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, using these as examples: 

  • 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. 

For instance, we can identify when a customer is likely influenced by the “fresh start effect” or when they’re probably compartmentalizing their finances in ways that prevent them from prioritizing debt repayment.  

By understanding these patterns, we can leverage applied behavioral science—or the study of decision-making—to craft targeted messages that counteract these biases. Ultimately, this makes it easier for customers to take the necessary steps to resolving their debts.

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 in a customer’s debt journey.

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.  

Is there any practical reason for starting—or stopping—a specific behavior on January 1st? Nope. But for some reason, there’s an emotional significance to it that we recognize immediately. A new year is a fresh start in many people’s minds. And a fresh start is an opportunity to leave past failures behind and start anew… so we gravitate towards it.  

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. 

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—on top of her past-due bill—to get reconnected. So she promises herself, “This month, I’m going to pay the bill before incurring late fees.” 

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!” This takes advantage of her inclination to choose something new (a new month) for positive action while offering her a solution that effectively ensures she pays all future bills on time.  

Mental accounting

People tend to allocate funds into specific categories. For instance, Darren and Jerome have $5,000 in their joint savings account that they’ve earmarked for a trip of a lifetime to Machu Picchu.  

They also have $3,000 racked up on their credit card.  

Technically, they could use the money in their savings account to pay off their credit card debt. But they don’t, because that money is reserved for the trip they’re both looking forward to.  

And so the interest keeps accumulating on the credit card debt... 

When we recognize mental accounting, we can send messages that make the customer aware that they would benefit from taking a more holistic approach to their finances. We break down the silos between the different “pots” they’re reserving for specific objectives to show them that by redirecting their funds now, they’ll have more money in the future for those objectives. 

An example email could be: “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. But they also have additional negative emotions associated with settling the bill. Maybe it’s humiliating for them to call to make the payment, or perhaps they feel resentment because they had to scrape to get the money together.

One way to counteract the pain of paying is to highlight the benefits of making a payment. For instance, 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, we could send her a text message that says, “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 in debt recovery

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. This integrated strategy encourages customers to take repayment action in a positive manner—and that leads to improved engagement and higher cure rates.  

Discover the four key tactics that make it easy for customers to decide to repay—read How to reduce the burden of decision-making in debt repayment.

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