EXUS Collections & Recovery Blog

How the flywheel effect can benefit debt collections

Posted by Dimitris Vassiliadis on Thu, Jan 24, 2019 @ 02:45 PM

How the flywheel effect can benefit debt collections-1

The sales funnel is a model that has worked across numerous industries for decades, but is its time in the sun waning?

Its success depends largely on trust, but trust in the government, the media and brands has been whittled away in recent years. People no longer hold much (if any) stock in what marketers have to say. In this era of mistrust, word of mouth is more important than ever before - particularly in debt collections, where mistrust is rife, due to a history of aggressive practices and continued reliance on antiquated collections techniques.

The funnel no longer works, so perhaps it's time we look towards the flywheel effect?

The Flywheel Effect Explained

This flywheel effect focuses on the power and momentum catalysed by certain business practices.

A flywheel, as described by author James C. Collins in his acclaimed managerial tome, Good to Great, relies on an initial force to get the wheel working until the momentum kicks in and it spins faster and faster with its own weight propelling it. At that point you aren’t pushing any harder, but the flywheel is accelerating, its momentum building, its speed increasing. You’re getting more and better results from the same initial effort.

From a debt collections perspective, this momentum could be achieved by encouraging staff to produce faster and better results, or using more customer-focused practices that put the customers back in control of their debts. These tools and strategies effectively capture, store and release energy from customers and employees alike.

Using the right tools and the right parameters in the right way can build the right amount of customer energy and make your collections process a flywheel that spins indefinitely - not one that sputters to a sad standstill. These tools and parameters can be grouped into two dynamics that will make any flywheel work: force and friction (or a lack thereof). It's a combination of these two dynamics that must be mastered in order to truly harness the potential of the flywheel.

The Right Amount of Force

A wheel requires force in order to be set in motion, of course, but the kind of force, its strength and where you place it make all the difference. Excessive force (demanding money through coercion) might cause the flywheel to spin off its axis and out of control, whereas a more subtle and refined force could set in motion an effect that continues to gather pace and results.

Amazon founder Jeff Bezos described a “eureka” moment upon reading Collins' book. Bezos used the flywheel effect to build Amazon into the powerhouse it is today by reducing prices to generate customer visits and attract third-party sellers. The flywheel effect can be most obviously gleaned, however, through the prism of the monumentally successful Amazon Prime service, which boasts 80 million members (60% of total Amazon customers) and an $1,300 average member annual spend (compared to $700 by non-members).

According to Bezos himself: “Prime Members buy more on Amazon than non-Prime members. Once they’ve paid their annual fee, they’re looking around to see how they get more value out of the program. So they look across more categories, they shop more and a lot of their behaviours change. It really is a flywheel”.

So, in the case of Amazon, the successful flywheel forces were lower prices and a forward-thinking premium subscription service, but what forces work elsewhere?

In sales, the right place to apply force is in the areas that please and encourage customers. In debt collections, this approach could perhaps be applied by letting support staff know they are being judged on customer feedback, thereby motivating them to provide a better service. It might seem like a bold move, particularly if bonuses depend on it, but it's the kind of bold move that could have an immediate impact on customer satisfaction, and satisfied customers are far more likely to repay their debts quickly and efficiently.

Of course, this could have a detrimental impact on your employee satisfaction. The proverbial carrot needs a stick: your customer service and collections staff should receive bonuses based on customer repayments, emphasising reward and not punishment, creating a more positive attitude that will pass on through customer interactions. The carrot could work for customers too. If they pay a certain amount a year with no defaults, for example, perhaps the bank could reward them by paying off two months of debt for free. Of course, there are few precedents for such tactics, so there’s no way of knowing definitively if this would be effective, but fortune often favours the bold.

Using a combination of the carrot and the stick approaches should get the flywheel turning smoothly. Just remember that the whole point of a flywheel in a debt collections scenario is to get the repayment wheel turning faster and generating its own energy - so you’ve got to look for the factors that hold it back.

A Lack of Friction

Customers always come first, but banking has been slow to adopt this thinking. Making sure the flywheel has as little friction as possible means giving some agency back to the customer and utilising customer-first practices, even if the customer happens to be a delinquent debtor. Remove the barriers that are making it harder for your debtors to repay and keep the flywheel well-greased, and you’ll need to use less force to keep it spinning.

A major aspect of modern customer-centricity is, of course, digital transformation. Debt collections has traditionally fallen behind its financial peers on this front. Many major banks see digital transformation as an evolving capability – a flywheel that will be turning for the next decade or so. Technologies that work elsewhere in financial services could quite easily benefit debt collections.

AI chatbots are a convenient, 24/7 option that is constantly improving. The impersonal nature of a chatbot has obvious benefits in such a sensitive sector, with customers feeling more comfortable talking to a machine about their debts than a human being. Machines don’t judge, after all.

Perhaps the most obvious implementation of digital transformation, however, is in the user-friendly apps and self-service technologies that have long been utilised by banks to put the control back in the hands of the customer. Most modern debt collections channels are anachronistic by comparison, but that needn’t be the case. Bespoke apps and debt collections software can offer customers convenient tools that allow them to organise their debts and repay them more efficiently.

Tech is an incredibly powerful tool, but customer repayments need to be made as simple as possible, and you need to set the right parameters to ensure they can keep up with repayments. This will ensure that payments continue to be made and the wheel keeps on turning.

How the flywheel effect can benefit debt collections

Mental Transformation

Banks have been thinking about debt and debt collections in the same ways for years, but it's time for a change. While digital transformation is certainly a start, perhaps a little mental transformation is necessary too, particularly among banking leaders eager to push back against trends and avoid costly changes. Often, the solution is more about making a number of smaller changes than one big change, and these changes can be rolled out in stages to avoid major disruption.

Getting the flywheel in motion requires the right amount of force in the right areas, and removing the things that keep it from spinning freely. This means using a combination of the tactics above to create a system that generates its own energy and its own results. Ultimately, making the flywheel effect work for your retail bank might involve a little initial disruption, but once that wheel kicks in and the repayments start flowing, you’ll be happy you made the effort.

CLICK HERE for more information on how EXUS is helping digital, customer-focused debt collections services follow the banking sector at large in framing client focus.


Ashton Frost Flywheel image credit:

Globbet [CC BY-SA 3.0 or GFDL], via Wikimedia Commons

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