Disaster #9 -Absence of Offer
Part 9 in a series: Disastrous Debt Interactions
A great offer, but not right for debt collection!
The right offer will open the payment floodgates. Absence of one will condemn you to negligible response.
The direct marketers among us will instantly recognize “the offer” as the most powerful driver of response, but regardless of marketing channel, the American consumer is conditioned to buy when there’s an offer and to put it off when there’s not. Consider the following staples of our consumer culture:
50,000 airline miles for getting a credit card
Unlimited free shipping for Amazon Prime members
0% APR financing on a new car
Buy one, get one free.
Even Apple, the most offer-resistant of brands, recently started offering free Air Pods, a $150 value, with the purchase of certain MacBook and iPad models from their Education Store.
Without an offer, the consumer sees you as just another marketer “trying to sell me something.” With an offer, you transform the proposition into: “Here’s my opportunity to buy when there’s a deal.”
Or, in the case of a delinquent borrower: “…my opportunity to pay…
Our testing reveals that the optimal collection offer can increase response by up to 500%
Why does the offer have such a huge impact on a collections communication? The three main reasons are:
The stressed borrower is in “triage” mode. They can’t satisfy all of their creditors, so they selectively pay those willing to work with them.
Signaling an offer dramatically increases the “open rate.” If it’s seen as just another payment demand, most borrowers won’t even open the envelope or click on the email.
As we said earlier, every red-blooded American consumer is always looking for a deal.
So…what are the different kinds of collection offers?
I. Threshold Warning
What it is: A last-minute text message or email reminder to make a minimum payment before incurring a late fee or negative credit bureau report.
Why it works: Borrowers appreciate the opportunity to prevent a penalty, and this signals you’re acting in their interest, rather than seeking additional fee revenues.
II. Fee Waiver
What it is: A forgiveness of late fees and/or similar penalties if a borrower brings the account current within a prescribed time period.
Why it works: Even if fees are small in proportion to the total balance, they take on an outsized importance in the consumer’s mind. Borrowers resent lender fees, and feel guilty themselves for incurring them. The waiver helps alleviate the anger and restore hope.
An even bigger idea: Offer a fee amnesty for seriously delinquent accounts, wiping out months’ or years’ worth of penalties. Amnesties are successful for tax collection and are even used by libraries to recover long-overdue books.
III. Payment Deferral (forbearance)
What it is: Allow the borrower to skip payments for a designated period. Ideally, interest stops accruing during the deferral period.
Why it works: A respite from payments is a welcome relief for a borrower who’s been making timely payments but now suffers a decline in income, such as a Covid-19 related layoff.
Why it may not: A deferral does nothing to promote a resumption of payment by an already-delinquent debtor. In fact, it may prompt them to re-prioritize their payments, paying other creditors instead of you.
IV. Payment Arrangement
What it is: A plan to bring an account out of default, by splitting the overdue balance into a series of smaller payments debited from the customer’s bank account. The plan can also freeze new invoices during the term of the payment arrangement.
Why it works: A series of smaller installments makes it more affordable to bring the account current vs. a lump sum.
Why it may not: The plan doesn’t do anything to solve the initial reason for the default. So, unless the debtor’s overall finances have improved, a delinquency is likely to recur.
V. Balance Liquidation
What it is: Paying off a high interest credit card account with a lower interest, fixed term personal loan. Typically, the credit card account is permanently closed.
Why it works: Balance liquidation provides two things a borrower wants: a lower interest rate and a certainty of when the debt will be paid off.
Why it may not: The borrower may continue to run up more debt on other credit card accounts, interfering with ability to pay down the personal loan.
VI. Debt Settlement
What it is: An agreement to pay off a debt for less than the full amount due. The discount off the balance can be variable – e.g. from 10% to 60% –and can be negotiated between lender and debtor. There are even online settlement apps such as Settl.it to automate this negotiation process
Why it works: Settlements generate high response rates because the benefit of saving money is so clear, and also because debt settlement companies have advertised the concept for many years.
Why it may not: Even if a debtor agrees to a settlement, they may not have the money to pay it. In that case, you can collect the settlement in monthly installments, but not every debtor will keep up with the payments.
VII. Credit Counseling
What it is: Referral to a reputable non-profit credit counseling agency that negotiates a reduced interest rate Debt Management Plan (DMP) across multiple creditors. A typical DMP aims to pay off the debts within 3-5 years.
Why it works: A DMP helps preserve the consumer’s credit record, and a good credit counselor works with the client to help develop better financial habits and budgeting skills.
Why it may not: As with any kind of counseling, not all clients will stick with the program. Some have deep financial, family or behavioral problems that are difficult to solve.
Applying a clinical treatment model
At PCS, we often refer to these offers as “treatments,” and the comparison to medicine is an apt one. We do not pretend to be in the same league as doctors, nurses and medical researchers, but are inspired by their scientific method. Our approach features:
· Diagnosis: We use data analysis as well as diagnostic customer questionnaires to identify and categorize at-risk borrowers.
· Outreach: Our marketing communications promote high response, reaching deeper into the community and driving higher levels of engagement with the payment programs.
· Targeting: We personalize the offer, the timing and sequencing of messages to each specific audience segment.
· Testing: Our test-and-learn methodology evaluates the effectiveness of each tactic against a control group, and continually tests new improvements to enhance results.