Nine ways to change the consumer payment hierarchy
A credit controller who came to one of our seminars early this year told us about a problem she had. She had sold a car to a friend. She had received a cheque for half and the rest was to be paid the next week. Months later, the money hadn’t arrived. Despite the fact that her job was, in part, chasing overdue accounts, she wasn’t sure how to handle this. She was embarrassed to chase a friend for money. How could a friend do this to her?
Most credit staff we meet are decent, honest, sensible people. Because of this, they don’t think like debtors. But to collect money we need to understand what makes debtors act as they do. Obviously, problem debtors don’t all fit neatly into one standard box but there are some conclusions we can draw. This article looks at problem consumer debtors: which debts do they pay and why, and how can we make them put ours at the top of the list?
There is a consumer hierarchy of payment. Anyone who can’t pay all of their debts will have some sort of mental list of who gets paid first. For most of us, the necessities of life - groceries, power, housing, and water - would come first, followed slightly afterwards by telephone.
But the priorities awarded by consumers will not necessarily be as predictable and rational as we might expect. All of us make bad decisions about what to spend our money on sometimes. We can probably all think of a car or a house or a parcel of shares we bought which turned out to be a mistake. Those who get themselves into financial difficulty make more bad decisions than most. Sometimes they make decisions which defy logic; we can cite examples of:
- A financially-stretched woman with two children from a newly broken marriage whose top priority was a $20,000 pin-ball machine (although it required her to commit fraud to obtain it),
- A woman who put a $250 haircut for her seven-year-old daughter ahead of paying the power bill,
- A customer who told the pay television company that they were about to have the phone cut off, and that they’d already had the power cut off. They couldn’t afford to pay those creditors but they couldn’t live without their pay tv so that was the one they were going to pay.
So the hierarchy of payment is not etched in stone. It will vary from debtor to debtor and often debtors can be persuaded to change the order. How do we use our understanding of consumer debtors to persuade them to pay? Here are nine ways.
1. Use the basic needs of humans. Every person has the same basic psychological desires. We can induce psychological resistance to not paying in debtors by:
- Making use of the desire to be liked. People generally want to pay people they like, so charm the money out of them. Collecting money is not just about threats.
- Making use of the desire to reciprocate. People pay those that they owe a favour to. Give them something - good service, an invitation to the Christmas party, etc - and they will feel more obliged to pay.
- Making use of the desire to be consistent. It is human nature that people want to do what they have said they will do. If you can get a clear promise to pay, you’ll generally get your money. Whatever the objective importance of the various unpaid accounts, often the money goes to whoever manages to get the debtor on the phone or face to face and extract a promise of payment.
- Appeal to morals and societal norms - everyone wants to be seen by others as "a good person", or at the very least, as one of the crowd. Say things like, "yours is the only account that I have which is over three months old."
2. Make the consequences of non-payment very clear. Some people don’t realise what might happen if they don’t pay. A common example is that a person who takes out a car loan and misses payments often doesn’t realise that repossession of the vehicle seldom clears the debt. A creditor in that situation has to make it clear that the debtor is likely to end up with thousands of dollars to pay on a car which they no longer possess.
3. Often you will need to make an argument to change the debtor’s hierarchy of payment. "The power company will give you some more time to pay, but we’ve already given you every chance. If we have to lodge the debt with the debt collectors it will affect your credit rating for a very long time. You need to pay us first."
4. It is not enough to warn people of the consequences. Consumer debtors, in particular, need to be given a course of action to avoid those consequences. Tell them exactly what they have to do, and when they have to do it.
5. Organise the debtor. Have they written down what they have promised to do? Have they written down they amount? Do they in fact have a pen?
6. Make payment methods as easy as possible. An example is picking up the cheque rather than expecting the debtor to manage to address an envelope and find a stamp.
7. Beware of learned helplessness. If, in the past, people have learned that no matter what they do, they can't escape their circumstances, they will fail to take the initiative in situations where they could do something to help themselves. This is known as learned helplessness. If people believe their efforts have no effect, they become passive. If one of your debtors is in this situation, you need to spell out what they can do to make a difference, and stress that they can make a difference.
8. Most obviously, increase the threat of penalty for non-payment. In many cases debtors will forget their hierarchy of payment (the order that they had planned to pay their debts, based on their view of the importance of the competing creditors) and pay whoever puts the most pressure on (for example, the first creditor to commence legal action).
9. Lastly, don’t allow debtors to feel anonymous or overlooked. Let them know that a person rather than a computer has noticed that they haven’t paid. It is harder to do the wrong thing when we feel someone is observing us. The more you know about a debtor, the less anonymous they are, and the less they feel they can get away with. Debtors hope that you will forget, so show them that you won’t. Follow up on broken promises. Keep calling.
So what happened to the credit controller with the false friend? The main problem in this case seemed to be one of attitude. It was difficult for her to demand money from a friend. She needed to convince herself she was in the right and get on the phone, repeatedly if necessary. We were pleased to get an email from her recently. She wrote:
"I was at one of your courses back in March and I spoke to you about a friend owing me money for a car. I just wanted to let you know that they finally paid me last week - surprise! I'm sure it was because I started phoning him every week."
Peter Hattaway is a director of Hattaway & Associates and Sarah Fifield is a psychologist.