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Boosting profitability in collections

By tailoring collection strategies to each customer segment, a bank’s consumer-finance division reversed a growing trend in delinquencies—and posted its most profitable year ever.


The consumer-finance division of a leading European bank had seen the number of delinquent loans rise substantially—at a rate of more than 30 percent every 3 months—since the beginning of the global financial crisis. The division’s risk and collections team was struggling to manage the rapid increase; the profitability of the division was falling dramatically, with severe losses forecasted for the year. The CEO of the division engaged McKinsey to help the management team transform the risk and collections unit, with a focus on improving performance to mitigate expected losses.


The 9-month project began with an in-depth analysis of the division’s collections strategy and operations. Based on this analysis and our proprietary benchmarking data on collections, the McKinsey team collaborated with the client to identify improvement levers across various functions of the business, including marketing, operations, and organization. The team then helped design and launch 22 initiatives—in areas such as customer segmentation, product portfolio, call-center operations, team performance, and risk modeling—each containing specific improvement levers.

Of the 22, the highest-priority initiative involved redesigning the division’s customer segmentation. The McKinsey team, drawing on the expertise of our India-based analytics group, developed advanced models for estimating the probability that a customer would default and for segmenting delinquent customers based on their behavior (such as payment and spending patterns). The models, which incorporate detailed analysis of the delinquent-loan portfolio based on statistical regressions, have been approved as internal-ratings-based models under Basel II standards. The team then helped the client develop customized collection strategies for each customer segment. For example, the client now offers different restructuring solutions, uses different collection channels, and creates different call-center scripts for each segment.


The risk and collections unit showed a dramatic improvement in performance. Delinquency rates, which had been rising by 30 percent every quarter, fell by 13 percent in the 3 months immediately after the project—and they continued to decline in subsequent quarters. Moreover, the project had remarkable financial impact: the consumer-finance division was able to offset the previous two years’ losses, and the current year became the division’s most profitable year ever.

With McKinsey’s continued support, the bank has expanded most of the improvement initiatives to its other divisions, boosting the performance of its collections operations in businesses beyond consumer finance.

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