Getting the Basics Right

In this 3 part series of tips we look at some of the basic fundamentals of debt management and how getting the basics right can improve the overall effectiveness of a collections department.

The second tip of this series focuses on the different methods of delinquency measurement and how the method used can have a significant impact on an organisation’s collection results.

A delinquent account means an account where a customer has failed to make an obligatory payment on a specified due date. There are two main methods of measuring the level delinquency:

Recency delinquency
Contractual delinquency

Recency delinquency is measured according to the last time a qualifying payment was made on the account. Contractual delinquency is calculated by the total number of monthly payments (where billing occurs once a month) that were due and that the customer failed to pay.

To illustrate, a customer makes a purchase and it is agreed that the customer will pay the purchase price by way of a number of minimum monthly payments. Subsequent to the purchase, the customer will receive a statement that will set out, among others, the minimum payment amount that is due and the date by which payment is due. Should the customer fail to pay the required amount on the due date, the account will be regarded as being delinquent and the level of delinquency will be 1 payment missed or 30 days past due.

Another statement will be sent the following month. Should the customer again fail to make a minimum payment, the account will move to 2 payments missed or 60 days past due. Generally, one payment is made every billing cycle. As a result, the number of payments missed is often referred to as the number of cycles delinquent.

Should the customer pay one of the outstanding minimum payments, the new level of delinquency will depend on the method used to measure delinquency. Using Recency, the account will be returned to an up to date (current) position and the account will be treated as if the account is up to date. Using Contractual, the account will be returned to the appropriate level of delinquency based on the number of minimum payments/instalments that are still past due, in this case 1 cycle delinquent, and will be treated as a 1 cycle delinquent account.

Should the customer once again fail to make a minimum payment, the account will be regarded as 1 cycle delinquent using Recency and 2 cycles delinquent using Contractual.

The timing and harshness of the collection action should depend on the level of delinquency of the account. However, it is clear from the above illustration that the timing and harshness of the collection actions, and the consequent results achieved, could differ depending on the method of delinquency measurement used.

Recency is a more lenient measurement as it ignores the arrears amount on the account. Recency often delays the inevitable write-off of bad debt, which could result in the value of the organisation’s bad debt being disproportionately large.

Contractual delinquency is a more risk conscious measurement as it adjusts the account’s level of delinquency according to the amount of the payment compared to the arrears amount. This is a true reflection of the accounts position in terms of payments outstanding, and is by far the most common methodology that is considered best practise.

In the next tip of the month we shall consider specialisation, and how specialised functional areas within a centralised collections department can maximise the overall efficiency of the department.

Charl Van Rhyn is a Senior Consultant at PIC Solutions, the largest customer management solutions company based in the Southern Hemisphere. He has over 8 years of credit and risk management experience as a practising attorney, specialising in collections during all stages of the delinquency life cycle. At MBD Attorneys, a leading South African debt collection law firm, he served both in the capacity as Director Litigation and Senior Accounts Executive. Key responsibilities included the management of key business relationships within the banking, financial services, furniture retail, telecoms, utilities and health & leisure industries. He holds a B. Juris and LLB degree from the University of Potchefstroom. He is an admitted attorney of the High Court of South Africa and a member of the SA Institute of Credit Management.

About PIC Solutions
PIC Solutions provides customer management solutions to a wide range of blue-chip organisations. We are experts in the fields of credit, risk and marketing and have an established track record of success powered by solutions.

For more information on how PIC Solutions can optimise the credit life cycle of your business please visit www.picsolutions.com.