Ask the Experts: Can SIFs Benefit My Agency?

Question: What are current SIF rates in the ARM industry? And how can SIFs benefit my collection agency?

Answer: (from Paul Legrady, Director at Kaulkin Ginsberg)

Settlement in Full rates for credit card paper can reach 50 percent pre-charge-off, declining over the life of the receivable to 20 percent or less when managed by a tertiary contingency agency.  Few credit card issuers with developed recovery systems will refuse to settle accounts at early stages of delinquency, even when an account is four months overdue and has yet to charge off.

Kaulkin Ginsberg has heard of settlement authority granted to pre-chargoff collection companies at as little as 20 percent of face value.  This suggests that a $1500 flat screen purchased by a borrower in January 2010 could be paid for in May 2010 for as little as $300.

Over the past two years, forecasts of liquidation rate performance made by credit issuing companies have been waning.  Whether actual liquidation curves decline, remain flat, or improve in 2010, upfront settlements with certain debtors will continue.

Competition has also increased among credit issuers for settlement rates.  Sophisticated debtors can choose to settle one credit card account, for example, with a lower settlement rate while leaving another card unpaid.  As credit issuers competed for the “wallet share” of borrowers on the basis of interest rates, frequent flyer miles, and other perks in 2006, credit issuers now compete with each other on the basis of settlement rates, with payment sometimes going to the issuer willing to resolve its past-due accounts for less.

The owners of many collection agencies and first party service providers have been happy to incorporate lower settlement rates into their talk-offs with debtors. In insideARM’s most recent Credit & Debt Collection Industry Confidence Survey, 32.4 percent of collection agencies and 44.8 percent of debt buyers reported deploying lower SIF thresholds recently to improve collections. Providing this incentive for borrowers to repay their accounts also improves the immediate financial performance of receivables management companies in difficult economic conditions.

For all of these reasons, Settlements in Full have become a different collection strategy for a different period of time.

For more on SIFs and their impact on ARM firms, please read Paul’s most recent blog entry, “SIFs: How much is too much?“

Paul Legrady provides management consulting services to creditors and receivables management companies. To confidentially discuss your interests, or to learn more about Kaulkin Ginsberg’s Recovery Review program for credit issuers, contact Paul at 240-499-3818, or by email.