In April 2008, my company conducted a survey of U.S. households which found that 25 percent have at least one bill 30 or more days overdue, and that 52 percent of households are finding it harder to meet their financial obligations than they did twelve months ago -- an increase from 43 percent who said the same in October 2007.
Americans are increasingly being forced to prioritize their bill payments by creating a delinquency budget, ranking which bills they would be most likely to pay if they had to choose. It should come as no surprise that the mortgage bill tends to be the one that most households (98%) are most likely to pay.
Utilities Hit by Spiking Delinquencies
With consumers prioritizing their bills, utility companies are seeing an increased risk of delinquencies. Our survey showed that approximately nine percent of households are at least 30 days delinquent on their utility bill. That number is up significantly from October 2007. Just this week, the National Energy Assistance Directors' Association reported that utilities across the country are seeing record numbers of shutoffs.
The perfect storm of colliding financial pressures on consumers budgets hits a utility company particularly hard during the spring and summer months. As winter moratoriums end and warm-weather energy bills hit their peak, utilities face significantly increased costs. These encompass having to send severely delinquent accounts to collections and hire additional crews to physically shut off service -- which, these days, means ever higher fuel costs for those crews to do the job. Add to that the additional cost burden of having to collect deposits for households now classified as high-risk when service is restored and having to, again, dispatch crews to physically turn on service.
And, sadly, these high-risk households may be cyclically delinquent at various times of the year, requiring repeats of this costly exception handling. Unlike other service companies, such mortgage lenders, wireless telecommunications or credit card issuers, utilities cannot just charge off debt and walk away from high-risk accounts. They must provide service universally to every household in their region.
It is no wonder that the words delinquency and collections typically generates stress and challenges for utilities.
Advent of Virtual Collections Traditionally, managing delinquent accounts has meant an increase in staff with the accompanying challenges related to hiring, training and compliance, or an increase in dollars spent outsourcing debt collection to first-party collection agencies. Both of these are a significant burden for most utilities
Online payments for accounts that are current have been around since the late 1990s. Web technology specifically created for the collection of delinquent payments is a relatively new concept that only a few billers in recurring industries, such as utilities, have deployed, thus far.
When consumers are faced with the consequences of collections, our research strongly suggests that delinquent account holders are much more willing to resolve the situation via the privacy and convenience of the web, through what we refer to as virtual collections. In fact, 28 percent of consumers said they would be more likely to pay a past due bill if they had the ability to settle the debt via a web site, whereas only about half that number was likely to respond to a phone call or letter from a collection agent.
Web-based collections has proven to be a cost-efficient and effective tool in improving delinquency roll rates for early stage delinquent accounts, and increasing payments from later-stage delinquent accounts. It has also helped eliminate or soften many of the negative aspects related to managing these situations with consumers and has given account holders more convenience to resolve their delinquent status.
This is of particular importance, I believe, for utilities, because they must provide universal service and have, in effect, customers for life. Providing as positive an experience as possible, as consumers cycle all the way from delinquency and collections and back into good standing, just might give utilities an edge in competing effectively for those consumers on-time payments during good times and bad.
- Adoption of web-based collections by delinquent account holders is increasing as users become more comfortable remitting payments online.
- Account holders who make a promise-to-pay during a web session keep their promisesthe average payment commitment experienced a 94% keep rate.
- A key benefit to web-based collections is convenience22% of logins occurred on Saturday or Sunday, or during off-hours when regulations or hours of operation prevent contact by billers, creditors and traditional collection agencies.
Overcoming Skepticism about New Collection Technology
From January to May 2005, we set up a pilot study with a large bank to test whether people would pay their delinquent bills at a web site offering them multiple ways to self-cure or resolve their debt online without assistance from a live agent. The bank was initially skeptical. First, it questioned whether delinquent customers would even come to a web site. Second, management doubted that delinquent account holders, whom the bank had been unable to reach by phone, mail or an 800 number, could be convinced to pay their overdue payments simply because they could go to a web site to do so.
The study was a champion-challenger test where the bank randomly selected 10% of its delinquent accounts and changed how they were treated. The only variable in how these accounts were treated was the promotion and notification of the financial advisory nature of the virtual collector web site for those customers to make payments, learn about potential payment programs or perhaps settle out their accounts.
The bank realized a loss reduction of 310 basis points, which would translate to an annualized savings of $3.1 million for an organization with $50 million in delinquent balances.
Other studies by our company have shown that companies who implement specialized web sites for resolving delinquent accounts have seen positive results.
- About 20% of the users who self-cure online do so during hours that companies collection operations, whether in-house or outsourced, are not traditionally open.
- Almost half the users have not been successfully contacted by the company in the prior 6 months, if ever, and two-thirds of them are late-stage delinquent accounts.
- Web users have higher rates and amounts of payment against higher average balances.
- Consumers choice of the web increases over time: the web has about twice the activity today that it did a year ago.
- Web site visitors paid a dollar amount three times more than the portfolio average and paid four times more often than the portfolio average.
Utilities, other Billers Out of Sync with Consumer Preferences
Only 8% of billers -- including utilities -- offer a web site that goes beyond accepting payments to allow consumers to cure their delinquency. This means that they are missing out on a significant opportunity to improve how they meet consumer preferences for making delinquent payments, while saving money at the same time.
As more consumers find themselves in unfamiliar territory, being delinquent on bills they have always paid on time, utilities should embrace the opportunity to adopt new collections practices that minimize credit losses and ease the pain for consumers.
Innovative technology cannot prevent people from facing tough economic choices between which bills to pay this month. But its effective use can limit the repercussions and costs for the companies that serve them.