Critical Initiative Delivery, Business Analytics & Data Management, Regulatory Compliance & Risk Management

6 minute read

Recoveries Optimization Enhances Compliance, Revenue and Customer Experience

Oct 16, 2020

Written by: Deb Hollowell

The Big Picture

In today’s heightened regulatory environment, it’s hard to imagine that just a decade ago, banks handed over charged-off accounts to outside recoveries agencies without much thought. After all, the bad debt had been written off and the banks had already invested considerable resources during the collections process trying to get those customers reestablished. 

The Spinnaker Approach

As banks exited the Great Recession, recoveries activities at bigger banks began to come under increased scrutiny through the Office of the Comptroller of the Currency, which ruled in 2013 that financial institutions need to ensure their third-party suppliers meet the same stringent regulatory standards that apply to bank operations and servicing. The added attention has been building, and the need for stringent oversight is now catching up with mid-tier and small banks, as well.  

Because of this shift, banks have taken important steps to ensure their partners for recoveries a largely outsourced function meet these updated compliance requirements. However, many have overlooked an opportunity to capture two equally critical gains: improve the experience for customers as they struggle during financial hardship and secure revenue often left on the table by not applying a strategy tailored specifically to the recoveries process. 

Before we go too much further, let’s consider the overall banking environment. In general, banks have largely kept collections as an internal or first-party operation. But the recoveries process is often deployed to a cross-section of external agencies with different levels of segment specialties and capabilities. Across the industry, banks have not invested the same level of energy (read: funding and oversight) in recoveries functions that they have in their internal collections teams. As a result, they aren’t adequately serving a pretty substantial group: A 2018 report from the Consumer Financial Protection Bureau showed that 28% of consumers had debt with an external collections agency. 

Optimizing the Recoveries Process 

Without question, a well-managed and tailored vendor partnership can be a valuable way for companies to augment services in the most cost-efficient manner possible. Unfortunately, many banks have almost outsourced recoveries by default without a well-devised strategy for how the process integrates with their complete collections pipeline.  

We know this because of our banking practitionersdepth of experience (each with two-plus decades) in optimizing recoveries strategies for some of the nation’s largest financial institutions. Tapping into the analytical talent, tested operational leadership and senior compliance expertise in Spinnaker’s related practice areas, our Recoveries Optimization offering applies the appropriate mix of information firepower and hands-on experience necessary to help clients make measurable gains in each of these three critical buckets: better compliance, increased revenue and improved customer experience. In a single month, our team can conduct a comprehensive assessment of a financial institution’s current recoveries state and recommend smart tactics and informed changes for better management of external agencies.  

As part of the process, we help clients develop strategies for ensuring outsourced call centers exceed expectations, rebuild relationships and authentically engage with customers whove fallen on tough times, and boost recoveries revenue. The specifics of any institution’s current operation ultimately will shape the final impact, but Spinnaker’s optimization approach can help banks increase their recoveries revenue by at least 15% – which is essentially found money added back to the bottom line after writing off that bad debt.  

Understanding the Situation 

Across the industry, financial institutions are required by regulations to charge off debt at designated timeframes, with 120 days for loans and 180 days for credit cards being most common. In collections or pre-charge-off, teams employ many tactics to get customers current including adjusted minimum payments, reset strategies, fee waivers and settlement offers. Unfortunately, some accountholders still transition into recoveries. As they enter that stage, many customers don’t realize banks are able to offer a host of other strategies to help them resolve their debt – and have dignified and respectful interactions with them in the process 

It’s important for banks to remember that for many of these customers, this is a one-time low moment and they will ultimately rebuild their credit history. For banks, it’s a triple-win opportunity: Get paid, build brand, earn repeat customers. 

Because you can’t effectively navigate without understanding the tools you have in hand, the first step in this process is a comprehensive assessment of the people, processes and operations employed by internal and outsourced recoveries partners, as well as debt sales. Digging into those areas and baselining existing processes will help quickly identify gaps and top areas of opportunity. 

To determine if a recoveries team is working at optimal levels, we review incoming work – examining the types of accounts and customers the financial institution passes off from collections. Banks also need to know that they can trust this information. By taking a deep dive into this data, we can determine the accuracy of future charge-off and recovery forecast models and whether the appropriate levers are being deployed in customer segmentation before outsourcing this work. 

Capturing insights on how the bank assigns accounts to its internal and external partners is critical because recoveries agencies often operate within specialized industries. Three quarters of third-party providers focus on medical, telecommunications and utilities debt while only 10% have targeted expertise in banking and financial debt. Banks need to confirm that their partners truly understand their business. 

Deeper analysis is also conducted in reference to performance results – everything from dollars collected to agent metrics and customer complaints (which recently hit an industry high in the collections space). For instance, how does the recoveries partner call customers? How does each customer segment pay? Does the team work all accounts the exact same way? Are they recovering a greater percentage from one particular customer segment? How do they optimize and/or implement the best processes to capture the most money? 

Looking purely at the numbers isn’t enough. We also calibrate against the agency’s or internal team’s stated policies and procedures and evaluate how risk is truly being managed. Only then can we be confident that results are being achieved in a compliant manner.  

Finding the Opportunities 

By breaking apart each piece of the recoveries process, we can find ways to take every component, make it work more efficiently and effectively, and drive maximized overall performance. Using regulatory compliance as the guiding standard, we lead financial institutions in applying an information-based approach that repositions recoveries for stronger, sustainable success. 

One of the most meaningful lessons for our clients is discovering more about their customers – including those who are “sloppy” (haphazard payers) and struggle until they land in recoveries. Every dimension of a customer’s profile is different, and banks should use this to their advantage in segmenting and assigning accounts to the right resources that align with that profile. Remember: Consumers are still responsible for their debt, but they have more options when their account is charged off. 

To arrive at the best solutions, recoveries agents must enter customer conversations with empathy and full knowledge of available payment options. That means banks and agencies need to hire articulate, compassionate individuals. Effective collections skills can be taught. Potential offers expand at this point, because skillful agents can understand what’s going on with customers and make appropriate offers that they can afford – no more sloppy payers. We can prepare agents to ask the right open-ended questions that enable them to offer tailored options, one customer at a time. 

Agents must be focused on re-establishing relationships with customers instead of getting as much as they can as fast as they can without regard for the customer’s ability to get by. In recoveries, it’s a common practice for the same agent to talk and reach out to a customer repeatedly. The agent might not collect even a dollar on the first call, but theyre building trust that the customer will talk to them again and again. We’ve seen firsthand how this not only generates customer payments, but also often leads to larger commitments later on than what might have been expected. 

The Importance of Strong Monitoring 

The Recoveries Optimization assessment is a short, 30-day exercise but if its improved effectiveness youre seeking, that requires longer-term oversight. Banks that rely on external partners need to implement proven monitoring practices to ensure those agencies are meeting compliance standards, generating maximum revenue and delivering the best customer experience possible. The Spinnaker assessment helps banks set the appropriate benchmarks and controls that define success. 

For compliance reasons, banks shouldn’t outsource that part of the equation; they need to actively track actions and results for their internal, external or sales shops. Internal processes for managing vendors or sales might cover several different areas, but expectations must be aligned to ensure effective management. This can be extremely helpful with audits and with making long-term decisions about where to place new business, making market share decisions, and benchmarking. 

Keep in mind that recoveries monitoring shouldn’t be considered a punitive task, where banks are looking for partners to trip up. Strategic monitoring helps uncover gaps and opportunities to continue to improve and optimize the process. Assessments are foundational for future gains in this business area and should be performed with regular consistency whether that’s monthly, quarterly or, at a minimum, annually. 

Improvements aren’t limited to the recoveries function. With an enhanced recoveries operation in place, banks can also consider opportunities to influence upstream debt strategy, meaning potential optimization for pre-charge-off. Could you be doing something differently to support customers earlier and minimize your volume of charge offs? 

The Client Benefits

Prior to the COVID-19 pandemic, consumer debt delinquency rates had dropped nearly 40% over the course of a decade. Almost overnight, however, the novel coronavirus dramatically upset the economy, leaving millions of people without jobs or working fewer hours – and without the means to pay their bills. Are you ready if the pandemic continues to drive greater debt? If not, find out how Spinnaker can position your bank to optimize its recoveries process and be better prepared for what’s to come.