How Can the ARM Industry Reduce Waste?

Chris Smith

I’ve been thinking about waste.

As you probably know, the ARM industry largely operates on a “no win no fee” basis, meaning creditors typically pay debt collection agencies a % commission when they collect money. This results in much talk about the “cost-to-collect” – but I’m left wondering about the cost to not collect. What about the costs incurred on all those accounts which don’t pay?

The truth is that the accounts that do pay, end up paying for those that don’t.

Collection agencies work out how much cost they will incur in working a portfolio of accounts; for example on letters, outbound dial attempts, inbound calls, payment processing and so on. Commission rates are then adjusted to ensure that these costs are covered by the likely yields per account. So as more accounts pay, the blended commission rate drops.

This has led me to consider just how much spend is wasted on accounts which don’t pay?

Wouldn’t it be valuable to reduce the work on these accounts (fewer letters or dial attempts), and reinvest those costs on accounts more likely to pay? After all, we know all about the ‘low hanging fruit’ – accounts that pay fairly easily, but what about the fruit hanging halfway up the tree that, with a little extra shaking, will liquidate too?  If we invest extra activity on those accounts, which is funded by the reduction of spend on what is basically a rotten apple, could we shake more off the tree.

Another example of potential wasted effort in the industry is with customer queries and disputes, they are expensive to manage, delay account resolution and are not supportive of a positive customer experience. We know that swift resolution of simple queries is known to deliver an uplift in cash collections, so by taking a close look at the queries and disputes raised – finding out the root-cause or understanding why the same issues re-occur – it is often possible to reduce the number of unnecessary customer queries being raised. Fewer queries mean lower costs.

Reducing waste and investing those savings in more productive activities is the key to more effective collections. All activity is becoming more expensive, and in some areas arguably less effective, so we need to look at how we uplift net collections in a more intelligent way. As ever, the solution can be found through a combination of data; to pinpoint the accounts that will bear fruit, and process improvements; to remove the inefficiencies currently present within the collections industry.