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Accounts Receivable Management in 2009: Hitting the Wall
Last January, I made some predictions for post charge-off recoveries in 2008. These included “the economy will slip into recession by the second half of 2008” and “recoveries will be 5 to 10 percent more challenging in 2008 than in 2007.” “These forecasts as a whole,” I wrote,” are rather gloomy.” In retrospect, they were not gloomy enough. The government now says that the current recession began in the fourth quarter of 2007, around the time I made my forecasts. And I think it goes without saying that any credit issuer or accounts receivable management company would be delighted if 5 to 10 percent degradation in recoveries took place between 2007 and 2008. Now we see more “apples to apples” liquidation decreases of up to 30 percent year over year. If you think this figure is shocking, consider that the Dow Jones index of U.S. financial services companies fell 56 percent in 2008!
With all of this as background, here are my five predictions for accounts receivable management in 2009.
- The current recession will deepen more than many expect. President-Elect Obama’s transition team has forecasted unemployment of greater than 9 percent by the end of 2009. Some of the recovery executives we’ve spoken to are modeling unemployment even higher. Unemployment is the principal barometer of all collection activity, and as it spikes in the coming year, all of us in the field of post-chargeoff recoveries will be strained.
- Credit issuers will test the capacities of their specific service providers and their recovery networks as a whole. Chargeoffs will increase in rough proportion with increases in the unemployment rate. As economic conditions continue to turn, credit issuers will sell more and more paper to debt buyers, and place more and more accounts with collection agencies, continuing to flood the market with their paper. In turn, the operating capacities of specific service providers and the recovery networks of issuers as a whole will be put to the test in 2009.
- TARP and TALF will restructure many recovery efforts. Essentially all of the country’s largest banks and financial services companies have accepted bailout money under the Troubled Asset Relief Program. The Term Asset-Backed Securities Loan Facility (TALF) also makes federal funding available to student loan, auto, and small business lenders. As the government finances more private sector debt, executives within credit issuing companies will increase their expectations of recovery operations in light of closer government scrutiny. As this takes place, more and more ARM companies will seek to gain approval as government contractors.
- Revisions to the Fair Debt Collections Practices Act will make collections even harder. The Federal Trade Commission held hearings on revisions to the FDCPA in October 2007, and has since brought unprecedented enforcement actions against large ARM companies. The General Accounting Office is now assessing the ARM industry on the request of the Senate’s Government Oversight Committee. It is likely that President Obama and a Democratic Congress will make consumer-friendly revisions to the FDCPA and other collections laws in 2009.
- Success in collections will rely more and more on advanced technology solutions. It goes without saying that in a recession, placements increase as liquidations decrease. The most successful recoveries will be conducted by those who know how to segment, score, model, and reach the most likely payers. The days of “smiling and dialing” are done. If this has been true for some time, it is especially true in this recession.
All marathoners understand what it means to “hit the wall.” Around mile 20 of a 26.2 mile race, legs cramp, brains fog, spirits sag, and for many, the race ends. Runners who have trained properly, conserved energy, and maintained a consistent pace throughout the race cross the finish line -- sometimes in better shape than expected. So it will be with recoveries in 2009.
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Comments
Comment from John McNamara on January 5, 2009 at 1:12PM EST
During recessions, for every consumer who loses his/her job and thus the ability to pay, hundreds read about that job loss and become afraid and lose their willingness to pay. This works in the reverse when the economy rebounds. Those agencies that do the right things now will be in existence to enjoy the coming boom. Phil is dead on with point 5. Relying on technology does not mean knee-jerk reactions and buying old technology. This recession will push software as a service over the top in our industry. The days of tying up precious capital in fixed solutions are over. Agencies need to conserve capital to stay nimble.
Comment from Luke Kinton on January 5, 2009 at 3:08PM EST
And sadly, relying on litigation and arbitration will most likely pose a bigger backlog in the court system. So, in essence, its going to be easier to abuse credit given by banks and other institutions as a consumer and harder to have it collected.
Comment from Anonymous on January 5, 2009 at 4:05PM EST
Ensuring full use of effective technology might give that little extra push...identifying & getting the right payers will become paramount...2008 rightly pushed the overall recoveries low, but I'm hopeful, 2009 will surely secure better
Comment from Jer@PaydayLoanIndustry.com on January 5, 2009 at 5:19PM EST
Volume is already up significantly in the payday loan industry. Collections are up as well. As unemployment increases it becomes more important than ever to get a handle on underwriting criteria, verifications and regular, consistent communication with our consumers.
Technology and know-how is the key to future success in collections.
Jer@PaydayLoanIndustryBlog.com
Comment from Ray on January 5, 2009 at 6:28PM EST
Mr. Legrady makes some good points, but every collection agency has differing needs and clients, no matter the economic climate. For anyone to claim “one solution fits all” is shortsighted at best. Those who find success are those who invest in technology that best suits their specific needs, whether it is a capital expenditure, a hosted solution, or a mixture of both.
Comment from Anonymous on January 5, 2009 at 6:52PM EST
I would really like to see the ACA step up to the plate and lobby accordingly in regard to the FDCPA and the subsequent FTC actions. It would be a shame if the law(s) became even more restrictive. when will government realize it is the small business owner that provides the majority of the US work force? When will government stop making it more difficult for the small business owner to succeed? Why reward a consumer that doesn't make attempts to resolve their situation with ambiguous and stringent laws? I think it is time that agencies step up, lobby for changes and begin to fight as a united front the antiquated laws that govern our industry. I am all in favor of ethical collections, but to have to leave the foti message instead of clarifying the law. Just one example of many...
Comment from Michelledunn1 on January 6, 2009 at 11:40AM EST
In my opinion 2009 is going to be a big one for this industry, things are going to change and we all need to be educated on what is going on so we can make educated decisions and help others who are cramping up, especially at the end of the race. I also agree with Luke and think that more and more consumers will be pulling their credit reports and checking them than ever before. Consumers will want to see what is on their reports and will dispute more and more items.
Comment from JJ Hornblass @ CollectionTechnology.net on January 6, 2009 at 12:30PM EST
Your point about technology is a good one. Certainly, I agree that technology will be a strong counterbalance to recessionary forces.
With a caveat. My concern is the recession ends up whittling staffs at collection agencies (we've already seen some layoffs in the industry) and that prevents technology advancement. Surely, there are agencies -- National Recovery Agency comes to mind, for example -- that have vastly increased their collection capacity largely by leaning on technology. NRA and its ilk are the minority, though. Rather, technology spending at most agencies fluctuates with the economic winds. There is a certain fortitude that is required to make good on the promise of technology. Agencies need to commit to the IT path wholeheartedly, to "stay the course," as one former president said, in order to reap the returns you write about. As Ray pointed out above, every collection agency is different. Unfortunately, some just don't "get it."
Comment from mike@therainmakergroupinc.com on January 6, 2009 at 1:09PM EST
Great analysis! How about #6?
Success in collections will also rely more and more on "selecting the right candidate for the job" versus plain-old "hiring."
After all, technology is worthless without a systematically and objectively chosen collector driven and inspired to use it to its best advantage!
Comment from Mark Alves on January 7, 2009 at 11:01AM EST
The gentleman “Ray” said it all; purchasing a technology without a plan based on business need is wasted capital. What are the objectives and what technology, if any, can help to achieve the objectives? Also, I would like to add to #6 stated in the comments above; an investment in the right person for the job is paramount. I'll take this one step further as it extends beyond the collector. Your IT and back office staff has a significant role in the success of the organization as well. Competent, thinking individuals that "Get IT” and understand the use of technology" help to cause efficiencies and decrease overall expenses (the other factor in profits.)
Comment from Gary Jensen on January 7, 2009 at 12:17AM EST
@Mike: I also believe that candidate selection will become more important. The revolving door is too costly even during good times!
Also, I wonder if staff training and development might see a slight boost? As companies struggle to do more with less, ensuring that the right skills are in the right places and that staff is motivated during these tough times will be key to weathering the storm.
Gary Jensen President & Founder | Skills World Editor | collector mentor www.thepicklefork.com