Collection Scoring – Are you leaving money on the table?

Are you a do-it-yourselfer or do you bring in an expert? I suppose it should depend on the ‘cost’ of putting in the effort such as getting a local teenager to cut the grass, combined with the risk or the potential loss, like taking out your own appendix. (Doctors tell me it is not a difficult operation but you don’t want to be there if something goes wrong.)

There will be occasions in the credit and collection business when you need an expert, the best available for both for the effort cost AND the potential loss. It is a risky business, credit & collections and while in Vegas one is not allowed to tilt the odds in their favor, one can and should do so in managing delinquent accounts. When I have questions on collection scoring, I turn to Rina Mancini and recently I took the time to ask her some questions.

T.P.
For those who may not know, what is collection scoring?

R.M.
If you have a sufficient volume of delinquent accounts, a system using past behavior and statistical analysis will provide a score on each of your accounts that becomes delinquent. It will tell you, with proven results, the probability of their paying or not – regardless of your efforts.

Suppose you had 100 accounts that you believe you should work today. A good system tells you, based on a score, which 32 of them will cure themselves and 19 will not pay not matter what you do. Now you have only half the work volume and can adjust your strategy further based on the collection score.

You can do much more of course, such as valuation of portfolio, improving your strategies.

Perhaps you want to reduce your costs or your bad debts, maybe a bit of both. A good system will help you achieve those goals.

T.P.
What are the two biggest mistakes made with collection scoring?

R.M.
Firstly, if a firm has a large number of delinquent accounts each month and they ARE NOT using a scoring system, they are leaving money on the table. Some advertisers will tell you that only one dollar out of every twenty they spend on advertising is worthwhile. They just don’t know which ‘dollar’ is worth the effort – a collection scoring system gives you that information. Why spend money on accounts that will cure themselves and also on those who won’t pay regardless of your efforts.

Secondly, they try to use a credit score to determine risk and strategy after an account has been approved and is active. Both systems have ‘scoring’ in the name and use statistical analysis, but they are not the same tools. It’s a bit like trying to use a rubber hose in place of a hammer. It won’t work but the major difference is that it can be very costly.

T.P.
Is Collection Scoring necessary? A large organization could get along without it, couldn’t they?

R.M.
Sure. They could get also get along without dialers and a collection management system and even go back to rotary dial telephones and collection cards…but once the technology is known, it borders on the criminal not to make the best use out of the tools available. Why leave money on the table?
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Who is Rina Mancini?

She is a Credit Risk Management Consultant.

Independent consultant to financial services and related industries on strategic planning, management of retail/consumer loan credit risk, accounts receivable management, restructuring, business process outsourcing, call centre operations, training and mentoring, executive search, and consulting to new industry entrants.

Specific questions for Rina? Please contact us.