The Changing Face of Debt Management & Collections

R e s e a r c h W h i t e P a p e r

© PAC 2015 www.pac-online.com www.pac-online.com/blog

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The Changing Face of Debt Management & Collections

How new business, regulatory & technology challenges will impact collections practitioners.

A PAC White Paper Sponsored by

http://www.pac-online.com

http://www.pac-online.com/blog

Contents

! Management Summary Page 3

! The Technology Revolution Page 4

! Debt Management Today Page 7

! The New Role of Collections Page 9

! FICO – An Independent Assessment Page 11

ABOUT THE AUTHOR

Nick Mayes – Principal Analyst. Nick joined PAC in 2007 and has been working in the software and IT services industry since 1998. Nick is responsible for PAC’s research on the UK IT services market, and is also one of the lead analysts in PAC’s global coverage of areas including application management, business process outsourcing and IT outsourcing. Nick also leads many consultancy engagements in addition to managing PAC’s Deal Tracker service.

The Changing Face of Debt Management & Collections 3

Management Summary

Debt management has become one of the most challenging issues for businesses and public sector organizations.

High and volatile delinquency rates coupled with the need to maximize revenue and tax returns, and a fresh set of regulatory demands have created the “perfect storm” for collections organizations, both internal and external.

At the same time, most collection teams have to tackle these issues while supporting group-wide programs to reduce operating costs. There is little funding available to invest in expanding or enhancing the collection organization, meaning there is an ongoing dependence on outdated technology platforms and processes.

This makes it difficult for organizations to capitalize on the massive changes taking place in the technology landscape, which have the potential to transform and improve the efficiency and effectiveness of their debt management function.

Data analytics software tools provide a wealth of valuable information on the debtor profiles and are enabling collection teams to work smarter by identifying and prioritizing those with the strongest likelihood of short or medium-term payment returns. Some collection organizations deploy analytics tools to help them understand and improve agent performance.

Meanwhile, the explosion in the use of mobile devices has opened up an entirely new channel through which collection teams can engage with a broad cross section of debtors quickly and efficiently. Strongly linked to the rise of mobile is the growing use of cloud computing delivery models, through which collection organizations can access scalable software applications and tools across a range of devices on an on-demand, by-the-drink basis.

In this White Paper, industry analyst house PAC looks at the current and future challenges in debt management, with a focus on both business and technology dynamics. We also provide an independent analyst assessment of FICO, one of the world’s highest-profile providers of debt management technology platforms.


The Technology Revolution

Managing and recovering debt has moved towards the top of corporate and government priorities during the last five years.

The economic downturn, and the ensuing pressure on income coupled with high unemployment in most major markets have made it increasingly difficult to recover outstanding debt (see fig 1).

At the same time, the collection industry is being transformed by major changes in the technology at its disposal.

The explosion in data analytics tools, the widespread use of mobile devices and the increasing maturity of cloud computing models are enabling major improvements in the way collection organizations perform.

Fig 1. The Debt Management Challenge in Numbers (Source: Various)

$479bn The amount of bad debt written off by European businesses last year – up 40% since 2007.

$385bn The U.S. “tax gap” – the difference between what the IRS collects and what they expect to collect.

$1.1tr The amount of U.S. student debt that was in default as of early 2014.

$727m Amount Bank of America & FIA were charged for unfair credit card practices.

5,000 The number of front-line enforcement agents cut by the IRS between 2010 and 2012.

25% Percentage of European businesses claiming that late payments have forced them to cut jobs.


Data is at the heart of the collections process, and how it is captured, managed and processed is increasingly important to its effectiveness. Analytics software tools are enabling more sophisticated modeling of this data and are driving business benefits in three key areas: mapping and understanding debtor behavior; agent performance optimization; and regulatory compliance.

By gaining a better understanding of the debtor landscape, collection teams can focus agents on those groups most likely to deliver a short-term return, based on analysis of their individual debt profile, past behavior and more. Different debtor groups behave in different ways and require different approaches. For example, while overall mortgage default rates in the U.S. have stabilized in recent years, the default rate on mortgages held by senior citizens shot up from 0.85% to 4.96%. Analytics tools can also help to identify the most effective channel through which to engage with different debtor groups.

Data transparency is becoming a key issue in today’s era of compliance. For example, the U.S. Department of Education is being sued by the National Law Consumer Center over its failure to disclose data on how the government works with organizations collecting delinquent student loan debt. The ability to provide and share a view of relevant performance data will become increasingly important as businesses execute audits on their internal and outsourced collection functions, as well as facilitating investigations from external regulators.

The contact center has historically been the major hub of the collection organization. However, many are taking a more diverse approach to engaging with debtors, with mobile devices playing a bigger role. Not only can text messages alert debtors of their repayment requirements at an earlier stage in the lifecycle, but the majority of debtors would prefer not to have a conversation with a collections agent. It is also a more cost effective way of making early stage contact with debtors, and is becoming the primary engagement channel for many businesses, particularly those that serve younger audiences.

Many collection organizations have spikes in activity during the course of a trading period, particularly in the run-up to the end of the quarter. As a result, there is a growing interest in cloud computing delivery models, where software and hardware are managed and hosted by an external provider, and are accessed by the client on an on-demand basis. As a result, collections organizations can add new workstations and licenses as they need them, rather than paying for peak capacity across the year. Cloud adoption is in its early stages of development within the collections industry, but a handful of technology vendors have constructed mature propositions that are delivering these benefits of scale and flexibility.

But for many organizations, finding the investment to take advantage of these advances is difficult. Corporate IT budgets remain under great pressure, and the


collections department has often struggled to get towards the front of the line in terms of securing funding for new and essential technology.

The truth is that many collections teams remain highly dependent on legacy systems that can be decades old. Some were built by internal development teams, and are becoming increasingly difficult to support as senior skills retire from the organization. These systems can also act as a barrier to taking advantage of new technology such as data analytics or mobile technology, due to challenges around integration and performance. Few were designed with the ability to provide a consolidated, real-time view of data, which makes it challenging given the renewed focus on compliance.

As a result, there is a growing interest in replacing these homegrown systems with standard off-the-shelf platforms developed to meet present-day requirements. Fewer and fewer businesses are developing new collections software platforms as the functionality, adaptability and affordability of third party products becomes more attractive. PAC estimates the market for new debt management platforms is growing at a faster rate than the overall business applications software market (see fig 2).

Cost remains a pressing concern when considering software platform upgrades, and applications vendors are being asked to deliver a return on investment within an ever-tightening timeframe. Five-year investment plans have become two or one year initiatives. This is also driving an interest in cloud computing delivery models, where clients access software that is hosted, managed and updated remotely by the vendor. Cloud removes the need for on-premise hardware investment, and the pay-as-you-go pricing model means that the service can scale to meet peaks in collections activity.

Fig 2. Forecast WW Spending on Collections Software (Source: PAC)

$1.8bn

$1.4bn

2018

2014

Note: The figures are based on PAC’s SITSI market model, which is based on annual end user surveys plus detailed analysis of vendor financial performance

6.0%

CAGR


The Changing Debt Landscape

While economic conditions are slowly improving, the picture for debt levels and delinquency rates is a very mixed one. U.S. banks reported their lowest levels of mortgage delinquencies in over six years in 2014. On the other hand, the country’s student loan debt stands at $1.3 trillion - its highest level since 1995, and has been described in the media as “the next sub-prime crisis.”

In the U.K., total household debt currently stands at $2.6 trillion, and is forecast to rise by 43% in the next five years, driven by housing price inflation, low interest rates and stagnation in salary increases. In Asia, the South Korean Government has launched a raft of initiatives designed to tackle the country’s household debt problem, while in India, the cooling of the country’s economic growth is forcing some corporations to sell assets in order to repay loans taken when interest rates were considerably lower.

Businesses are feeling the effects of these trends. Research from European credit management services firm Instrum Justitia found the total bad debt loss for companies in the region rose to 3.1% of revenue in 2013, equivalent to a total of €360bn. The impact is being felt across the organization, with 40% of European companies stating that late payments contribute to them not hiring, while one in four say it has forced them to reduce headcount.

Debt management is also a major challenge for the public sector. Many national and regional government organizations continue to push ahead with cost reduction programs that began during the worst years of the economic downturn. And a slow recovery in employment levels in most countries coupled with cuts in government collection resources means that recouping unpaid tax bills is not getting easier. This challenge is best illustrated by the latest figures from the U.S. Internal Revenue Service, which has reported the revenue collected from tax enforcement fell by 13% between 2010 and 2012. Over the same period, the IRS cut 8,000 positions, of which around 5,000 were front-line enforcement agents.

But perhaps the biggest challenges facing collection organizations is compliance. The regulatory landscape has been transformed by a wave of fresh government and industry guidelines and requirements on how businesses engage with debtors throughout the collections process. The highest-profile development in this area was the establishment of the Consumer Financial Protection Bureau (CFPB), an


independent U.S. government agency designed to police the behavior of banks, credit unions, securities firms, payday lenders, mortgage-servicing operations, foreclosure relief services and debt collectors.

The risk of not complying with the guidelines of the CFPB was brought into sharp focus by the $727m in relief that Bank of America and FIA Card Services were ordered to pay back to customers after the CFPB found they had illegally sold credit card payment protection products in a misleading way. Bank of America was also hit with an additional $20m civil penalty.

There is also local regulation to consider. The State of California introduced a new set of stricter guidelines on debt collection under the Fair Debt Buying Practices Act. Regulation is not exclusively a North American concern. In the U.K., the Financial Conduct Authority is implementing the ‘Treating Customers Fairly’ program.

Some organizations are struggling to come to terms with challenges specific to their vertical industry sectors. For example, many utility companies are in the process of deploying smart metering infrastructure, designed to provide more accurate service charging to consumers based on real-time consumption information. However, early generation projects in the U.S. have shown that customer disputes over outstanding payments have sky-rocketed due to concerns over data accuracy. Meanwhile, mobile telecom operators are faced with the challenge of attempting to recoup outstanding debt from customers who are readily able to switch to a new supplier.

All these pressures mean collection organizations need to adapt and evolve in order to meet new business requirements.

Fig 3. Key Market Dynamics in Debt Management (Source: PAC)

Growing and complex regulatory pressure

Rising or volatile client debt levels

Need to improve client retention rates

Need to leverage multiple channels of

contact

Rising agent labor costs in onshore/offshore locations

Dependence on ageing systems, compounded by budget constraints

Need to support external as well as internal agents

Challenge in recruiting and retaining the best

employees


The New Role of Collections

The role and focus of many debt collections organizations has changed dramatically during the last five years.

Economic conditions, regulation and technology advances mean that many organizations collecting debt have been forced into a balancing act. On the one hand, they need to maximize their returns from delinquent accounts in order to boost cash and revenue streams. On the other, they need to ensure they maintain their relationships with clients, even while the collection process is in progress. This is particularly the case in very competitive industry sectors such as utilities and telecoms.

The tactics board has been wiped clean. At the height of the economic downturn, the focus of many collection groups was maximizing call volumes, through the use of a global team of agents supported by auto-dialing technology. But today’s collection team is working a lot smarter, running analysis on its debtor landscape in order to assign agents to those areas where they are likely to have the greatest impact.

Advanced collection organizations are also seeking to take a more proactive approach to collections, by educating customers on the effects of their credit

Fig 4. The Changing Focus of Collections (Source: PAC)

Old World

New World

Reactive approach Proactive approach

Maximize call volumes Prioritize most attractive areas

Voice channel dominates Multi-channel diversification

Business dictates best practice Regulatory compliance

Persistent, confrontational contact

Sympathetic, strategic engagement


agreement throughout the lifecycle. Regulation governing how agents can engage with debtors has driven a change in approach in many areas, away from persistent, confrontational contact towards a more strategic, sympathetic engagement, where the retention of the client on a long-term basis is the long-term goal.

Outsourcing has become a hot topic in the collections industry. Many large businesses already use external specialist collection agencies to help boost their recovery levels, and this trend is spreading into the public sector. The IRS has considered using private collection partners to target delinquent taxpayer accounts. Meanwhile, the U.K. Department of Revenue & Customs is believed to have doubled its use of external collections firms in the last two years as it gets more aggressive in pursuing unpaid taxes.

A big challenge posed by the use of third party collection agencies is that of control. While businesses and government departments can outsource their collections functions, they cannot outsource their brand. A great deal of time and effort is being invested in ensuring that selected agencies will conduct their operations in an effective and compliant manner. Where possible, organizations want to monitor and track the performance of their agency partners. Ageing technology can act as a barrier.

One of the impacts of the new regulation is that it can be more complicated and costly to pursue debtors. This is particularly true in Europe, where even consumer credit groups looking to repossess items bought on credit typically go to court. And this can be a lengthy and costly process – a World Bank report found that the time it typically takes to resolve a legal dispute in Italy is over 1,200 days, compared to just 370 days in the U.S.

These factors have led to a major focus on maximizing the efficiency of first and third party collection organizations in recent years, in order to ensure profitability. This started in the late 2000s with a wave of investment in offshore talent pools in countries such as India, Central America and the Philippines, in order to take advantage of labor arbitrage offered by the talented, low-cost skills bases. However, salary inflation in some of the delivery hotspots, coupled with incentive schemes from Western governments, has seen a focus on developing onshore delivery operations.

This trend is reflected in the strategy of Expert Global Solutions, the world’s largest specialist collections firm. The company was created in 2012 by the merger between U.S. players NCO and APAC Customer Services, with the latter having opened three sites in the Philippines, plus one apiece in Uruguay and the Dominican Republic between 2006 and 2010. But in 2011, the group unveiled a new 250-strong delivery site in Green Bay, Wisc., and in 2012, announced an expansion of its military veteran hiring program.


FICO – An Independent Assessment

Selecting a new software platform to support debt management and collection functions can be a daunting task.

PAC’s latest analysis of this sector found there are more than 250 software companies currently selling debt management systems around the world, with many claiming the ability to address organizations’ primary concerns of reduced delinquency, improved remittance, and more efficient processes.

But in truth, only a few can claim to operate at a truly international level, have the scale to meet the requirements of the largest collections organizations, and have the client references to back this up.

One of these companies is FICO, which PAC ranks as one of the largest players in the fragmented global debt management software market. FICO traces its roots back almost 60 years, having been founded in 1956 by Bill Fair and Earl Isaac. In fiscal year 2014, the company’s revenue reached $788.9m, and it supports more than 5,000 clients across 90 countries.

The company’s first product was a credit scoring system, for which it continues to be well known in North America. It first launched a debt management platform in the 1980s, when it released the first adaptive control system for managing card accounts, and enhanced its proposition in 2012 with the milestone acquisition of CR Software, which brought with it the Titanium ORE product.

Today, FICO supports more than 300 companies through the FICO Debt Management collections and recovery solution across 40 countries. Clients range from those with tens of users to tens of thousands of users, and incorporate banks, utilities, telcos, government departments and collections agencies. For example, the main services organization currently managing delinquent student loan accounts on behalf of the U.S. Department of Education uses FICO Debt Manager to support up to 2,200 concurrent users.


The core proposition of the solution is that it serves as an end-to-end collections and recovery system, supporting the process from the moment the organization first contacts the customer, through account history, automated notifications, client reporting, and payment plan processing, right up to the point of resolution.

The core solution, FICO Debt Manager is built on a services-oriented architecture (SOA) that substantially eases the upgrade process and enables the sharing of data with other FICO and third party applications supporting other areas of the credit lifecycle. This includes the company’s Falcon fraud management tool, TRIAD customer management product and Blaze Advisor business rules management system.

While collections can broadly be considered a horizontal area, FICO Debt Manager can be configured to meet those industries with specific process requirements. The system has a single code base for both its government and commercial sector products. However, there are different functionality sets for clients in areas such as student loans, healthcare, and banking collections.

One of the main concerns of businesses that are considering modernizing their existing systems is the potential disruption to the business as it makes the jump from decades-old homegrown software to a standard 21st century platform. FICO Debt Manager aims to address this by enabling the client to configure their existing business processes into the system, rather than forcing them to completely overhaul their way of working. By doing so, the client is able to retain the more innovative or unique aspects of their collections processes.

As we discussed in the earlier section of this report, the future success of the collections organization is going to increasingly depend on how they manage, process and analyze their data. FICO has a long heritage in the analytics space and has made several acquisitions to enhance its capabilities in this area, including InfoCentricity and Karmasphere’s big data analytics software business.

PAC believes that analytics is becoming FICO’s biggest differentiator in the debt management space. The company integrates its FICO Customer Communication Services, formerly Adeptra’s Risk Intervention Manager, into FICO Debt Manager, to provide enhanced customer segmentation based on data analysis. FICO can cite examples where its analytics capabilities have driven an 18% increase in average remittance, and a $20,000 increase in revenue per agent.

Clients are also looking to use analytics to measure and improve the performance of their agents. FICO’s Engagement Analyzer tool provides real-time analysis of an agent’s conversation with a client and helps management understand the level of performance and identify where improvements can be made. FICO states that this can help to boost agent productivity by at least 20%, as well as ensuring compliance.


Multi-channel communication is becoming increasingly important to collections organizations, as they look to leverage the efficiency and effectiveness gains that can come from digital channels. FICO supports this using its Customer Communication Services platform, which enables intelligent, automated, two-way communications for businesses to reach out to customers in real-time, through voice, SMS, mobile applications and email.

One of the most interesting features of FICO Debt Manager is its delivery model, with clients able to use either a cloud delivery model or install the system on-premise. The majority of new clients have opted for the on-premise model, in line with PAC’s recent research into cloud computing identifying ongoing concerns over data security and control. In regions such as continental Europe, there is also a strong desire to ensure that data stays within their domestic market. However, FICO believes adoption of the cloud solution will become more prevalent. This is something that FICO has responded to by building out a network of delivery centers around the world, which enable it to provide locally hosted versions of FICO Debt Manager in Asia, Europe, Latin America and North America. In addition to FICO branded products, the FICO Analytic Cloud serves as a debt management hub providing access to services, including third party data, tools and applications. To date, FICO has more than 500 debt collection agencies and data providers utilizing its cloud to serve 50 lenders. FICO also ensures that data is protected both in transit and at rest by building in a layer of 256-bit encryption for added security. In summary, PAC believes the FICO Debt Management solution is one of only a few solutions that can address the end-to-end needs of large collections organizations in both the public and commercial sector. The company’s strong focus on analytics is in tune with current and future market dynamics, and is a strong differentiator, as its ability to integrate with and leverage other areas of the FICO portfolio. Collection organizations tend to take a cautious approach to investing in new systems, due to budget constraints and concerns over whether standard solutions can meet their specific requirements. The configurability of the system to match existing business processes, coupled with the hosted delivery model helps FICO avoid the lengthy and costly implementation process that some other systems require.


PAC:

Nick Mayes

Research Director

Pierre Audoin Consultants (PAC)

15 Bowling Green Lane

London EC1R 0BD

UK

Tel: +44 20 7251 2810

Email: [email protected]

www.pac-online.com

FICO:

Name: Brad Rollin

Title: Senior Manager

Address: 200 Smith Ranch Road, CA 94903

Country: United States

Tel: 415-446-6644

E-mail: [email protected]

www.fico.com

Contact

mailto:[email protected]


mailto:[email protected]

http://www.fico.com


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From strategy to execution, PAC delivers focused and objective responses to the growth challenges of Information and Communication Technology (ICT) players.

PAC helps ICT vendors to optimize their strategies by providing quantitative and qualitative market analysis as well as operational and strategic consulting. We advise CIOs and financial investors in evaluating ICT vendors and solutions and support their investment decisions. Public institutions and organizations also rely on our key analyses to develop and shape their ICT policies.

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Economy & Finance

The Changing Face of Debt Management & Collections