Preparing for the Post-Recession Collections Environment

The collections industry and organizations supporting it, both internal and outsourced, have been forever changed by the extreme economic conditions of the recent recession. As the economy begins to turn the corner after the deepest downturn in some 70 years, collections organizations will need to deal with the new realities of the consumer credit and collections landscape. Federal Reserve data shows that consumer credit card balances have reached their lowest point in 10 months, dropping by approximately $70 billion.

This can be attributed to two main factors: first, consumers are becoming far more frugal, and perhaps more significantly, because the Fed also reported a second quarter seasonally adjusted charge-off rate for all banks of 9.55 percent.  This may cause a short-term bubble in account and portfolio volumes to the collections industry.  However, organizations will need to take a more long term and diversified view at their operations to maintain profitability in the post-recession environment.

Both collections agencies and departments need to prepare for the new realities of the credit issuing markets post-recession. Prior to the economic downturn, account charge offs and attrition of customers was easily overcome through new acquisitions. The reality of the new economic environment will mean that this type of customer attrition can not be offset in the same manner. As a result, the recent focus on pre-charge-off collections and the reduction of forward flow/attrition will continue post-recession. Collections organizations will need to continue to improve performance through three main areas:

1. A focus on new early stage collections models that differentiate performance through the use of alternative data and supplemental scoring solutions.
2. The ability to offer custom economic solutions in real time at the individual customer level.
3. An expansion into alternative customer contact and alternative payment channels.

Internally developed models utilizing portfolio-specific transaction data in accord with some level of credit data have long been the norm at most major credit issuers. However, the performance of these models has not kept pace with the rapid change in customers’ economic circumstances. As a result, the value of alternative data and supplemental scores will increase.  Additional points of data and scores that can identify potential swap sets in current account segmentation will allow collections organizations to dramatically improve roll rate performance, thus decreasing charge-off rates and improving impairment costs. The investment made by credit issuers to more aggressively work portions of their early stage delinquent portfolios could directly benefit collections agencies that are capable of performing on this more analytically complex playing field.

In the past, most decisions regarding economic solutions or payment options to consumers have been based on general guidelines determined by credit issuers and often applied subjectively, based on a collector’s perception of a consumer’s economic situation. Many times this has yielded sub-par results. The data and analytical tools available in today’s marketplace allow for more intelligent data driven offers that can be centrally administered across an operational platform, driving the best economic outcome for both the consumer and the credit issuer. The use of data points such as income estimators, model score migrations and behavioral indicators will result in the creation of individual offer trees that yield higher acceptance rates and beneficial economic results. Organizations that position themselves to utilize this information effectively will be poised for greater success.

The recession also has greatly expanded the profile of the consumer that is experiencing difficulty in paying their creditors. That expansion has created a significant portion of the population that will respond better to alternative contact channels such as e-mail, SMS, and Web-based interaction. Contacting consumers in their preferred mode of communication, allowing consumers to negotiate on-line and enabling a variety of real-time payment options via the Internet will be a key to collections success moving forward. These alternative channels can increase customer contact and payment rates at costs that are far more favorable than traditional methods. Utilizing these new types of services will be necessary to effectively manage margins and remain competitive in the post-recession collections environment.

David Nathanson is vice president of strategy & business development for TransUnion’s collections group.  He can be reached at dnathan@transunion.com