Advanced strategies for more effective debt recovery II
How to counteract mental shortcuts to drive better outcomes in delinquency management
Key Takeaways
- The pain of paying can delay customer action. Address it with supportive, clear messaging.
- Data science enables smarter outreach by predicting what works best for each customer.
- Small changes in timing, tone, and delivery can significantly improve recovery rates.
In debt recovery, heuristics and cognitive biases can get in the way of a customer taking repayment action. Here, we explore how to counteract mental shortcuts that prevent customers from making sound financial decisions when they're in debt:
- Fresh start effect
- Mental accounting
- Pain of paying
Reframing customers' financial situations is key
Mental shortcuts like prospect theory and optimism bias can heavily influence how customers react to collections messages. It follows that when we recognize the mental shortcuts at play, we can adapt our messaging to reframe their situations in a more positive, empowering, and action-inducing light. This is critical to improving cure rates.
Data science—an essential element of effective debt recovery messaging
In this endeavor, data science is indispensable. By analyzing millions of data points—from customer behavior patterns to historical repayment data—we can uncover hidden trends and signals that allow us to predict where each customer is in their debt journey. In other words, we can determine which delinquency archetype they are.
This context enables us to determine what types of mental shortcuts are likely impeding repayment—and when customers are most open to responding positively to specifically framed outreach campaigns. It's a complex process involving predictive modeling, behavioral segmentation, and near real-time analysis.
Examples of mental shortcuts in debt and how to counteract them
There are dozens of mental shortcuts—and many of them are helpful for navigating our daily lives. But when they get in the way of a customer's repayment efforts, they become a problem for both the customer and collections. Let's take a closer look at three mental shortcuts we frequently encounter.
Fresh start effect
People inherently have a slight positive bias towards things that are new. Think of all those New Year's resolutions we make, like making healthier food choices or stopping smoking.
To counteract the fresh start effect, we have to understand that the customer is focused on their past failures and then redirect their attention to the new opportunity we present.
Example: Mary's phone bill
Let's say that Mary is frequently late with her phone bill payments. She keeps trying to make them on time, but recently, her service was disconnected and she had to pay a significant late fee.
In this situation, we could reframe her fresh start bias with a message that says: "Mary, let's start the month fresh by setting up autopay for your phone bill!"
Mental accounting
People tend to allocate funds into specific categories. For instance, Darren and Jerome have $5,000 in their joint savings account earmarked for a trip to Machu Picchu—but also have $3,000 on their credit card.
Technically, they could use savings to pay off their credit card debt. But they don't, because that money is reserved for the trip.
Example message:
"Darren and Jerome, imagine how much more you can save by redirecting your funds toward reducing your credit card balance today. Pay off your balance now to stop additional interest charges from piling up, and free up cash for your other priorities."
Pain of paying
With pain of paying, a customer has negative feelings due to the initial sense of losing money when they pay the bill. They may also have additional negative emotions associated with settling the bill.
One way to counteract the pain of paying is to highlight the benefits of making a payment.
Example: June's car payment
June has an overdue car payment. She keeps thinking of paying it, but she's been working overtime to make ends meet and is having a hard time letting that money go.
To prompt her to pay: "June, don't waste your hard-earned money on late fees and interest—make a payment within the next 24 hours."
The combined value of data science and behavioral science
To successfully overcome mental shortcuts in debt recovery, we need to combine the power of data science with the nuances of understanding decision-making. We can use predictive models and behavioral segmentation to help pinpoint when and how customers are most likely to respond to specific messaging. Then we can leverage our in-depth insights into mental shortcuts to guide the messaging, tone, and timing of our outreach.
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