Importance of collections management

U.S Banks charged off $ 9.2 billion in bad loans in the second quarter of 2007, a growth of $ 3.1 billion over the same period in 2006. If this is any indication of the enormity of the issue of bad debts in the Banking system, it also throws light on the crying need for a strong collections management system and the magnanimity of its role in reducing Bank NPAs.

The US Collections Industry is a $15 billion dollar industry, today. Making collections and recovery management an important component of the consumer financial services industry employing several thousand professionals, directly and indirectly. It also benefits the economy by recovering billions of dollars in delinquent debt, which in turn, affects the pricing and availability of consumer credit in the market - leading to reduced consumer prices and increased purchasing power.

With bottom-line results becoming increasingly important in the highly competitive consumer financial services industry, as well as the growing volumes of consumer collections, there is a lot of emphasis on lowering costs and increasing the efficiency of the collections management process. A well-managed and streamlined collections management process is extremely critical for establishing successful consumer financial services practice.

Technology and consumer collections management

While the key tactics to collect debt have not changed in the recent years, the technology being employed, certainly has. The industry has come a long way from the ‘paper records, typewriters and telephone’ days. Over the years, the industry has moved from ‘no models’ to ‘predictive models’ to the ‘decision models’ in use today. Time is of primary importance in initiating collections and the need for automated Technology that provides speed with efficiency can’t be stressed upon enough.

Consumers today want the freedom to select the mode, channels, frequency and timing for their payments. In light of this, many consumers are turning towards electronic payment channels, such as credit and debit cards for debt settlement, which provide greater control.

In order to keep up with the changing trend of consumers using modern, technologically advanced modes of payment to suit their convenience, the collections industry has upped its pace of upgradation. There’s a large technology industry supporting the collections business.

Technology trends

The latest collection systems integrate the consumer’s accounts, key contact data, response to earlier recovery attempts and other key information. The industry also uses advanced tools to actively pursue, follow-up and collect funds. These integrated systems consolidate a customer's A/R activity, provide up-to-date information and empower collectors by streamlining the entire collections process, leading to an integrated, efficient and effective collections environment. Some knowledge-based technology software can also guide collectors through pre-determined collection scripts, resulting in precise outcomes, depending on the case.

The industry now also has use of better account sorting technologies like predictive dialers, and interactive voice solutions, computerization of collection records and technologies like skip tracing to make the process more efficient. Techniques developed to quantify the risk of borrower default (credit scoring) are now being applied to evaluate the prospects for successful collections of individual accounts and the pricing of entire portfolios.

Given that collectors are generally able to obtain payments on only a small fraction of their delinquent accounts, it is extremely important to know how to allocate collection resources across accounts. Thus, the ability to locate a delinquent borrower and monitor changes in his or her financial condition three or five years after the initial default can be extremely valuable.

Some recent technology systems/workflow driven software also includes online systems that provide real-time status updates on collection, and use powerful analytics to effectively control the debt collection process and provide features like user controlled parameters, online security, limited access to specific accounts, and online help facilities, among other tools to execute the process. In fact, it even enables collectors to create customized approach strategies for debtors. Such technology provides the industry with tools which make the collection process faster, provides key management personnel with strategic information and thus enables them to make better informed decisions.

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