ARM Outsourcing: Opportunity Worth Considering November 2013
All about Account Receivable Management Outsourcing Given the current economic scenario, where financial institutions are facing a challenging environment, the pain of the pinch of high account receivable is even higher. Realizing the fact that collection of money for the next sale is equally or even more important compared to sale itself, more and more lenders are approaching third-party collection agencies to improve their collection rate. This white paper briefs on the importance and advantages of outsourcing the accounts receivable portfolio to an external agency that has an expertise in collections and recovery.
Overview Debt collection business in the US and elsewhere is on the rise as retail debts and delinquency ratio is growing at an unprecedented rate. The competition among banks and lending institutions has shifted from being the leading lender towards being the first ones to get their dues back. Historically, consumer spending has been the backbone of US economic growth. But with the recent global economic crisis, it has been increasingly realized that the consumer spending has come at an unexpected price. Factors including a growing number of mortgage foreclosures, higher credit card balances, rising delinquencies and low saving rates have all been the outfall of the lenient approach shown by lending institutions while extending loans to the customers. Fortunately, third-party collection agencies have provided the much-needed helping hand to banks and lenders in their collection efforts. Equipped with the latest technology and specialized pool of trained collectors, third-party collection agencies have successfully helped banks and lenders in improving delinquency rate at a significantly lower cost.
Debt Collection Industry Understand the Basics A collection agency is a company hired by lenders to recover funds that are in the form of past dues or accounts that are in default. The lending company itself may also have a division or subsidiary that acts as its collection agency. A collection agency is often hired post multiple failed attempts by the company to collect its receivables.
US Debt Collection Industry US debt collection agency creates both direct and indirect economic benefits. Direct benefits are in the form of hiring and paying collection agency employees. Indirect impact includes jobs, compensation and economic activities associated with suppliers to the debt collection industry. These include companies that sell office supplies, telephone service building service, and other goods and services purchased by debt collection agencies. According to a 2011 study by ACA International, the Association of Credit and Collection Professionals, the third-party debt collection industry in the US recovered approximately USD54.9 Bn in total debt in 2010, on which they earned USD10.3Bn in commissions. After deducting the commissions paid to thirdparty agencies, the remaining USD44.6 Bn in net debt return represents an average savings of USD396 per household, or about 1.8% of the total consumer credit outstanding.
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The study also highlighted that the states of Texas, New York, California, Florida and Illinois contributed towards the maximum debt collection. The early out debt, consisting of receivables that are aged 90 days or less, represents 30% of total debt collected. The remaining 70%, classified as bad debts, consists of receivables aged 90 days or more. In 2010, there were approximately 148,300 employees in the industry, including 133,900 full-time, 12,900 part-time and 1,500 contract employees. The industry also supported 153,300 employees in indirect employment during that period.
Key Advantages of Outsourcing ARM Debt collection outsourcing market continues to grow and evolve with the new technologies and geographies. It gives financial benefits via improved cash flow with faster customer settlement cycle, customer account reconciliation, and centralized customer invoice control, prompt customer invoice generation, and automated customer statement generation. Some of the key advantages offered by third-party collection agencies are highlighted below. Save Accounts with Early Intervention
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Debt collection agencies, if introduced early in the process, i.e. within in the critical time frame of 30-60 days window, can be largely successful with tactful communications intended to get the account holder re-engaged with the bank and settling his/her delinquencies.
Bank’s Reputation Remains Intact
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By outsourcing the collections process, banks distance themselves from the role of bad guy when existing clients are reluctant to pay. The first notice from a collection agency may be enough to spur the customer into action while allowing the relationship between the bank and the customer to remain cordial or neutral.
Economics of Specialization in Collection
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Agencies focusing solely on collection possess better technology required for collection. They are also better in attracting employees who are expert at collections. They are much better equipped to provide healthier incentive to employees compared to collection department of the banks.
Improves Collection Success Rate
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Communications from a debt collection agency carries far more authority and impact. Though tactful, a collection agency will communicate the gravity and magnitude of rectifying the matter. The very first touch base from a collection agency may be sufficient to encourage customers to pay the due amount.
Bank can Focus on the Core Business
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Lending is the core service provided by banks. Debt collection, a pain-taking and time-consuming process, is not a necessary skill set possessed by most of the banking staff. Collection outsourcing can ease a lot of time and stress by getting a third-party involved, and thereby freeing bankers to focus on their core business.
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Centre of Excellence (CoE) for ARM Solutions Human resource, technical expertise and analytical tools form the important pillars of collections and recoveries services. Similarly, deploying a specialized and skillful collection team, automating the workflow through a feature-rich platform, and employing contact center & payment trend analysis are the essential ingredients to success in ARM services. The figure below highlights some of the strategic initiatives that need to be adopted by a collection agency in order to increase its collection efficiency for reduced delinquency.
Key Pillars of Debt Collection 1 Realigning the Operating Culture
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1 Realigning the Operating Culture
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Go paperless and use e-Invoicing for electronic invoices/ statements Increase frequency of sending e-invoices/statements A standard procedure should be established to handle uncollectable accounts Customers should be encouraged to adopt advance mode of payments
2 Training and Motivating of the Collections Team
Information Gathering and Review
Bifurcation of Customers
Training and Motivating of the Collect
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Set appropriate collection procedures and collection targets Award team members with incentives in proportion to the collection done Team members should be trained to handle difficult customers and to identify prospective delinquent customer
3 Information Gathering and Review
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Promote Proactive Approach
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Customer data gathered in the initial application process should be thoroughly reviewed Past due reports by collector should be reviewed on a regular basis An internal committee to conduct periodic review of collections performance, strategies & processes should be established
5 Promote Proactive Approach
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Communicate product features, collections fees and charges to the customer
4 Bifurcation of Customers
A mutually agreeable payment schedule should be established
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Customer service complaints should be addressed on priority basis
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Initiate customers segmentation based on their ability and willingness to pay The approach to collection should be based on the category in which the customer is categorized
Timely payment should be awarded
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Predictive Analytics Identifying and predicting the conditions when debtors of banks may have trouble paying their dues and then developing plans to avoid these customers to become delinquent is becoming increasingly necessary. Selectively targeting the customers with appropriate collection strategies at the right time improves collector’s productivity and lowers costs. Use of analytics, especially predictive analytics, has emerged as an effective and efficient solution to this targeting approach. Predictive analytics can be categorized into traditional and strategic predictive. Traditional predictive analytics uses mathematical algorithms to examine current and past account data and the relationships between this data to generate a predictive behavior score. Strategic predictive analytics leverages traditional predictive analytics ability to generate enhanced-value behavior scores using algorithms, but it goes further by determining break-even points. This allows collections management to target the right debtors at the right time, with the right communication strategies.
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A Typical Collection Cycle Process The below figure is a pictorial representation of the end-to-end receivable collection process. The parties responsible for collection vary based on the delinquency stage of the loan. First-party agencies are often subsidiaries or a department of the original company that owns the original debt. Third-party agencies are separate companies contracted by a company to collect debts on their behalf for a fee or a commission.
First-party agencies typically get involved earlier in the debt collection process and try to maintain a constructive relationship with the delinquent customer. Being a part of the original creditor, first-party agencies may not be subject to legislation that governs third-party collection agencies. Moving ahead in the value chain, if the first-party collector is unable to collect the debt, an external collection agency is hired. This collection agency is a third-party agency because it is not a party to the original contract. The financial arrangement between the creditor and the third party depends on the service level agreement (SLA) that exists between the creditor and the collection agency. An increasing number of collection agencies, sometimes referred to as debt buyers, are purchasing the entire portfolios of bad debt. In such deals, banks accept a fraction of the debt in payment for passing on the debt collection and recovery responsibility. The sale of bad debt for any recovered funds is often more profitable than pursuing the debt internally considering the cost and time involved in pursuing delinquent debts internally.
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Outlook In the aftermath of the recent financial crisis, financial institutions including banks are getting increasingly skewed towards outsourcing their debt collections requirement. At times, they are even forced to outsource more of their debt collections activities at an earlier stage, if losses are to be restricted. Financial lenders who are partnering or outsourcing their accounts receivables are creating synergy necessary to improve collections result significantly without affecting the core workloads. However, any collections outsource strategy, especially the early-stage arrears outsourcing, needs to balance profitability with accountability. Banks cannot afford to lose loyal customers, nor see the cost of collections escalate higher than the value of outstanding arrears. Hence, appropriate time should be spent on selecting the collection agency that best fits the lenders’ needs and their culture. But whatever is the outcome, collection outsourcing is rapidly becoming a risk worth taking.
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