Credit Risk Connection Top Tip

First Payment Defaulters – Part 1

First payment defaulters, or FPD’s, are those customers that failed to make their very first payment on a credit facility. Intuitively, they represent a substantial risk and should receive accelerated collections actions.  However, the assumption that the customer intentionally refused to pay the first instalment amount is often questionable, especially in developing markets.
This month’s tip focuses on managing FPD accounts in developing markets.  These markets typically have unique infrastructural, cultural and socio-economic conditions, which necessitate specific early stage treatment.  As a result, lenders in emerging markets have developed specific tactics to effectively manage FPD’s:

• Queue FPD’s immediately

It is best practice to queue first payment defaulters immediately.  Accounts should be assigned to a collections queue to enable immediate and specific treatment.  Collections management will also be able to determine and track FPD volumes over billing periods.  A substantial increase in volumes may prompt further investigation, as this may be an early indicator of attracting higher risk applications in the marketing campaigns.

• Educate customers

In developing markets, it cannot be assumed that the customer received a statement.  This means that the collector talk-off in one cycle delinquency should be less aggressive.  In order to promote a monthly repayment culture, it is typical that an educational message is conveyed to the customer.  This includes specifying the importance of maintaining a good payment record and providing an indication when payments become due.  Aggressive action may be taken at two cycles delinquency, as customers were previously informed of the monthly payment obligation.

• Beware of postal service excuses

In regions where postal services are less reliable, mail may be returned if incorrect details are contained in the address. Mail may also ‘disappear’, even with a correct address, thereby effectively providing a customer with an excuse for non-payment.  The subsequent follow-ups by collectors should therefore be focused on obtaining updated and corrected contact details and explaining that payment is due, regardless of receipt of a statement.
For card-based revolving products, it is crucial to determine whether approval letter packs, the card and/or PIN mailer were sent to the same address.  If this is the case, then it is less likely that the first statement was not received!  Where a different address was used, this needs to be verified and if required, a PTP set and duplicate statement mailed.
In the next Top Tip, we will consider best practices in managing FPDs in developed markets.
About the Author
Stephen J. Leonard, Founder & CEO, Credit Risk Connection

Stephen J. Leonard is the Founder and Chief Executive Officer of Credit Risk Connection, a risk management consultancy and reseller of analytics, consulting, CRM, scorecards, software and training. Stephen has over 25 years’ of specialist credit risk management experience in the emerging markets of Europe, Middle East, Africa and South Asia. He has managed assignments with over 150 clients in 30+ countries, covering the entire credit life cycle and the complete range of organisations and products in the consumer credit, SME and credit bureau industries. Stephen holds an AS, BA and MBA and can be contacted at SLeonard@CreditRiskConnection.com