Optimising payment collections for prime vs subprime borrowers

In addition to the obvious differences in the quality of their credit histories, navigating the payments landscape for prime vs subprime borrowers can look starkly differently from a lender’s perspective. Not only are subprime borrowers viewed as higher risk for defaulting on payments, but they are also subject to further constraints related to payment authorisation, collection attempts and the handling of defaulted debt.

Transaction Attempts

When it comes to compliance, it is important to consider that VISA have different rules in place when reattempting payment collection for subprime lenders vs prime lenders. For subprime or debt collection agencies, merchants may not resubmit a payment for authorisation if there have already been three collection attempts, whilst resubmission rules for prime lenders are more lenient.

For all lenders, a transaction may not be reattempted if the decline response code was a hard decline, this includes 41 (lost card) and 43 (stolen card). This restriction highlights the importance of solutions such as Account Updater which can pre-authorise a customer’s card ahead of their collection date. Account Updater solutions automatically update the tokenised card details ahead of the collection of funds, resulting in higher collection success rates.

Insufficient Funds

Subprime merchants tend to have higher rates of insufficient funds declines than their prime equivalents. The ability to collect funds on the first attempt is important not only for lenders, but also for borrowers as late repayments of loans may further impact their credit scores, putting subprime borrowers in an increasingly difficult situation. Running analysis of previous transactions can help lenders find the optimum payment collection time. This can make a huge difference, as merchants may have significantly higher acceptance rates at various points in the month and at particular times of day. 

Selling Defaulted Debt 

Often with a limited or damaged credit history, subprime borrowers are deemed more likely to be unable to re-pay loans and it is common for lenders to sell on defaulted debt to debt collection agencies. This usually requires a token migration which takes place between the lenders payment gateway and the debt collectors payment gateway in order to transfer the defaulted customers. Working with a payment gateway who is experienced in this type of token migration can help ensure a smooth transition of funds. This prevents disruption in the collection process and removes the need to ask customers to provide their payment details again. 

Understanding the Ecosystem

Whether lending to prime or subprime borrowers, an in-depth knowledge of the industry and a 360 view of the lending ecosystem is a critical success factor. From lead generation, customer acquisition and risk and affordability checks through to secure and streamlined loan payments, the efficient collection of the funds and potentially the handling of defaulted debt; leveraging 3rd party expert guidance in this area can provide a huge advantage to lenders.