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.

1. 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.
2. 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.
3. 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.  
4. 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.
5. 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.