Discover the behavioral science tactics that turn customer hesitation into action—and improve recovery rates.
Updated on November 5, 2024.
Did you know that taking a behavioral science approach when developing your debt recovery strategies can enhance customer engagement and increase cure rates?
Behavioral science provides a different approach to tailoring your interactions with your past-due customers—offering the insights you need to truly connect with customers and encourage them to take repayment action.
After reading this blog, you’ll understand what applied behavioral science is and why it offers such exciting opportunities for successfully engaging with delinquent customers.
Applied behavioral science for debt recovery strategies
Simply put, applied behavioral science is the study of decision-making and how we can influence the decision-making process to drive better outcomes.
People don’t tend to base their decisions on pure logic or rationality. We’re emotional beings, and our decisions are shaped by multiple intersecting perceptions, attitudes, needs, biases, personal circumstances, and contexts. Behavioral science provides the ability to understand these influences, to analyze and quantify them.
In the context of debt recovery, when you understand how your customers make decisions, you can address those obstacles that prevent them from making payments. Additionally, when you understand how they’re likely to react to interactions, you can design your communications empathetically to get to a win-win outcome: happy customers and a competitive advantage for your company.
Why behavioral science is critical in delinquency management right now
Uncertainty challenges customer engagement in collections
In this time of economic and social volatility, exhausted and uncertain consumers face adversity across many aspects of their lives. Perceived and actual threats to life and livelihoods (such as health, job security, and financial security) are reshaping perceptions and motivations. This makes behaviors more volatile than ever. As a result, it’s increasingly challenging to effectively engage with consumers.
For example, customers who are in a crisis or feel threatened may expect rapid responses. If you don’t respond quickly enough, it can make them even more stressed and impact their decision-making further.
On top of that, in an increasingly digitalized world, there are also growing barriers to engagement such as:
- Digital fatigue: Mental and physical exhaustion caused by an excessive amount of time spent on digital devices.
- Decision fatigue: A state of cognitive overload that impedes a past-due customer’s ability to effectively evaluate and make decisions.
These barriers to engagement can encourage customers to avoid communications, drive them to make impulsive choices, or make them unwittingly act against their own best interests.
Dynamic engagement with past-due customers
Against this backdrop, it’s no surprise that behavioral science has become the go-to option for powering successful debt recovery tactics. It’s also worth noting that legacy collection strategies are, by definition, insufficient in the face of most past-due customers’ complex and changing behaviors.
Legacy strategies are often defined by analyzing retrospective data—in essence, they’re defined by what happened yesterday. They trust that any behavioral shift since yesterday, which could compromise the strategy’s effectiveness, hasn’t been too significant.
Using applied behavioral science, however, you can engage with past-due customers in a more dynamic manner. By understanding their decision-making behavior today and what it could be tomorrow, you can create debt recovery strategies that adapt to customer needs in real time. This approach also allows you to hyper-personalize outreach campaigns, letting them be shaped by individual behaviors and expectations.
With behavioral science, debt collections teams looking to address pain points along the customer journey can easily and unintentionally miss the mark. In contrast, successful outreach campaigns look beyond surface-level indicators and address underlying causes of delayed or missed payments.
A key behavioral science concept that drives customer decisions
To identify these root causes, let’s unpack one of the main concepts at the heart of behavioral science: the intention-action gap.
The intention-action gap: Bridging the divide between goals and follow-through
Even with the best intentions—such as repaying a past-due bill—various biases and distractions can prevent follow-through. We refer to this as the intention-action gap.
For instance, a customer might fully intend to make a payment, understanding the importance of staying on track financially. However, when unexpected expenses or immediate needs arise—like car repairs or groceries—those intentions can take a backseat. Perceptual biases, competing needs, and immediate desires can shift focus away from initial goals, impacting outcomes for both customers and service providers.
Helping past-due customers over the intention-action gap
Behavioral science helps you identify and understand the specific barriers, challenges, and biases that are creating the gap between a customer’s intentions and actions. You can leverage this comprehension to bridge that gap, using specific behavioral tactics to validate the customer’s motivation and subsequently encourage the desired repayment action.
Behavioral science in action
So how does this work in practice?
Behavioral science in everyday life
According to psychologist Daniel Kahneman, the human brain processes information on two levels: automatically (System 1) and analytically (System 2). When using familiar technology, it’s in System 1 mode, where actions flow naturally. But when we switch to something unfamiliar, like moving from Apple to Android, we’re forced into System 2, where tasks feel slower and require more focus… and that often causes frustration or other negative feelings.
Behavioral science in delinquency
In debt recovery, let’s say a customer has always called to make their monthly payments by phone. In other words, they rely on automatic behavior, or System 1 thinking. However, recently your company introduced a new way to process payments via a web-based payment portal. That same customer may now feel frustrated or overwhelmed when they receive an email asking them to use the new payment method. Here’s how a possible scenario could progress:
- Confirmation bias: As the customer tries to log into the new payment portal, they start to mentally confirm the assumptions they had at the beginning (“I knew this would be difficult”) and feel frustration and resentment towards your company.
- Ostrich effect: Their frustration level hits its peak, and they just want to go back to paying by phone, the way they used to. Instead of working through the new process, they choose to metaphorically bury their head in the sand to avoid it.
- Status quo effect: They decide to abandon the payment portal altogether in favor of the more familiar interaction: engaging with a real person.
Boosting debt recovery outcomes through behavioral science
Interestingly, by making your communications easier to digest—and so reducing the need for System 2 thinking—you can guide past-due customers towards the desired repayment behavior without unnecessary friction.
Let’s look at an example of how we could gain more information about the customer while also helping reduce friction:
Here, behavioral tactics are being applied interdependently to discover and better align what motivates each individual customer.
First, the customer’s perception of the process is addressed using a tactic called implementation intentions. With the creation of a concrete plan to do something, the customer is more likely to actually do it. There is a clear path to achieving a goal.
Second, the quick checklist activates the goal gradient effect. By ensuring the customer feels closer to achieving the end goal—which is visualized in the three steps—they’ll accelerate towards it.
Third, highlighting that this item belongs to the customer (“Ready to check this off your list?”) encourages both ownership bias and self agency. This can guide them towards a greater level of accountability to complete that task.
Finally, by including response options, you put a feedback loop in place to validate assumptions about the customer, better understand their challenges, and tailor future interactions.
Debt recovery strategies that are a win-win
Employing behavioral science methodologies in delinquency management has benefits for companies and customers alike:
Companies
- Gain a competitive edge with insights that are tailored to overcoming specific barriers to repayment.
- Are able to solve challenges and convert customers more efficiently by understanding what’s driving behavior so pain points can be identified and addressed at the root of the problem.
- Can apply insights across the entire debt recovery process to dramatically improve recovery rates.
- Can improve personalization, resulting in improved customer engagement and increased customer LTV.
Customers
- Make positive repayment decisions faster, which helps prevent their debt from escalating.
- Feel understood and confident that their provider knows how to meet their needs, thanks to highly personalized experiences.
- Receive options that are truly helpful and desirable.
Future-proof your debt recovery strategies
Incorporating behavioral science into your debt recovery tactics is a game changer. By understanding and addressing the thought patterns and emotional hurdles that impact decision-making, you can empower your customers to make positive choices while supporting your company’s goals of increasing recovery rates.
As economic conditions and customer behaviors continue to shift, incorporating behavioral science into your collections processes positions you to respond dynamically, personalize at scale, and ultimately foster better outcomes for both your business and your customers.
Read Advanced strategies for more effective debt collection I for a deeper dive.
