The ‘delinquency crisis’ is abating and returning to
normal. But a fundamental change is taking place in the way banks
are viewing collections. Charles Davis reports on the emerging
trend for banks to look at collections as part of their marketing
and retention strategy.
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For decades, collections has been regarded by most issuers
and consumers as the payments equivalent of a dental appointment:
necessary, but painful, seldom to be thought about and to be
avoided if at all possible.
Traditionally, issuers have
outsourced collections operations or built silos for it. Economic
realities demand a new strategy as US financial institutions face
$44.4 billion in charge-offs and counting, fueled by delinquency
rates that hit historic highs in 2011 exacerbated by unprecedented
unemployment levels.
Now delinquency rates are down –
way down, in fact (see Return to health?, page 4) – but
the effects of the recession have left their mark.
As the delinquency crisis faded,
the new credit card reforms squeeze issuer profitability,
transforming collections into an instrumental customer retention
tool that is capable of augmenting contributions to an
institution’s financial health.
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By GlobalDataTim Smith, senior vice-president at
Firstsource Solutions, an India-based collections and operations
outsourcing provider which works with eight of the top ten issuers
in the US and in delivery centres in the UK, India and the
Philippines.
Smith says his firm manages a
billion dollars a month in delinquent accounts across the globe and
has witnessed an increase in sophistication in collections.
“The collection business in general
is evolving in content and interaction,” Smith says.
“Ten years ago cell phones weren’t
a factor in the collections business and today it is not uncommon
for consumers to only have cell phones. The technology that is
available to a consumer changes and puts a significant stress on
collection models.”
Change in
emphasis
With
delinquencies skyrocketing, then plummeting and with credit
shrinking, Smith says that a premium is now being placed on
consumer experience with collections.
“In the credit card space
specifically, the amount of consumer credit outstanding has
contracted,” he says.
“An agency needs to be able to
partner with a card service that provides multi-shore capabilities
and has a good track record in customer experience. It is
non-negotiable and has to happen in order for consumers to walk
away with a better interaction because today card issuers are
demanding so much more from providers.”
So collections increasingly is
being recast as a retention and marketing tool, a dramatic reversal
from the days in which collections were viewed as the end game in
which cardholder relationships were severed rather than
salvaged.
Amit Garg, partner at McKinsey
& Co. says it is an opportunity in terms of counselling and in
terms of building incredible loyalty.
“Banks have become much more
cognisant of early recognition of problems, and they are examining
the customer relationship, reducing payments for a few months,
lowering APRs, and working with customers individually.”
Issuers have little choice but to
rethink collections these days, Garg says. When charge-off rates
neared double digits – nearly double the average rate of 5% over
the past 18 years — banks faced the reality of losing a tenth of
their portfolios or more.
With even the soundest acquisition
strategies, issuers will struggle to overcome persistently high
delinquency rates and maintain solid portfolios.
Focus on
retention
Therefore, to ensure long-term
prosperity new retention strategies must be embraced.
“To succeed, issuers must
fundamentally rethink their approach to collections, from an
aggressive, legalistic perspective to a proactive, counselling
perspective,” Garg says. “Issuers must become more proactive than
ever before.”
A TSYS report underscores the need
to make collections more of a two-way conversation. Entitled
Leveraging Collections As A Retention Tool, the report
makes a compelling case for reconfiguring the debtor-collector
relationship into more of a partnership, in which issuers work
collaboratively with delinquent accounts rather than merely try to
extract as much outstanding debt as they can and sever the
relationship.
The single biggest change is that
out of the economic crisis came thousands of what the study calls
‘first-time debtors’ – consumers with no history of debt problems
or delinquencies who suddenly found themselves adrift in the
economic storm, and who can be rehabilitated with some effort.
These households could not be
treated as ‘typical’ delinquent accounts, because they are far more
likely not to become consistently problematic.
Julie Austin, collections and
recovery product manager at TSYS, says a ‘perfect storm’ of events
introduced a whole host of people to the collections sector for the
first time, and required a re-examination of the collections
tactics of the past.
“Part of that change in
communication was how do you approach and communicate with that
population, so you don’t lose it,” Austin says. “You have to look
at it as customer retention. These are people that are going to
have to come back if you are to rebuild your portfolio.”
Many upstanding households simply
ran out of options in the current economic crisis, Austin says,
adding that they have fewer options than in years past.
Tapping into home equity is less
frequently a viable option than it has been throughout the past
decade. In response, consumer debt reached new levels as credit
cards became a last resort for the unemployed. Many have shifted to
debit card usage in an effort to rein in spending, while many
others have run out of options.
Drop in debt
The silver lining, of course, is
that overall consumer debt is dropping and credit card debt is
dropping dramatically.
The Federal Reserve reported in
January 2010 that revolving credit decreased at an annual rate of
13%, and the national credit card delinquency rate decreased for
the sixth consecutive quarter, dropping to 0.6% at the end of the
second quarter in 2011.
This was the lowest mark observed
in 17 years, according to TransUnion, which tracks consumer credit
in the US.
Credit card debt per borrower
increased $20 in the quarter to $4,699, though it remained near
record-low levels. Although credit card delinquencies were expected
to drop, TransUnion data shows credit card delinquency rates
improving by more than at any other time since the recovery began
in 2009, both on a quarter-over-quarter basis (-18.9%) and on a
year-over-year basis (-34.8%).
This is welcome news indeed, but
does little to assuage issuers, who are still reeling from the
effects of the recession and realising that old collections
strategies no longer work.
Traditionally, a typical
collections customer’s credit history is peppered with negative
records, such as unsteady employment, liens, late payments,
bankruptcy filings and previous collection records. These credit
events contribute to lower than average credit scores and are the
telltale signs of a higher likelihood of default.
By contrast, the current economic
climate has ushered in a wave of those first-time debtors who don’t
fit within the typical risk profile. Many may have had a
delinquency in their past, but in general their records have been
characterised by very few negative records and a history of paying
their bills on time.
These are consumers hard hit by the
credit crunch and who no longer have a safety net, as evidenced by
future dated payments, post-dated checks or distinct changes in
payment patterns. Many may be depending on credit cards and
accumulating mountains of debt, an embarrassing predicament.
This places issuers in a tough
spot. With such huge numbers of cardholders facing difficulties,
traditional hard-nosed techniques risk alienating otherwise solid
accountholders. On the other hand, collections strategies that
combine a multi-channel approach with more soft-gloves techniques
can form collections-centric relationships that lock in loyal
cardholders.
“These aren’t historically troubled
customers, and they are going to regroup and be good customers
again,” Garg says. “They can’t simply be dismissed.”
Garg says that lenders are
experimenting with changes to formulas to determine when and to
what extent to ease up standards on late borrowers. Some are even
setting up ‘counselling desks’, to which calls, incoming e-mails
and texts are routed. The bankers then reach out, suggesting ways
to maximise cash flow and cut expenses.
Investing in collection
methods
Issuers also are augmenting
traditional collection methods, such as telephone calls and
letters, with internet sites and other alternative contact and
payment channels.
In addition to being effective,
these alternative methods can be cost-effective for organisations
and less intimidating for customers.
Issuers know they are competing
against other debts, including delinquencies on competitors’ cards.
While lenders are willing to give more ground to troubled
borrowers, operational obstacles to implementing wholesale changes
to collections and queasiness over the economics of forbearance
have hamstrung the industry.
Looming over the already chaotic
scene is the CARD Act, which limits the amount of credit available
to consumers at a time when they’ve exhausted other options. As a
result, the credit crackdown is directly impacting collections.
The CARD Act’s main focus – reining
in credit card practices and limiting fees – has forced many card
issuers and banks to alter their business models by actively
reducing risk. Issuers are tightening credit lines, dropping or
restricting some borrowers and marketing less aggressively.
These changes are running headlong
into the consumer behaviour of the past several years, when many
people typically spent their savings and maxed out home equity and
personal loans. For many consumers, credit cards are the only
short-term credit available.
The CARD Act also is leading to
another huge change for consumers: they can no longer pay off a
credit card debt using another card. While that is not specifically
part of the CARD Act, in response to it, credit lines are being
reduced – removing liquidity and making it more difficult for
consumers to be able to leverage credit cards to pay down
outstanding debts.
The Act also bans retroactive rate
increases on existing balances unless the borrower is delinquent by
60 days or more, and mandates that excess payments go to pay off
the highest-interest balances first. It also enables customers to
set their own credit limits, which can be lower than those set by
the card companies.
Then there’s the Fair Debt
Collection Practices Act, a 33-year-old statute reinvigorated by
the newly created Consumer Financial Protection Bureau, which will
be looking into complaints about errant bill collectors.
Consumer Financial
Protection Bureau
The new bureau will have authority
not only to write new rules on how debt collectors deal with
consumers, but to hear and resolve complaints – a role the Federal
Trade Commission has played.
Meanwhile, the stakes of the battle
between debtors and collectors are rising.
In March, a collections firm
reached a $2.8m settlement with the Federal Trade Commission, one
of the commission’s largest enforcement actions ever against a debt
collection agency. The firm, West Asset Management, didn’t admit
wrongdoing as part of the settlement, but agreed to extra
monitoring and other measures for five years.
The agency said the company, which
employs about 1,500 debt collectors in 13 states and overseas, made
repeated, harassing phone calls, often using obscene language;
falsely claimed to be a law firm; and falsely threatened debtors
with lawsuits, property seizure and arrest.
Consumer complaints about debt
collectors – especially so-called third-party collectors who buy
and then attempt to collect delinquent IOUs on credit cards, phone
bills and other debts – have nearly quadrupled during the past
eight years.
This makes issuers more eager to
take a softer approach to collections. The fact many experts say it
is the prudent business decision is more than just a happy
coincidence.
“When issuers really need the
solutions, it’s when they are totally overwhelmed by delinquencies,
then when things improve, all the attention moves to the front of
the portfolio,” says Austin of TSYS.
“This kind of preventive medicine is now in place, and so what
you see are much tighter, healthier portfolios.”
