Today, TransUnion and the Aite Group released a report titled The State of Collections 2019, noting that the debt collection industry is at a crossroads but has a bright future ahead. The report—which covered a cross-section of the industry representing collectors of all sizes who collect many different types of debts—benchmarks what collectors are doing today, dives into the challenges faced by increased costs of payroll and decreased consumer contacts, and lays the groundwork for what the future holds for debt collectors willing to embrace technology.
insideARM spoke with Peter Ghiselli, Vice President of Third-Party Collections at Transunion, to discuss the report and dig into some of its findings. Below are some of the highlights.
Debt Collection Margins are Tighter Than Ever
It seems that the perfect storm has hit the debt collection industry: due to a variety of factors, margins for third-party collection have been steadily shrinking. Some of these factors include the cost of payroll, increasing legal and regulatory demands, reduced commission rates from creditors, and the high cost of postage and telephony—which are still the primary communication channels used by debt collectors.
Payroll is, by far, the largest expense at collection agencies, accounting for up to 41% of the company’s budget. On average, only 55% of full-time employees at companies are directly engaged in collection work. As legal and regulatory requirements for collectors have grown, compliance departments have seen a boom. Additionally, bringing on new collection agents is a challenge in today's low-unemployment environment. [Editor’s Note: insideARM previously published an article about recruiting and retention in a time of low unemployment.] Postage and telephony also represent a significant portion of collection expenses.
At the same time, commission rates for debts collected have fallen over the years, tightening margins even further amid the rising costs referenced above. The report notes:
One interviewee notes that 20 years ago, companies had returns of 18% to 20%, while a 10% rate of return is pretty good now. Another concurs, citing dramatically shrinking margins resulting from commission rates reduced by half.
Difficulty Reaching Consumers
Debt collectors have seen an increased difficulty in reaching consumers using the widely-accepted communication methods of mail and telephone calls. Consumers' phones are plagued with illegal spam calls, making it difficult for consumers to differentiate between a legitimate call from a debt collector and an illegal robocall.
The report also mentions the delicate scorpion dance debt collectors and consumers must endure once a consumer answers the phone:
The “catch-22” of having to ask that consumer for information before revealing details of why the collector is calling is a high hurdle. As one industry leader aptly notes, “right-party contact has fallen off a cliff.”
The Result: Fewer Collection Agencies
Due to the tightening margins and increasing compliance demands, the number of collection agencies available that can shoulder this new environment has fallen. Some agencies fold, others get acquired by larger agencies that want to diversify their business. The overall result, however, means there are fewer choices in the market and the barrier to entry is much higher.
Specialized debt collection companies that collect only one type of debt or one stage of the debt lifecycle (e.g., post-charge off) are going the way of the dodo. More and more companies are choosing to diversify the type of debt they collect in order to survive in this new environment.
Despite All of This, The Future is Bright
While the above-stated statistics may seem grim, the future of the debt collection industry is bright. Ghiselli states that as collection agencies move toward modern, digital communication channels—for which the Consumer Financial Protection Bureau laid the groundwork with its Notice of Proposed Rulemaking for debt collection—things will improve.
In fact, the report notes that more and more debt collectors are considering new channels of communication, such as email, SMS messages, and social media, in the future.
Modern channels of communication will increase the right-party contact rate and decrease the costs of operations for debt collectors, which would make up for some of the challenges faced by debt collectors today.
Final Thoughts from Peter Ghiselli
Ghiselli shares three themes he believes will guide the future of the industry:
- Diversification is critical for success.
- The willingness and desire to embrace technology has permeated to everybody that participates in the industry, and this desire needs to remain high as we await the CFPB’s final rules.
- The CFPB’s rulemaking is going to be extremely favorable to the industry as it will provide clarity on the rules of the road of employing technology for collections.
Ghiselli sees traditional call centers turning to “omnichannel centers,” where you have groups of agents focused on not only calls, but webchat, emails, text messages, and so forth.
The future is bright. When asked what message he has for debt collectors in light of this report, Ghiselli references the crossroad that the industry is facing and optimistically notes:
This is the most exciting time in our entire careers, and we are privileged to be a part of it. It is the obligation of industry participants to take advantage of this opportunity and lift the third-party collection industry as a whole into the modern age.