Deconstructing Debt Head

American Demographics, Dec, 1998 by Charles Fishman

Mitch Bonilla is deploying one of the most exotic, sophisticated kinds of technology available today to tackle one of humankind's oldest tasks: bill collecting.

Bonilla and his San Diego-based company, ContiAsset Receivables Management, are using neural network software to better understand the people who fall behind in their bills-and to help identify which ones will ultimately pay up.

Neural networks are computer programs that actually "learn" from their experience performing a particular task, and then get better at it, like IBM's Deep Blue, by identifying significant patterns and aberrations. The programs are used for a wide variety of complicated jobs, from managing power plants and understanding traffic jams to doing medical diagnosis and detecting fraud in financial transactions.

Bonilla just wants a little help figuring out which of his delinquent credit card customers will ultimately pay their bills in full, which ones will only pay 50 cents on the dollar, and which ones will tell him to get lost. The neural network his company has designed takes data about customers from several different sources and searches for patterns that will predict how various groups of delinquent debtors are likely to behave. Bonilla would, of course, much rather call on the full-pay customers first. "We're in the developing stage now," he admits. "It's a little fragmented, but even in fragmented pieces, it's working pretty well."

ContiAsset is one of a handful of companies nationwide pushing into a new frontier in financial services: studying the demographics and psychographics of delinquent debtors so that creditors can tailor their collection approach. The company is looking for signals about payment behavior based on its customers' current situation-their present income and how they're dealing with other creditors.

Other financial services companies are trying to understand whether the circumstances that caused people to fall behind on their bills can be used to predict if they will ultimately pay those bills. Do divorced people need different incentives than those who have been widowed? Do kids fresh out of college who max out their cards with furniture and bar bills respond differently than people who were unemployed for nine months and used credit to buy milk and bread? Who struggles to pay, and why?

Tulsa-based Consumer Financial Services, which owns $15 billion in charged-off credit, has been the giant within the group of companies that buy delinquent debt from credit card companies for a substantial discount, then work to collect that debt. CFS, which stumbled this fall amid allegations of irregularities involving its financing, is nonetheless a pioneer in studying delinquent debtors. This summer, the company went so far as to hire a full-time clinical psychologist to help it learn more about its customers, luring John Bachman from private practice in Menlo Park, California.

Demographic analysis has been common for years, if not decades, among companies that offer credit-using sophisticated formulas to figure out who to offer credit cards to. But even the credit card companies haven't expended much energy trying to understand why people stop paying their bills, and how best to persuade them to resume paying.

"What we would like," says Wayne Learned, operations manager of CFS, "is to be able to say about a customer, 'This is a WASP from Minnesota who subscribes to these three magazines, attends this kind of church, has this socioeconomic status,'" and got into financial trouble because of, say, a divorce. "So when we contact him, our computer [will] say, 'This is who he is and this is the available employee who is the closest match, in terms of demographics and psychological profile.'"

Two things are surprising about these efforts. One is that they reveal how little financial services companies often know about their customers. The other is how revealing, and how powerful, even a little bit more information will be.

"We don't know where this is going to end up," says Learned. "We're just dreaming this stuff."

More than ever, this is the season of consumer debt, and not only because December is the month Americans traditionally buy things they pay for come spring. In 1997, there were 1.3 million personal bankruptcy filings-an all-time record-up 20 percent from 1996 filings, which were 29 percent above 1995. Those three years alone account for more bankruptcies than were filed during the entire 1970s. At the end of July 1998, Americans owed $1.266 trillion in nonmortgage debt-a number that has ballooned 66 percent since the roaring 1980s and now equals roughly $5,000 in debt for every man, woman, and child in the nation.

Of course, most people pay their bills. But the ones who can't keep up are a huge business in the United States. Credit card companies alone charge off $22 billion a year in unpaid bills-$60 million a day. The 1.6 million families who voluntarily sought counseling for financial problems in 1997 with affiliates of the National Foundation for Consumer Credit, a nonprofit association of credit counseling agencies, together claimed delinquent debts totaling $35 billion-and they make up less than 2 percent of all U.S. households. (The percent of bank credit cards with past-due balances has ping-ponged up and down over the last decade between 2.5 percent and 5.6 percent, but the size of the total debt, and thus the mass of the delinquent debt, has grown steadily.)