Is bad debt the price of growth?

As the economy fluctuates between contraction and growth, those businesses getting ready for the latter must prepare to face a new set of challenges. In the past, the volume of sales coming in meant businesses could absorb a certain amount of bad debt without cause for concern and credit departments were forced to absorb this debt in the name of ‘growth’. Today, even a little bad debt can cause big problems.

This, coupled with the surge in new regulation, means businesses are having to re-think many of their processes and strategies to treat customers fairly while staying competitive – strategies that not only maximise profitability but minimise risk, co-ordinated across all departments. It may sound like a large task, however, maximising responsible lending and profitability doesn’t mean starting all over again. It’s about optimising what you already have.

Smarter decision making is key to identifying the most profitable, low-risk opportunities within your customer base. Billions of decisions are made every day about customers – from what credit limit to set to who to contact first on the daily call list. Often these decisions will be based on who are the best and worst customers in your portfolio using scorecards and propensity models, which is a good place to start. As consumers embrace a multichannel environment and use new technologies for everyday tasks, customer demand and expectation has soared. Consumers expect organisations to gain insight from all the information being captured. They want tailored communications and businesses to take account of their preferences, purchasing history and other customer information. If they’re not satisfied, they’re quick to tarnish brands using these same technologies and social media. In a short space of time negative comments can spread and a brand’s reputation is damaged.


However, as pressure to lend responsibly continues and capital requirements increase, making your risk scoring models more complex can help you manage customers more effectively and minimise bad debt. This should include incorporating the wider goals and business objectives of all departments, such as expected loss, lifetime value, return on capital and provision for bad debt.

Managing the conflicts and trade-off between these often competing business goals is a complex issue. Optimisation software can be used to help manage this in the most effective way possible and at every point in the customer lifecycle – from acquisition (e.g. initial limit assignment, setting pricing terms and acquisition strategies), and customer management (e.g. limit management strategies and retention) through to collections activity (e.g. dialler optimisation by call centre and time of day).

The Holy Grail is to optimise decisions across functions or departments. Imagine if a credit limit management strategy was co-ordinated with a cross sell campaign, with the impact of how one affects the other, and the trade-offs between the two, understood in detail.

Optimising existing strategies also provides insight on the effect of different actions, limits or terms on profits, so departments can see the trade-off between their decisions clearly. This enables customer management and collections to identify the optimum blend of decisions that generate the most profitability with the lowest risk. Even so, the financial situation of customers can change quickly.

When getting ready for sudden upturns and downturns in your customers’ circumstances, early notification can make a big difference. Knowing, for example, that a customer has missed payments to a competitor is a sure sign that the same might happen to you. With an early warning system in place, action can be taken quickly to reduce credit limits, and ensure collections know who to chase first.

Businesses will also be in a stronger position to not only decide if they can or cannot lend, but assess how to lend – what measures should be put in place to maintain the relationship and future profitability, whilst also minimising risk, recovering monies owed, and reducing the potential for bad debt? As competition grows across global marketplaces, organisations will come under more pressure to make these effective decisions. The good news is that for those that do, customer management capabilities will increase, driving up your brand reputation, the lifetime value of every customer and your profitability.

David Percy

David is a Business Consultant within the Global Consulting Practice in Experian. He is also responsible for the development of Experian’s optimisation propositions in the UK.

David has over 13 years of experience in implementing and managing analytical and optimisation projects across credit risk, as well as on the marketing side.

To learn more about optimising your collections strategy, see our latest guide.