An Altered Landscape

With the economy still in flux, the receivables management industry is adjusting to a new norm.

The economic downturn that began in 2008 dramatically changed the lives of consumers and the future of many businesses. It also significantly altered the landscape of the receivables management industry and created a new normal for those businesses. While the U.S. seems to be in a recovery period, market conditions and collectability are still in flux due to the economy. Collection professionals are facing changes in their portfolios due to the new mix of business and the volume of collectability, and legal and compliance challenges continue to mount.

In many respects, 2011 has mimicked 2010, and it seems 2012 is poised to be another year of the same. Unemployment continues to remain in the 9 percent range and shows no signs of decreasing. Liquidity is down from traditional norms of anywhere from 25 to 50 percent, depending on type of debt.

Historically, consumers would either raid their savings accounts or use their home equity to pay off debts. However, in today’s market, consumers have exhausted their savings—many have even dipped into their retirement funds—and homes no longer have equity. In addition to the problem of liquidity, the volume of debt against which consumers can collect is also starting to shrink. For collection professionals, this is the worst-case scenario—there are fewer accounts to collect against and the liquidity consumers need to repay their debts has rescinded.

Another reality of the new norm is the heightened focus on regulatory compliance and the associated scrutiny that comes with it. Both the federal government and state lawmakers are enacting new legislation geared toward further protecting consumers. The federal government recently created the Consumer Financial Protection Bureau, which is tasked with rulemaking, supervision and enforcement of federal consumer financial protection laws, as well as taking consumer complaints. Many states are going above and beyond federal measures as well.

Many collection professionals and businesses are succeeding in this new reality, largely by accepting that success means doing more with less. Right now, the ability to effectively maintain and grow a business and do more with less in the receivables management industry is dependent upon changing your business strategies, specifically:

• Improving your technology and adopting new technologies.
• Gathering and using increasingly advanced insight about consumers.
• Stepping up efforts in risk mitigation compliance.

 Investing in Technology

When the economic downturn began, businesses pulled back on their investments in technology. This reaction occurred predominantly because technology upgrades require capital investment, and other priorities took precedence. As a result, many businesses are using legacy technology platforms that restrict the ability to drive efficiency and automation.

Every organization can benefit from streamlining processes, increasing automation and optimizing efficiencies.

In order to achieve the benefits of more advanced technology capabilities and features without the capital investment, many businesses are turning to cloudbased technology.

The benefits of cloud-based technology include minimal upfront capital investment coupled with minimal set-up and implementation time. This allows collection agencies to replace or enhance their current platforms more quickly while managing costs more effectively. Cloud-based technology also offers the option of moving your entire platform onto the cloud or augmenting your current system with new “bolt-on” functionality to extend its life.

Adopting cloud-based technology also enables collection businesses to increase their effectiveness by taking advantage of market opportunities. For example, right now data security is a huge priority for individuals and businesses alike. Many legacy technology systems don’t adequately address security concerns, and implementing a new system through traditional means (via hardware and software purchases) can take up to a year. By moving to cloud-based technology, a collection agency can add new customers by showing that it provides greater security coupled with greater efficiency. In addition to gaining new customers, agencies will reap other rewards—increasing security comes at a high cost that clients aren’t willing to pay, and cloud-based technology offers a way for collectors to absorb this cost in a way they can live with.

Consumer Insight

In the credit and collection industry, you often hear people talking about the need for more data. The truth is, it’s not more data that’s needed—it’s more insight into the data. Understanding consumers and their behaviors can drive your competitive advantage. The key is to gather more insight by working with fewer people. There are more benefits to be gained by consolidating data suppliers and working more closely with a select few to leverage the data they provide more fully. Insight comes in different forms, but it starts with understanding the individual with whom you are dealing.

There are four primary consumer categories that collectors (from both a first- and third-party environment) may encounter in their recovery efforts:

• Slow Payers: Slow payers are habitually behind on payments. There are many historical reasons for slow payers (young people tend to pay slowly early in their credit lives, for example), but since the onset of the recession, this group has expanded. For instance, many consumers have been turned into slow payers by a loss of income or extraordinary debts—such as a large medical bill—exacerbated by economic stagnation.
• Consumers with Willingness but No Ability to Pay: This is arguably the group that has expanded the most since 2008. These are individuals who really want to honor their obligations but do not have the resources to do so. Unemployment is the main driver here.
• Consumers with Ability but No Willingness to Pay: These are people who are trying to work the angles to avoid debt payments. These consumers, despite full employment and minimal deterioration of assets, will try everything to avoid paying what they owe. They also tend to be very savvy when it comes to credit use and collection practices.
• Credit Criminals: This group includes fraudsters, habitual offenders and professional litigants. Individuals in this group—which is rapidly growing, thanks to the Internet— often never pay, even with a legal judgment.

Actionable insight leads to understanding what type of consumer you are dealing with, and in turn this allows for segmentation, prioritization and setting a strategic course of action. If a consumer is single, doesn’t own any assets and has had four addresses in the last seven years, you can assume he or she is going to be harder to contact than someone who is married with two children, owns a home and has relatives living nearby. The difference in these two individuals is stability, which often correlates with contactability—and contacting a consumer is the key to debt repayment.

Another example of actionable insight is staying abreast of trends. According to Monster’s 2009 and 2010 Annual Job Survey, 40 percent of college graduates who have graduated in the last five years are living at home with their parents. Knowing this, if a collector is trying to locate a 25-year-old consumer, obtaining contact information for not just the individual but his relatives will likely yield the best results.

Valuable insight is not limited to individuals; insight into the market helps businesses with their strategic planning. For instance, the fact that the volume of bankcard debt has dropped tremendously has led many receivables management firms to redo their business plans to include seeking out new customers in different industries. The collection firms that are able to grow their businesses right now are doing so because they are diversifying into other types of debt, such as health care, municipalities, telecommunications and utilities.

Ultimately, insight provides collection agencies with the ability to segment and prioritize across the business with the goal of focusing limited resources—time, money and effort—to drive the best results.

Risk Mitigation

 Certainly, there is always a level of risk in the business world. However, in the receivables management industry, risk has spiked in the last few years due to heightened regulatory compliance, increased scrutiny and the financial ramifications at play. Collection professionals are actively looking for ways to reduce or better manage their risk. At the core, improved risk management comes from having better controls in place coupled with a better understanding of the strategies you are invoking.

Traditional reporting and tracking used to be enough, but it’s not anymore. In today’s world, for every action or step taken, a collection professional must note what occurred and have rules in place that allow for quick course correction if needed.

The ability to implement more advanced controls comes from having an infrastructure in place that continuously takes into account your collection strategy and tracks the details and outcomes on each interaction with each customer. Monitor at a granular level and adjust quickly when needed. Without the proper metrics tracking, strategy monitoring and associated controls of real-time risk mitigation, a collection firm is highly exposed to legal action, financial penalties and reputational damage.

Collectors who can leverage the latest technologies, drive greater insight and optimize operational effectiveness while mitigating risk are the winners in today’s new norm. Anyone operating in the receivables management industry who doesn’t adapt will have limited longterm success.