portfolio or integrate new commercial loan products.
- Look carefully at the offered features. Determine which are useful and which are superfluous. Observe how the program performs using loans the bank already offers or intends to offer, such as simple interest, adjustable rate, and graduated payment loans.
Collection Performance: Beyond Automation
Automation is an important factor in reducing delinquencies, but it is not a panacea for delinquent loans. Effective collections begin with training staff members in successful collection techniques. Credit departments of every size can improve performance by establishing objectives for the collection manager, organizing the collection area, and listening to collectors' suggestions.
Establish Objectives
Have the collection manager list the most important tasks for the job. Next to each task, he or she should write an objective - a specific goal to be accomplished - relevant to that task, and include a date of attainment. For example, "train collectors" should be on the list of tasks. An accompanying objective should be: "To establish a collection training program by September 1, 200X".
Organize the Collection Area
Collectors should telephone debtors to collect money and do very little else. Successful collections depend on maximizing the collector's telephone time. Collectors should do almost nothing but make one phone call after another. The more calls are made, the more debtors will be contacted; the more debtors who are contacted, the more dollars will be collected. Predictive or automatic dialing is one technological innovation that increases a collector's efficiency.
Collector Suggestions
As the frontline contact with problem loans, collectors will have collection-improvement ideas. Promote the discussion of ideas, and encourage collectors to make proposals - courses of action. Collectors should present reasons why their ideas are good for the bank. This process itself does not "sell" the idea, but it does provide an excellent forum in which to discuss issues and often leads to changes and to improved collection procedures.
All ideas will not be workable, but some will be, and these should be considered. Collectors need positive attitudes to perform their pressure-filled jobs. Finally, it is important for collectors to remember they are contacting clients. Therefore, collectors need to develop the ability to collect in full while treating each client with respect and consideration.
Conclusion
Deciding which collection software system best meets a bank's needs can be exhausting and confusing. Commercial lenders need to be pragmatic when evaluating these needs and determining how automated solutions can best meet them. The right software combined with support from bank managers will create a sense of professionalism and aggressiveness among collectors, a sense of urgency among delinquent clients, and a significantly enhanced cash flow.
Figure 1. Comparison between Automated and Manual Collections
| Computerized* | Manual | ||
|---|---|---|---|
| Percentage of calls requesting payment in full | 85. 6% | 80. 5% | |
| Average number of active accounts handled by each collector | 1,713 | 780 | |
| Average number of calls per collector per hour | 17.5 | 13.5 | |
| Average number of debtor contacts per collector per hour | 8.5 | 6 | |
| Average number of payment promises per hour | 10.5 | 6.4 | |
| Percentage of collections involving payment plans | 60 | 47 | |
| Average hours in a collector's work week | 39.3 | 37.7 | |
| Average number of letters sent before telephone collections | 2 | 2.2 | |
| Percentage of accounts paying on: | First letter | 9 | 7.8 |
| Second letter | 6.9 | 4.4 | |
| Third letter | 6.6 | 3.9 | |
| Fourth letter | 6.7 | 3.0 | |
| *Includes predictive dialing | |||
| Source: American Collectors Association, Inc. | |||
Sharkady is manager, loan services, Southwest National Bank of Pennsylvania, Greensburg.
Christeson is chairman, Dynamic Interface Systems Corporation, Los Angeles.