Risks vs Rewards: The Dynamics of Debt Collection

A joint study conducted by the Urban Institute and Encore Capital Group's Consumer Credit Research Institute showed that about 77 million Americans currently have a debt in collections, which amounts to 35% of consumers with credit files or data reported to a major credit bureau 1. The Consumer Financial Protection Bureau (CFPB or Bureau) also reports that US consumers have submitted more complaints about debt collection than about any other product or service 2. Meanwhile rising cost of collections, the mandate for higher provisions against loan losses, and combating a flat economy is threatening lenders’ profitability.  IT budgets are strained even as mobility, analytics, and new technology trends hold the promise of streamlining processes and simplifying debt collection operations.

In the light of these facts it is clear that financial institutions simply cannot afford to write off bad debts neither can they ignore customer experience. Even a fractional reduction in loss rates for large consumer portfolios can result in a significant and recurring reduction in credit losses. Maximizing return on investment by minimizing unpaid loans and managing traditional credit risk as well as profitability factors such as customer retention and resources are all key components of a financial institution’s Collections and Recovery process.  Here are a few trends and challenges that are currently impacting debt collection operations:

• Collections functions are increasingly the focus of regulators. One of the most impactful regulations comes from the Office of the Comptroller of the Currency (OCC) -- The OCC 2013 vendor management rule requires banks to audit, monitor and mitigate risks of third-party debt collection agencies 3. Banks (State and Federal) are expected oversee and control every operation that affects a customer. For the agencies this is a significant rise in costs  by way of connecting to the banks monitoring systems and reporting solutions, and increased  time and effort in responding to audit queries and training staff in compliance procedures. Furthermore, debt collections agencies now fall under the CFPB regulations, either directly or indirectly because of their relationships with banks. Accordingly, these companies must be compliant with CFPB standards and guidelines and provide assurance to their bank counter-parties of such compliance. The New York Department of Financial Services (DFS) has issued its own debt collection rules. What this means for collectors - they will have to make changes to meet evolving regulatory norms and expectations. Saddled with complex and rigid applications that cannot be configured at a business level, they are likely to find themselves involved in time consuming, cumbersome and expensive IT improvements or face the consequences of lapses in compliance and governance. 
• Current debt collection systems are not very effective and involve several disparate applications with very little integration between them. Debt collectors do not have consolidated data portals or centralized operational control leading to data inconsistencies, loss of information, duplication of efforts and high operating costs. Collectors incur the added expense of maintaining these systems and training IT staff to manage this complex infrastructure.
• Debt collection agencies do not segment the customers efficiently and provide appropriate flexible payment arrangements. Even if some form of segmentation of customers is done and payment arrangements are arrived at, they are not effective because they are based on the expertise and experience of the debt collection agent and not on intelligent segmentation using vast amount of historical and current customer information. In many cases collection agencies try to close the debt by settling for lower payment or foreclosing the loan by reclaiming an asset instead of applying appropriate collection strategies. 
• Collectors currently do not have right tools at their disposal to improve delinquency rates and maintain borrowers as customers. Delinquent borrowers are, first and foremost, valued customers. It is not uncommon for customers, especially those in early-stage collections, to quickly cure following a temporary hardship or have other accounts in good standing. Without a consolidated comprehensive view of the customer’s relationship with the bank, collection personnel are unable to make quick decisions or offer customers a best fit solution and clear delinquent accounts.
• Lacking a consolidated borrower-centric approach, debt collection officers unwittingly authorize different agents to communicate with the same customer. Repeated aggressive calls by different agents leaves customers frustrated and the likelihood of having customer service rated poorly and broadcast over social media to the larger public, is quite high. And there is a distinct possibility of the customer switching loyalties in search of better customer experience.
• Multi- product, multi-channel and multi- debt obligations are characteristics of today’s debtors.  They expect instant seamless, frictionless access to products and services. They are turned off by interruptive calls and frustrated by repeated contact. They prefer to talk to an agent when they are ready. Furthermore, The Fair Debt Collections Practices Act (FDCPA) prohibits the use of threatening or repeated phone calls to individual borrowers. Considering the behavior and preferences of customers and the fact that staffing cost is one of the biggest expenses for lenders there is a growing demand for self- service options. 

The Bureau of Labor Statistics anticipates that between 2015 and 2016 the debt collection industry will experience a 23% rate of growth 4, much faster than the average for all industries. The time is ripe for financial institutions to take a strategic look at their collections operations. They need to examine what additional changes can be made to better align collections with the achievement of the organization’s overall business strategies and objectives including: increased profitability, improved customer experience and regulatory compliance.  An integrated, customer-centric approach can be applied to the management of delinquencies. Improving the robustness of systems and operational controls around collections process will not only improve recovery rate but also promote fair and consistent treatment of customers. Debt collections officers must make full use of today’s flexible, responsive operational and IT systems to deal with new, emerging risks in the debt market. 

Sources:

1: Waterloo Region Record. 30 July 2014. Avention.

2: Monthly Complain Report, January 2016, CFPB, http://1.usa.gov/1PW7D7e

3. http://www.occ.gov/news-issuances/bulletins/2013/bulletin-2013-29.html

4: "Debt Collection Statistics," debtcollectionanswers.com. debtcollectionanswers.com/Debt-Collection-Statistics.html