Credit Management: Collecting the cash

Summary

Careful credit management by a biller can reduce the number of days a customer's debt remains outstanding by actively detecting and managing overdue bills. Over time, credit management's incentives for prompt payment and penalties for ongoing delinquency should positively change established customers' ongoing payment behaviour.

The required sophistication of a biller's credit management processing will depend on the size of their customer base, the average value of their bills, and their customer's ability to quickly incur debt. Mass market billers with high customer volumes will be rewarded by automated processing that can systematically and cost efficiently perform credit management.

Key points of credit management

Credit management is the process of monitoring the customer's outstanding debt, acting to recover debt when it remains unpaid, and minimising additional debt if the customer refuses to pay. Credit management is a process rather than a one-time activity because each new bill's debt must be monitored until it is paid.

The credit management process is initiated when a debt remains unpaid past its due date and the biller begins to remind and cajole the customer into meeting their obligations. At its most severe this can include service termination to limit additional charges being incurred and provides the severest payment incentive to the customer to pay and be reconnected.

Size matters - A biller's (active) customer numbers influence how the credit management process is administered. A biller with a hundreds or a few thousand customers may find a manual solution to credit management to be workable. A biller with millions of customer will be unable to track delinquent accounts without automated processing to handle all but the rarest exceptions.

More relevant to post-paid rather than pre-paid billing - Credit management is a process associated with post-paid billing. Post-paid customers incur charges, including those billed in advance, for which payment is then sought. Customers are able to incur charges in an unrestricted manner on the assumption they will be paid. Exposure to excessive consumption may be limited by a vigilant biller who detects such increases and places limits on the customer's network access or receives additional payments (or deposits).

Pre-paid billers substitute a 'balance management' process for the post-paid credit management process. Balance management must ensure all charges are promptly and systematically deducted from a customer's pre-paid balance as they occur. When the customer's balance reaches zero further access to the biller's network must be restricted to avoid the biller providing products and services for which the customer has no obligation to pay (and for which the biller may incur external (content, interconnection) costs).

Customer segmentation

A customer's market segment is the initial dimension upon which credit management activity can be differentiated. Since corporate and wholesale customers generate larger revenue streams for the biller and are more complex to re-instate when disconnected, their credit management actions are likely to be less severe. These larger accounts are more likely to be managed by an account team who can contact customers personally to follow up unpaid debts.

Residential customers may be governed by industry regulations that outline acceptable industry practices for credit management methods and timing for debts.

Within their market segment, customers may be further segmented by their past payment behaviour. This is done on the premise that a customer's history is a good indicator of their future behaviour. This has one difficulty - new customers have no history. The result is that customers can be divided into a minimum of three categories: New, Old (good risk), Old (bad risk). Each category may be subdivided further to provide a more nuanced credit management approach.

Customers who return to a biller after a break can have their credit management plan adjusted if their previous history can be found and linked to. The biller must decide whether to assess them as a 'new customer with a positive history' or an 'existing customer with good repayment behaviour'. This may depend on the length of their absence from the biller since their circumstances may have changed. If the customer was a good credit risk in the past the biller may start them with a more lenient 'new customer' rating than a customer with no history.

Credit management plans

Billers have a range of actions they can perform to encourage payment from customers with outstanding debts. These actions can be assembled into different credit management plans that are assigned to differentiated risk profiles. Each plan will contain a list of planned actions and their relative timing. The action's timing may be relative to an outstanding bill's due date, or to previous actions (e.g. a network suspension) only performed on specific days.

The biller can tailor each credit management plan's actions and the timing between each action. Low risk customers will have less severe actions performed with larger gaps between each action; high risk customers will quickly move through more severe actions to 'send a message' that payment on time is expected and limit uncollectable debt.

Credit management actions can include:

Do nothing - This is the cheapest action and may be the best option for customers assessed as having a low risk of delinquency. Customers without a history of delayed payments may have forgotten to pay, be on holiday, or be paying just a few days late.

The biller may apply a cost / benefit assessment and decide that for low risk customers, especially those with low debts, doing any other action will cost them more than the interest on the outstanding debt. This approach will have its limits, but for low risk customers the period of inactivity may be 45 days, a delay possibly after their next (monthly) bill.

Electronic notification - Where appropriate contact details are known, an SMS or email may be sent to the customer to remind them of their unpaid bill(s). This is a relatively low cost option since the action and delivery are all electronic. The notification's message text can be varied by credit risk segmentation to indicate the biller's intended next steps.

This action may be placed on a credit management plan and applied only where the biller has sufficient contact details. In the absence of appropriate contact details this step in the plan may be omitted and the next action performed at the appropriate time.

Paper notification - This is similar to the electronic notification, but performed in a different medium. The use of paper can allow a richer message to be sent to the customer including details of available payment options. The downside of being a physical medium is that paper has relatively high production (printing) and distribution (postal) costs.

The messages on both paper and electronic notifications can range from a gentle reminder of a missed payment to a demand for payment that threatens to disconnect service in days. The biller can construct a range of messages suitable for different credit management plans.

Outbound phone call - The biller may contact the customer directly to ask for payment. Customers who indicate an unwillingness to pay may be quickly removed from the biller's network. Customers may promise to pay their debts by specified dates which can be monitored for compliance. If the customer fails to meet their promises, escalated credit management actions can be taken.

Outbound calls are relatively expensive to support due to the infrastructure required to track and make the calls. Larger billers may dedicate a specialised call centre for this purpose. Appropriate contact times, engaged phones retried after a delay, answering machines and incorrect contact details must all be addressed for outbound calls to be successful.

Penalty charges - The customer may be charged a fixed amount as a 'late payment' fee. This action may be deferred for customers who have historically been prompt in their payments. Customers may be unwilling to incur additional fees for late payment and improve their payment behaviour.

Increase the customer's assessed risk rating - Customers who consistently delay their payments may have their credit management risk profile changed, modifying the credit management plan applied in the future. The risk may be applied dynamically as part of the credit management plan or on the customer's next payment delinquency.

The complement of this action is that customers who change their behaviour and begin paying on time will have their assessed risk reduced with a corresponding change in how their future credit management will be performed.

Network suspension - The biller may suspend the customer from their network to limit their ability to incur additional charges. The customer may find the personal need for network access strong enough to pay their outstanding debt and regain access.

Partial or complete suspensions may be performed depending on the biller's regulatory environment, the ease with which suspensions can be performed and removed, the network's ability to support partial suspensions, the visibility of a suspension to others, and the desire to retain the customer's business.

A partial suspension of a customer's phone service might allow inbound calls to be received and limit the customer to only local and 'free' outbound phone calls. This constrains the customer's service and ability to incur charges without making a public statement that their bills are delinquent. This is easier to perform with an electronic network that can suspend from a remote location and differentiate between optional services (e.g. long-distance calls) and essential services (e.g. emergency calls - 000, 911).

Utility networks (e.g. gas, water, electricity) are more likely to require a physical attendance to suspend service, and another attendance to restore service. These 'truck rolls' are relatively expensive and the results is comprehensive in nature with little scope to reduce a customer's 'network access'.

Customers who were disconnected may have their network services limited when reconnected to reduce their ability to incur charges, or to limit network access whilst debt repayments are monitored.

Cancellation - This action is the most severe the biller can perform since it removes the customer (and any network services) from the biller's network(s). The customer has shown they are unable or unwilling to pay their outstanding debt and to prevent additional debt from being incurred the billing and customer relationships are ended. Any network services associated with the customer's account will be terminated.

This is a situation where convergent billing plays to the biller's advantage since all the customer's services are listed in one place and can be comprehensively terminated. Where the biller has multiple, uncoordinated billing systems, the same customer may be canceled from one network and continue to incur charges on another.

Cancellations may trigger penalty charges where the customer has signed a fixed-length service contract (e.g. mobile phone contracts). The customer's final bill will reflect all outstanding charges and penalties and finalise the unpaid amount of debt. This final debt can then be pursued by the biller or on their behalf by external collection agencies. If the debt remains unpaid it may eventually be written off as uncollectable.

Prepayment as a Credit Management option

A customer's charges can be broken into recurring or one-time charges that are relatively stable and the variable charges associated with network use. If a biller's network and billing systems can support it, customers may be asked to prepay their variable network use separately from their stable recurring charges. Customers who manage their network use with difficulty will be able to use only what they can afford whilst retaining network access (paid for using a post-paid bill). The biller benefits by receiving payment for the stable (recurring) charges whilst limiting their financial exposure to the customer's usage charges.

The ability to take this approach will depend on the customer's ability to measure the customer's network use in a timely manner. Those networks that measure usage monthly or quarterly (e.g. utilities) will have limited scope to use this approach. Networks that capture details in real-time or within a few hours may be able to provide post-paid customers with access on a 'pseudo pre-paid' basis whilst limiting the scope for loss by active charge and debt management.

Improvement using a Champion / Challenger approach

Once developed and implemented, the biller's credit management plans may be modified to improve their success. One way of doing this is to test a 'challenger' plan against an incumbent 'champion' plan. If the challenger shows a statistically better collection response it may replace the incumbent and become the new 'champion'. This 'champion / challenger' process can be repeated for each credit management plan to improve the biller's collection process.

Rather than measuring how customers respond by tracking them over a period of years, the champion / challenger approach divides recently delinquent customers into two groups (e.g. 90% champion, 10% challenger) and applies the two plans accordingly. Each customer group, when analysed in aggregation using statistics, determines whether the challenger plan is statistically 'better', 'neutral' or 'worse' in encouraging customers to pay their bills on time. To improve their credit management process, the biller can iteratively fine tune each plan's actions and when they are applied.

Tags: Billing, Debt collection, Credit Management