Rising Charge Offs Key to Nimble Collectors in 2008

The New Year brings opportunities to the ARM industry as charge offs are set to rise. But challenges await collectors that aren’t prepared for change, according to two experts in the field.

“What we see unfolding is an increase in charge offs from credit issuers,” said Mark Russell, director for Kaulkin Ginsberg Co. Debt placements, particularly on the consumer side, were starting to increase at the end of 2007, due to an early start to the holiday season and the impact of the problems in the subprime mortgage market on other consumer debt markets such as auto loans and credit cards.

The subprime meltdown was responsible, at least in part, for weak collections in November and December, according to Russell. While those months are historically weak because debtors put off payments in lieu of holiday spending, some collection agencies and debt buyers confirmed that their performance at the end of 2007 was weaker than normal.

While it is too early to forecast a trend for 2008, that weakness could be the precursor of economic problems in the New Year. The chance of a recession in 2008 adds uncertainty to the market, while on the plus side, unemployment remains historically low with no indicator of any sharp increase on the horizon, said Russell.

“As long as people have jobs, they still have money coming in the door,” Russell said. So they have money to repay their debts.

No matter how business and the economy go, the top accounts receivable management firms should continue to do well in 2008, Russell said. Collection firms that are struggling against their peers will have a tough time as creditors look closely at firms’ gross receivables as well as net recoveries. Debt buyers too will be active in this market, according to Russell.

To succeed in 2008, firms must have talented staff and be prepared for rapid change, said Russell.

“No matter how much technology a firm has, it’s still a people-driven business,” Russell explained. “Success all depends on how well the collectors are trained and the processes that agencies and debt buyers utilize to liquidate their debt inventories. Agencies and debt buyers that can quickly adapt their liquidation strategies to match the changing dynamics of the marketplace will outperform their peers and gain additional business as a result.”

Though some companies have added online collection programs to their offerings, the automated systems will never completely replace human collectors, Russell added.

Paul Legrady, director for Kaulkin Ginsberg, added that the best accounts receivable management firms will benefit from the growing collections needs of telecommunication, health care and financial services companies. He expects these firms to alter how they collect debt, with some increasing their collection outsourcing. Legrady also sees an increasing demand for legal collections.

“The winners next year will include the well-funded debt buyers,” Legrady said. “The losers will include small to mid-size collection agencies that focus only on credit card paper. Top performers will continue to be rewarded with additional placements from credit issuers.”

The best collection firms are the ones that know how to collect using a combination of analytics, communications, smart and scalable technologies, according to Legrady. “It used to be you could start in the business with just a telephone and computer. In today’s receivables management industry, agencies need much more to grow revenues and profits.”