story

Timing is everything: how to stimulate debtors to pay up

By Gea Schonewille, Minou van der Werf & Gerrit van Eck
Posted on July 08, 2019

Many Dutch citizens have a variable income. Amongst them are the self-employed – over 1 million people (MKB, 2019) – and those with flexible contracts. People without regular income streams face more challenges, especially when it comes to money management.

But they are not the only people who are financially challenged: it is estimated that one in five households are – or are about to be – plunged into problematic debt1, 2, which goes hand in hand with some kind of financial scarcity. And this is a form of stress that has been proven to impede cognitive functioning and influence decision making3.

Beware of brain fog

People living in financial scarcity can hardly relax. They make difficult trade-offs all the time, juggling various expenses to make ends meet: to pay the mortgage, feed the kids, fulfill other basic needs. Their budgetary concerns take up so much of their cognitive resources that they simply have less resources to spare. Their decisions – especially about finances, which isn’t their favourite field – just aren’t all that sound as they could be.

In one longitudinal study4, suggested that the experience of scarcity fluctuates within a person: it follows the income available at that moment. The researchers tested this hypothesis in India, where they found that the IQ of sugarcane farmers in India fluctuated on average 13 points between a situation of scarcity (just before harvest) and affluence (just after harvest).

Another interesting discovery was made by Carvalho, Meier and Wang5, who found that Americans are more focused on present outcomes before payday versus afterwards. So those who are poor or in debt might make different decisions just after receiving their income, simply because they are cognitively less strained.

“Matching the debt collection more closely to income streams, might increase payments and decrease financial scarcity.”

Time for a recharge

In our research, we want to find out if financial decision making might be improved by simply changing the moment at which debtors are asked to pay up. In our current study, we test this idea by collaborating with Flanderijn, a Dutch debt collector and bailiff organization.

At Flanderijn, debtors are summoned to pay up within five days, which is pretty common in the Netherlands. Flanderijn noticed, however, that most debtors pay between the 20th and 30th of the month, no matter when they received the summon. This led them to conclude that most people who don’t pay up probably just… can’t. They simply don’t have the money, and need to wait for their income. And yes, they even stick to this behaviour if the debt rises with additional interest. And so it goes from bad to worse.

This isn’t exactly efficient for the other party either, having to send out reminders. The costs of these reminders and other actions are charged to the debtors and will increase their financial problems. An extra hurdle which might have been avoided if the debtor would have been allowed to pay up a little later than usually. Also, pressuring debtors at the wrong time might also worsen the experience of financial scarcity, in turn leading to worse decision making.

In other words: matching the debt collection process more closely to the income streams of the debtors, might 1) increase their payments and 2) decrease their financial scarcity, because people simply get the break they so dearly need. This extra breath of fresh air may be enough to recharge their (monetary and cognitive) batteries.

“There might not be one answer to the question when it is the best time to send out a summon letter. ”

Flexible payments

Determining when a summon coincides with an income stream sounds straightforward enough – except it isn’t. When do employers pay their staff? There are no rules. Plus, the number of self-employed people grows each year. Another factor to take into account is multiple types of income streams one household may have. The Dutch ‘Nationale Ombudsman’ (2013) showed, for example, that a household consisting of two kids and a single mom on welfare assistance has 16 different income streams. In short: there might not be one answer to the question when would be a good time to send out a summon letter.

The Dutch National Institute for Family Finance Information (Nibud) also concluded that it would be wise to allow consumers to be more flexible in mandatory payments6. Households with financial constraints or (small) debts in particular indicated that more flexibility in payments would indeed help them to make ends meet. This way they could adjust the payments to their income streams, instead of their income streams to their payments, which would require higher levels of money management.

Our experiment: 4 conditions apply

With this in mind, our experiment allows 4.000 to 6.000 debtors to pick their own payment date, within a time frame of 30 days. We expect that this might influence 1) the payment behaviour of the debtors; 2) the amount of financial scarcity they experience; 3) their feeling of self-efficacy and autonomy. Apart from the flexible payment condition, we have three other conditions: the control condition, a simplified letter condition, and a flexible payment + reminder condition.

The control condition is equal to Flanderijn’s usual way of working. In the simplified letter condition, we changed the standard summon letter, but did not change anything else. Because we also work with this simplified letter in the flexible payment condition, adding this condition was necessary to disentangle the effects of the changed letter and the changed process.

The last condition equals the flexible payment condition, with one addition: on the payment date picked by participants, they receive a text message (SMS) including a payment link, to remind them about the commitment they made.

We will measure to what extent participants paid their arrears, whether they contacted Flanderijn for a payment arrangement, the amount of financial scarcity they experienced, and how they evaluated Flanderijn. We’ll measure the last two variables using a questionnaire.

The figure below describes our expectations:

The results will tell us whether flexibility in payment actually works. The financial counselling organization NVVK shows in its annual report that the average debtor has 15 different creditors. It might be possible that more flexibility in payment dates will backfire, with the more demanding creditors might having to be paid first. If this is the case, a flexible payment process might decrease payments instead of increasing them. Fully testing the effectiveness of flexible payments is a relevant question not only for debt collectors, but for every (governmental) organization dealing with mandatory payments.

The benefits of flexible payments

We expect that this intervention will indeed be effective for the creditors, and have a positive effect on the financial scarcity that the debtors have to endure. A simple intervention like this one might be beneficial for the individual and for society as a whole.

After all, financial problems can cause stress, tensions within households, domestic violence, poor physical and psychological health, stigmatization, social isolation, and even suicide7, 8, 9, 10. It is estimated that employees with financial problems cost an employer on average 13.000 euro per year. Think of more sick-days, worse performances, lots of administrational costs for seizing salaries11. Financial household problems in the Netherlands cost the Dutch society an estimated 10 billion euros a year. This amount includes costs for debt assistance, benefit payments, reduced work productivity, house evictions, and childcare12.

Finally, our research taking place this summer will not only help us to discover the benefits of flexible payments, but it will also give us insight in the difference between debtors who will act on their autonomy or debtors who will go for the default option.

Gea Schonewille is an economic psychologist and researcher at Nibud, Minou van der Werf is a senior researcher at Nibud and PhD student at Leiden University, and Gerrit van Eck is a financial specialist at Flanderijn.

Footnotes

  1. Westhof, F., de Ruig, L., & Kerkhaert, A. (2015). Huishoudens in de rode cijfers: Over schulden van Nederlandse huishoudens en preventiemogelijkheden. Panteia.
  2. Schonewille, G., & Crijnen, C. (2018). Financiele problemen 2018. Nibud.
  3. Mullainathan, S., & Shafir, E. (2014). Schaarste: Hoe gebrek aan tijd en geld ons gedrag bepalen. Amsterdam: Maven Publishing.
  4. Mani, A., Mullainathan, S., Shafir, E., & Zhao, J. (2013). Poverty impedes cognitive function. Science, 341, 976-980.
  5. Carvalho, L. S., Meier, S., & Wang. S. W. (2016). Poverty and economic decision-making: Evidence from changes in financial resources at payday. American Economic Review, 106, 260-284.
  6. Madern, T.E., Weijers, M., Werf, M. van der, & Gaalen, C. van (2015). Geld en gedrag. De theoretische basis. Utrecht: Nibud.
  7. Chapman, S. J., & Freak, M. (2013). Personal finance. New concepts in commerce, 1-351.
  8. Drentea, P. (2000). Age, debt and anxiety. Journal of health and Social Behavior, 41(4), 437.
  9. Drentea, P., & Lavrakas, P. J. (2000). Over the limit: The association among health, race and debt. Social Science & Medicine, 50, 517-529.
  10. Lane, J. (2016). A debt effect? How is unmanageable debt related to other problems in people’s lives? Retrieved from https://www.citizensadvice.org.uk/ Global/CitizensAdvice/Debt%20and%20Money%20Publications/The%20Debt%20Effect.pdf
  11. Van der Schors, A. & Schonewille, G. (2017). Personeel met schulden: Een peiling over financiële problemen op de werkvloer. Nibud.
  12. Simonse, O., Wilmink, G., & van der Werf, M. (2017). Effectieve manieren om verantwoord financieel gedrag te bevorderen. Nibud & Wijzer in geldzaken.