2010 Collections Business Analysis
Sample accounts and
Dollars Outstanding
for Healthcare and
others with internal collections activities
By Ray E. Noftsinger, President
American Payment Technologies, Inc.
March 28, 2011
This White Paper is available at (www.justpayontheweb.com/provider
). ALL efforts in this document
focus on maximizing your collections PRIOR to sending the accounts out to any
third party agency or firm. The roll
rate percentages are for discussion only and do NOT reflect any client’s
performance. Whatever your data
produces these same concepts work for you in a similar way (just adjust the initial accounts or outstanding $ cells). The purpose of this White Paper is to
look at the
Concept and not the dollars or
percentages collected.
Secondly, let me
identify the primary credit grantor types for using this concept for maximum
benefit. This approach centers on
maintaining a customer relationship and favorable impression while collecting
and quickly moving to legal on accounts that you would not want to have as
customers anyway. It involves
developing a professional rigid collection system of policy and strategy. Finally, it involves the use of
automated low cost vendors in harmony with your internal efforts.
Examples would include all mid-sized or smaller credit grantors, credit unions,
hospitals and physicians, utilities, cable/cell phone providers, and local
governments in some cases.
Professional Collection
System
The fundamental fact is
that you should know where you stand on all unpaid accounts prior to 100 days
from the first statement sent date.
There is little to NO value in holding an account longer in hopes of collecting. Effective application of energy in
the first 100 days gains the maximum return of funds. (In hospital accounts the
first day starts when all insurance claims have been applied.)
The most efficient
organizations have both a Collection Policy and a Collection Strategy that is in
writing and understood by the appropriate persons.
Collection Policy
- When
are statements sent? What is the interval
between statements? How many statements
are sent?
- When
phone calls are made, what is the minimum account balance used?
- What
are the messages on statements and in phone calls?
- When
does the account go outside for collections?
What factors other than delinquency time are used? (Account Balance,
Credit Score, assets, past payment history, future income potential)
- When
does the account get written off?
- What
conditions exist for you to use a pre-collection letter service, small claims
court, a collection attorney, a collection agency, or temporary in-house
collector?
- If
customer makes some small attempt to pay, how far do you go to accept a
settlement?
Collection Strategy
-
To collect unpaid accounts as quickly as possible
-
To collect unpaid accounts with as little investment of time and money as
possible
-
To collect unpaid accounts with the least possible loss of business
All accounts should be resolved within 100 days from Statement #1.
- You
start with a written Billing and Collection Policy
-
Gather as much credit information as possible as soon as possible
-
Deliver the product/services – collect as much as possible prior to delivery of
services
-
Statement #1
-
Statement #2
- First
phone call – 10 days after statement mailing date
-
Statement #3
-
Statement #4
-
Action taken 10 days after Statement #4
Three Requirements
for Success:
1.
Trap specific data
“metrics” to measure the effectiveness of your efforts
2.
Apply 80% of your
energy improving the earliest stages of the collection process by running
parallel testing
3.
Apply 20% of your
energy improving the last 45 days before you send the accounts to a third party
by running parallel testing
Requirement ONE
1. Trap specific data “metrics” to
measure the effectiveness of your efforts
A key to improvement in your collections involves accurate measurement of both
your current methods and the parallel testing of new approaches. If you don’t know where you are how
can you tell if you have improved?
Many collection professionals hold fast to traditional methods for the wrong
reasons. There is the pressure to
keep the status quo.
ü
If your predecessor
and/or industry peers do it the current way then there must have been a good
reason.
ü
Fear of trying
something new that could either not work or create negative attention to your
job performance and stability.
ü
Fear of having to
report and face the reality of your current collections performance.
This point involves
more detail than merely measuring the dollar volume or number of accounts
written off. It involves tracking
funds received at each of the cycles in the process correctly.
Insanity = “continuing to
do the same things and expecting different results”
Today we live in a totally different consumer financial environment than has
ever been witnessed before. We could
invest pages of data related to this but for clarity here are a few facts:
Current Economic Forecasts Consensus
Ø
Consumer debt is too high. Little spending power remains.
Ø
$2 Trillion worth of adjustable rate mortgages have already re-set. 28% of mortgages exceed market value. Huge wave of Commercial Mortgages
coming due with negative equity.
Ø
Consumer credit quality will continue to weaken
Ø
Job markets will slowly continue to decline. Most unemployed will not be
re-hired for a long time and then not in their skill and pay rate.
Ø
Auto lenders will see erosion in credit quality forcing dismal sales figures.
Ø
Bankruptcy numbers exceed pre-2005 levels
Ø
Interest rates will remain flat
Ø
Housing markets will remain in doldrums
Ø
Retail chains will struggle
Ø
Higher delinquency and chargeoff rates for the industry in 2010
Requirement TWO
2. Apply 80% of your energy improving
the earliest stages of the collection process by running parallel testing
Let’s take a look at
which cycle of improvement generates the greatest savings in the collection
process. The first table indicates
for an example a sample of 12,500 accounts (or you can choose an outstanding
balance) as they flow through the collection cycles. As you can see we are assuming set
theoretical flow through percentage rates with each example.
|
Roll Rate
Cycles
|
Accts.
|
% Cur.
|
% Prev.
|
$
Outstanding
|
|
Current to 30
Days
|
12,500
|
100.00%
|
|
$3,750,000
|
|
30 to 60 Days
|
625
|
5.00%
|
5.00%
|
$187,500
|
|
60 Days to 90
Days
|
350
|
2.80%
|
56.00%
|
$105,000
|
|
90 Days to
Chargeoff
|
298
|
2.38%
|
85.00%
|
$89,250
|
|
Chargeoff
|
600
|
4.80%
|
|
$180,000
|
(Note: chargeoff is higher than the 90 day due to accts going direct to
chargeoff from all prior categories)
Now lets look at
improving the 30 day cycle by 10%
|
|
|
|
|
|
Monthly
|
|
Roll Rate
Cycles
|
Accts
|
% Cur.
|
% Prev
|
$
Outstanding
|
Savings
|
|
Current to 30
Days
|
12,500
|
100.00%
|
|
$3,750,000
|
|
|
30 to 60 Days
|
563
|
4.50%
|
4.50%
|
$168,750
|
$18,750
|
|
60 Days to 90
Days
|
315
|
2.52%
|
56.00%
|
$94,500
|
$10,500
|
|
90 Days to
Chargeoff
|
268
|
2.14%
|
85.00%
|
$80,325
|
$8,925
|
|
Chargeoff
|
540
|
4.32%
|
|
$162,000
|
$18,000
|
|
|
|
|
|
Total
Monthly
|
$56,175
|
Now lets look at improving the 60 Day cycle by 10%
|
|
|
|
|
|
Monthly
|
|
Roll Rate
Cycles
|
Accts.
|
% Cur.
|
% Prev
|
$
Outstanding
|
Savings
|
|
Current to 30
Days
|
12,500
|
100.00%
|
|
$3,750,000
|
|
|
30 to 60 Days
|
625
|
5.00%
|
5.00%
|
$187,500
|
$0
|
|
60 Days to 90
Days
|
315
|
2.52%
|
50.40%
|
$94,500
|
$10,500
|
|
90 Days to
Chargeoff
|
268
|
2.14%
|
85.00%
|
$80,325
|
$8,925
|
|
Chargeoff
|
569
|
4.56%
|
|
$170,841
|
$9,159
|
|
|
|
|
Total Monthly Savings
|
$28,584
|
Finally, let’s look at improving the 90 Day + cycle by 10%
|
|
|
|
|
|
Monthly
|
|
Roll Rate
Cycles
|
Accts.
|
% Cur.
|
% Prev
|
$
Outstanding
|
Savings
|
|
Current to 30
Days
|
12,500
|
100.00%
|
|
$3,750,000
|
|
|
30 to 60 Days
|
625
|
5.00%
|
5.00%
|
$187,500
|
$0
|
|
60 Days to 90
Days
|
350
|
2.80%
|
56.00%
|
$105,000
|
$0
|
|
90 Days to
Chargeoff
|
268
|
2.14%
|
76.50%
|
$80,325
|
$8,925
|
|
Chargeoff
|
586
|
4.69%
|
|
$175,792
|
$4,208
|
|
|
|
|
Total Monthly Savings
|
$13,133
|
As you can see, the greater gains are possible in the earliest cycles.
Requirement THREE
3. Apply 20% of your
energy improving the last 45 days before you send the accounts to a third party
by running parallel testing.
The “net” funds
collected in the first 100 days from statement #1 are extremely high compared to
the netback of funds after assignment to a third party. Although your third party vendors
would be very upset, you have an obligation to expend effort to collect as much
as possible internally prior to the outsourcing.
Companies solicit your
organization for pre-collection letters and other tools to recover the internal
accounts frequently. When the collection
agency finds out they will offer the service free or at low cost in order to
prevent the program from becoming effective. This type of service for you is a
total conflict of interest that competes with their collection fees at the next
step. Since they have an existing relationship it is relatively easy to keep
these useful products from being tested due to their control of the relationship
with your contact person.
Let’s just be honest
with ourselves here for a minute.
Once you assign your low balances to a third party agency or law firm there is
almost NO hope of ever seeing hardly any money collected. Put yourself in their shoes. If the agency is getting paid on a
percentage of funds collected then the potential revenue to the agency on a
small balance is tiny. So, the
agency will at the most write a letter or two, or perform a single predictive
dialing phone campaign, or merely leave answering machine messages on the low
balances. Most agencies will
probably do little to nothing at some low balance level.
Since we all know that
this is what will happen on the low balances, why not offer a generous hardship
discount PRIOR to assigning the low balance accounts out?
Now that we have
identified the minimal value of working the low balances without big discount,
let’s consider applying more energy to collect the higher balances via account
discounting PRIOR to assigning the accounts outside. If for example your collection firm
is averaging collections of 15% of funds assigned and then takes a 20% fee of
collected funds then your “netback” is only 12% of funds assigned.
You could at least
offer the Customer a one time last chance 70% discount to pay you or you will
have no other choice than to report to the credit bureau and assign the account. You would still get more net funds
and perhaps keep the customer should their situation improve in the future. If the customer doesn’t take the
offer, then you can have the collection firm give it a try as you are currently
doing. You can substitute your own
percentages here but the concept still makes sense to everybody except the
collections firm.
With a few simple tools
in this last stage prior to assignment and with the discounts offered, you could
have a high probability of achieving double the netback funds you are currently
obtaining and possibly preserve the relationship with the customer should they
improve down the road.
The services offered by American Payment
Technologies, Inc. provide detailed financial tracking data to verify the
performance against current methods and performance levels. Customized Services
are offered to improve performance under requirements two and three.
www.JustPayOnTheWeb.com/provider