Loss Mitigation in Collections: Adapting to Market Conditions

The financial crisis and resulting Great Recession hit consumer lending globally, and around the world collections professionals were all that stood between lenders and the looming tidal wave of red ink.  Our company, Auriemma Consulting Group (ACG), works with clients in the two biggest consumer finance markets in the world, the US and the UK, and these two countries provide some instructive contrasts in approaches to loss mitigation.

Credit card issuers in both the United States and the United Kingdom shared some common environments: a bursting housing bubble, high levels of personal debt, steep declines in consumer spending, and rising unemployment.

In the US, the huge surge of volume had Collections and Recovery executives scrambling to hire and train staff, urged on by anxious senior management.  As they decided where to deploy these new resources to make the most impact, lenders’ reaction was to focus more on early stage collections. Analysis showed that accounts that reached 60+ days past due were showing a high likelihood of flowing through the buckets.  Collections departments worked closely with Risk Management to respond swiftly at the first signs of delinquency, and collectors diversified their communications channels in an effort to match the variability of delinquent customers, many of them new to the experience with formerly high credit scores.

On the other side of the Atlantic, bank management was faced with a similar surge in bad debt. They saw the same pattern, that the drop-off in roll rates was coming earlier and earlier in the cycle, and many organizations increased their focus on early stage intervention during 2008 and early 2009.  But during late 2009 and 2010 there was a noticeable shift in focus to later stage collections and recovery.

Why the shift?  A big part of the explanation comes from the collapse of the bad debt resale market.  In both the US and the UK, prices plummeted to the point that lenders who had relied on this channel were faced with need to “do it themselves.”  External agents were still an option, but most were similarly pushed to capacity.  And though both markets felt the stress when debt resale became financially unfeasible, British banks were especially likely to have relied on this channel for post charge-off income.  The recoveries market was relatively less mature there than in the US, so there was more “low hanging fruit” to be found in working later stage collections and recoveries.

In both cases collections looked for the points along the cycle where they could make the most impact in overall loss mitigation.  The point of most payoff was different in the UK, where the opportunity lay in an area that US collections practice was already optimizing.

Both markets have seen improvements in loss rates.  In the US losses spiked up 75% from pre-Recession levels to peak at 10%+/- in Q3 09.  Since then, a 21% decline has brought some relief, although the current level of 7-9% is still the highest in decades.  Recovery has been agonizingly slow, but most economists believe it has begun in the US.  Ironically, that very improvement may contain the seeds for more trouble, in the form of personal bankruptcies.  The number of BK filings in the US continues to rise, and may increase as the economy improves– it’s expensive to file, and the return of consumer optimism may be accompanied by the appeal of making a fresh start with a clean slate.

In the UK the road may be more bumpy. There too, losses peaked in Q3 2009 and have been declining since.  But economic output showed a decline in Q1 of 2010, and fears of a double-dip recession are more widespread, especially given the stringent austerity measures proposed by the government. Having  assumed a more active role in collections and recoveries, British banks were able to drive down net losses, but may be hard-pressed to continue that trend without the benefit of some improvement in the macroeconomic climate.

Whatever the outcome, events of the last three years have changed the role of Collections and Recovery within American and British banks, elevating its strategic importance and the attention it gets from senior management.  While that interest may cool somewhat as loss rates decline, we believe that the most savvy lenders in both markets will continue to invest resources into developing a more proactive and comprehensive approach to loss mitigation.

Tom LaMagna manages Auriemma Consulting Group’s world-wide Industry Roundtables and Benchmark business covering most functions in credit and debit card, auto finance, and consumer mortgage lending. Tom utilizes his experience and business acumen to play key roles in our consulting practice with a focus on operational effectiveness, collections, customer service, organizational effectiveness, project management, and internet optimization. Tom joined ACG after long relationships with JPMorgan Chase and First Chicago. He has extensive experience in e-servicing, collections, customer service, project management, systems development, and financial and loss management.

About Auriemma Consulting Group
Auriemma Consulting Group (ACG) is a full-service management consulting firm serving the payments and lending industries since 1984.  With offices in New York and London, ACG consultants are experienced practitioners, drawn from the credit card, private label, auto finance, mortgage, and retail banking industries that we serve.