New research study at the McCombs School of Business, the University of Texas, Austin dedicates study benefitting the banks who are often caught in financial risks and face uncertainty when it comes to chasing customers who default credit card payments and when to stop chasing after them.
Banks are commonly dependent on outside agencies to recoup important credit card debts, however this process is expensive. As a result, Naveed Chehrazi, an assistant professor of information, risk and operations management at the McCombs School, developed a model along with his team of fellow researchers. They targeted banks and their collection agencies in order to perfect the model which can determine when to begin the chase of a delinquent account and when to let it go.
The team relied on information based on the likelihood of repayment, and the amount in debt. This method helped bankers to decide the optimal collection strategy based on the information of the user and the state of the account.
“When you know how much capital is at risk when an account holder defaults, you are able to better assess the risk of an applicant and properly adjust the parameters of the account,” reported Chehrazi.
According to experts, the optimal collection strategy surveys any state of the account into action. With the help of the model, collection mangers are able to determine the right time and nature of the action. It can further also take form of negotiating a repayment plan, establishing a contact, or even filing for a lawsuit. The higher the person’s unpaid debt, the more sense it makes for the bank to undertake strong actions in order to spur repayment, which is not necessary for smaller delinquencies.
The study has also developed an ‘economic balance threshold’, it denotes a point at which an active pursuit of reclaiming a debt is not required. As a result, the banks could determine which accounts are worth spending money and time on. However, the model can also prove to be advantageous in different stages of collection process.
“One application of this is determining how much capital reserve banks have to hold in order to properly take into account the risk of delinquency and loss,” Chehrazi comments. “It is useful for an account, it is useful for banks and also it is useful for the general consumer population. The benefit of this for the whole economy is that the risk of default is better accounted for and that the general population would have easier access to credit they need.”
The research was published in the journal Management Science