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ISSUE PAPER

Using Behavioral Sciences to Improve Debt Collection

Companies have a significant opportunity to dramatically improve default management outcomes, including decreasing past due accounts and increasing dollars collected, by employing behavioral science techniques and predictive modeling to improve collections decision-making.

© 2017 CGI GROUP INC.

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INTRODUCTION Each day, companies send tens of thousands of notices, reminders and warnings to customers and businesses concerning unpaid bills. While much of this communication has a positive impact, the associated costs are significant. In addition, a large number of customers, even when followed closely, fail to pay their debts, explain why they cannot pay, or respond to offers of help.

Why do so many people ignore these important messages, which are logically in their own best interest to address? The emerging use of behavioral sciences is starting to reveal answers to this age-old question.

Economic theory suggests that people make logical decisions based on available information. Unfortunately, this is not always the case because people also are influenced by many “unconscious” factors that do not drive rational behavior. While people do not always make rational choices, their choices can be predicted by studying human behavior. This field of study is called behavioral science.

Understanding how people are likely to react to different messages and incentives can help companies develop more effective communications for debt collection (e.g., calls, letters, SMS texts, e-mails, etc.). Often, very small changes to how choices are presented can have a profound impact on how people respond. Such improvements can generate better outcomes for both companies and customers, at little to no additional cost. This paper reviews the kinds of insights that can be leveraged from behavioral science to improve collection results.

WHAT IS BEHAVIORAL SCIENCE? Behavioral science, the scientific study of human behavior, suggests that the way we behave is driven by two systems: 1. A conscious system that is reflective and rational.

2. An unconscious, or automatic, system driven by the environment. This unconscious

system motivates people to make instant decisions based on context, without an awareness of the reasons.

Traditional approaches to debt collection have assumed that the more information debtors receive, the more likely they are to pay (if they are able), and that clear explanations should be sufficient to prompt debtors to behave rationally. In fact, however, the unconscious system has been found to be much more influential than previously thought. As a result, when it comes to something as highly emotional as parting with one’s own money, it can no longer be assumed that supplying facts and rational arguments alone will persuade people to resolve their liabilities. Instead, collection strategies must be designed much more carefully to reflect how people respond based on real life rather than theory.

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CAN CUSTOMERS BE INFLUENCED USING BEHAVIORAL SCIENCE? Some may question the use of science to influence consumer behavior. Could this lead to a form of control where the company assumes it can make better choices for customers than customers themselves? Economists Richard Thaler and Carl Sunstein argue that, rather than leaving consumers free to make harmful choices, it is better for companies to frame choices in ways that will “nudge” them into decisions that will be good for them.

Example: UK organ donor registration Here is how the “nudge” concept was used by the UK government to improve organ donor registration. While 9 out of 10 UK citizens support organ donation after death, only 1 in 3 have registered to be donors. In a 2013 experiment, the UK government tested a number of organ donor registration pleas on a highly visited web page for driver’s license applications. The most effective message asked this question:

“If you needed an organ transplant, would you have one? If so, please help others.”

The results were striking. If the above message had been used to reach the entire population involved in the experiment, it would have generated approximately 96,000 more donor registrations each year, a 10% increase. Not surprisingly, this message now appears alongside every driver’s license application in the UK.

APPLYING BEHAVIORAL INSIGHTS TO COLLECTIONS The organ donation example is a good illustration of a “nudging” message that was helpful to society without harming the individuals to whom it was directed and whose behavior was influenced. But, is the same nudging concept effective in persuading people to pay their debts?

The answer is an emphatic yes. Nudging more people to pay their debts on time helps customers and companies alike. Customers avoid additional costs in the form of interest and penalties, while company costs are reduced as more customers are steered toward making the right choices.

Alternatives that force compliance through penalties or intrusive actions (e.g., multiple contacts, repossession or mandatory wage deductions) are inherently undesirable and more costly. As a result, a strong case can be made for the smart and ethical use of behavioral science techniques in collections. In fact, such techniques are strongly preferable to compulsion and enforcement by legal means. Ultimately, however, individual companies must decide when, where and how to use behavioral insights.

Following are examples of behavioral insights that can be used to improve collections:

• People are heavily influenced by who is communicating with them. Many public

service messages have greater impact when delivered by a neutral authority figure. Similarly, collections correspondence can be more effective when signed by a person of authority.

• People put undue weight on immediacy. People mentally “discount” the value (or

cost) of money in the future. For example, most people would rather receive $10 now instead of $15 a year from now, even though a 50% rate of return logically is the better deal. In the same vein, a small penalty that is charged immediately after a payment default is far more likely to influence a debtor than the threat of a much larger penalty in 12 months.

• Most people will do what others do. People often are motivated to act like others. As a result, sharing with a debtor that most people are paying their debts—and, in turn, inferring that the debtor is among the minority—becomes a potent message. The smaller the percentage of non-payers, the more powerful that message becomes. Conversely, sharing non-compliance statistics can risk reinforcing and encouraging such behavior.

A strong case can be made

for the smart and ethical

use of behavioral science

techniques in collections.

Nudging more people to

pay debts on time helps

customers and companies

alike. Customers avoid

additional costs in the form

of interest and penalties,

while company costs are

reduced as more customers

are steered toward making

the right choices.

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• People are strongly influenced by others “like” them. How peers and neighbors

behave matters to people. Targeted messages such as “95% of people in your city [or street or profession] have already paid their bills” can be highly effective.

• Personal messages are more effective. In a recent trial involving SMS text messages

sent to warn people of an imminent collections action, using the message recipient’s name at the start of the message increased response rates, as did including the sender’s name at the end.

• People are inclined to follow pre-set options. Providing default options that people

can perform on “auto-pilot” also can be very effective. For example, if the desired result is to secure an electronic payment after an online chat or message, providing easy access to an electronic payment option should be considered.

• People are drawn to things that are novel and relevant. Because people react

to what they notice, key messages must be prominent and easily understood. People may not read everything in a letter, and they may not read anything in a letter that looks like a previous letter. Small, low-cost adjustments to words and images can significantly improve response rates. For example, the use of emoticons (e.g., smiley faces) has proven to motivate positive actions. Different channels also should be tested to determine what works best and for whom. In a recent trial, SMS text messages were found, for a particular group, to be five times more effective in generating contacts than were letters.

• People tend to behave consistently with their public promises. When asked in

advance to make a written or oral commitment, people are much more likely to comply with their promises. For example, when setting up a payment arrangement, asking the debtor to confirm his or her promise to pay through a signed payment agreement increases the likelihood payments will be made. Agencies that allow people to set up such arrangements online or by phone have achieved lower default rates due to the higher level of personal commitment required.

• Most people want to do the right thing. As with the organ donor example, people

generally want to make decisions that make them feel better about themselves and are consistent with their beliefs and values. Companies should consider reminding debtors of the benefits of prompt payment, such as decreased interest charges and higher credit scores. In one study, people with large debts were much more influenced by such messages than people with small debts.

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WHAT CAPABILITIES DO COMPANIES NEED TO EXPLOIT BEHAVIORAL INSIGHTS? Behavioral science techniques increasingly are being used by a variety of debt collection agencies to significantly improve response rates at very little additional cost. As more is learned about how to apply these techniques in the collections area, the value of insights gained through behavioral science will continue to increase. Yet, this is not a “one size fits all” science. Regional differences will necessitate different approaches for different jurisdictions and populations.

Key success factors fall into two broad categories:

1. Gaining insights: Companies need to test the effectiveness of current strategies and

continually experiment with new approaches using statistically valid trials to determine what works best and for whom.

2. Deploying insights: Insights alone are not enough. Companies need to use new insights to

design and build predictive models that result in optimum collection strategies. They then need to deploy those strategies using an automated and systematic approach, continually evaluate them, and modify them quickly and flexibly, as necessary.

The essence of good debt management practice involves determining the likelihood a debtor will pay voluntarily within a given amount of time, and then using that knowledge to determine the best technique for producing the best result at the lowest cost. This discipline is called predictive modeling. It is predictive because it identifies the particular interventions that are statistically most likely to produce the desired outcome. Such models should be continuously reviewed for improvement.

THE 5R COLLECTION STRATEGY Organizations using the power of predictive modeling are able to achieve the “5Rs” of effective collections:

Placing the right account with the right resources at the right time using the right tools to achieve the right results.

PREDICTIVE MODELING BEST PRACTICES • Deploy—simultaneously

deploy and test multiple approaches

• Test—develop and test predictive models that enable them to “test and learn” using randomized control trials and other methodologies

• Simulate—assess the likely impact of new models before they go live, accelerating their testing and implementation timeframes

• Operationalize— move strategies into production by automating correspondence key processes and actions, allowing collectors to focus on cases that truly need human intervention

• Change continually— rapidly evolve their strategies.

+ + + =

Right Account

Right Resources

Right Time

Right Tools

Right Results

Optimal interventions will depend upon a range of considerations, such as the debtor’s previous behavior, the size and age of the debt, and the risk of default. They also will involve deploying the right behavioral messages, using insights from behavioral science to design smart and effective communications.

CONCLUSION Companies have an opportunity to significantly increase collections by employing behavioral science techniques and predictive modeling to help customers make better decisions. The key is to establish a strong and proactive analytics capability within a “test and learn” environment. Companies can then develop and maintain fully optimized and highly effective treatment strategies that derive maximum value from a new understanding of how their customers behave in real life.

HOW CGI CAN HELP CGI can help companies mine and analyze their own data, data from other companies and agencies, and data from third parties to build high-quality predictive models. We also can help them operationalize behavioral insights by deploying our Strata® decision engine. When integrated with CGI’s collection case management system, CACS®, Strata triggers a collection treatment action based on predictive models. Treatment actions then progress a case along the most optimal collection path. Our clients typically have benefitted from 10-45% increases in overdue collections by implementing such programs.

ABOUT CGI

Founded in 1976, CGI is one of the largest IT and business process services providers in the world. Operating in hundreds of locations across the globe, CGI helps clients become customer-centric digital organizations. We deliver high-quality business and IT consulting, systems integration and transformational outsourcing services, complemented by more than 150 IP-based solutions, to support clients in transforming into digital enterprises end to end. CGI works with clients around the world through a unique client proximity and best-fit global delivery model to accelerate their digital transformation, ensure on-time, within budget delivery, and drive competitive advantage in today’s increasingly digital world.

© 2017 CGI GROUP INC.