How did Covid-19 and the resulting economic downturn affect the collections industry? We may not know all the ramifications for a few years, but it’s clear that things have changed and will continue to do so. While delinquency levels did not spike, it is unclear how consumers will manage their obligations as the recession continues. Businesses are still reeling from the impact of pandemic related lockdowns and restrictions. TransUnion recently released a report on the state of Collections in 2020. Here are the four key takeaways.
1. There are fewer third-party collections agencies
The number of collection firms has been in decline since 2011, from 9,400 to 7,401 in 2018. That’s a 2.5% decline per year. There was a steep decrease in 2020, with only 6,699 remaining, a 10% decline. While much of the decline is due to mergers and acquisitions, the majority of firms that simply closed were small, local firms or larger agencies with heavy overhead . The ongoing recession is likely to result in more closures.
2. Spending, and related debt, has declined.
Although for many people income is down, spending is too. Not only are there fewer places to go, and less need for clothing, gas, and other items, consumers are tightening their belts and saving money. For the first time since 2014, total household debt fell in the second quarter of 2020 . The number of new loans originated has also fallen across a variety of debt types, with the most precipitous drop in bank card originations. The economic downturn has not yet translated into elevated delinquency rates for consumer loans. Delinquency rates have trended down for credit cards and unsecured personal loans while ticking up modestly for auto loans. Government mandated forbearance programs resulted in sharp declines in delinquencies for student loans and mortgages. Whether this will continue depends on the contours of the economic downturn and additional federal aid.
3. Employees are the biggest expense
Employee-related expenses continue to be a key cost driver for collection agencies. Over half the companies surveyed had seen an increase in employee salaries. Covid-19 accelerated the move towards remote work for most industries, including collections, and this may continue as office space is a huge employee-related expense. Tools and technology were the next largest expense for collections agencies. Technology that includes automating tasks can reduce employee expenses. Some agencies are investigating technologies that allow customers to self-service their accounts. Larger companies are more likely to embrace a wide range of debt-collection tools and technology. This varied toolbox includes more automated strategies, such as the use of a predictive dialer, IVR capabilities and speech analytics. Despite emerging technologies, acquiring and recruiting top talent remains an important goal for firms.
4. Communications methods are changing
Successful collections depends on communicating effectively. You have to be able to reach the right person at the right time. For years the collections industry has been stifled by call-blocking technology. However, new forms of communication are emerging to align with evolving norms and preferences, including text messaging, ringless voicemail drops, chatbots and other forms of automated communications that use Artificial Intelligence. As the methods of communication change, so do the laws. Collections agencies need to keep informed about changing communication methods and regulations.
The pandemic caused a sudden shift in the collections industry. For example, clients requested that collection approaches be modified, localities and states restricted collection activities and governmental restrictions even curbed efforts by companies collecting their own receivables. Court closures further slowed the litigation process. However, despite these challenges, collectors report that more consumers than expected reached out to collectors to deal with their delinquent and defaulted accounts.
Changes at The Kaplan Group
Our agency experienced some dramatic changes in 2020 as well. We got our staff working remotely with only 3 days notice. Our investment in infrastructure over the last several years made this possible. As the year continued, we switched from paper reporting and checks to electronic payments, statements and summary client status reports which could be initiated from home. While we moved to automate more administrative tasks, we didn’t automate any collection activities. We still to use a custom approach on each claim, which continues to be far more effective than automated approaches.
We changed our collection tactics to be understanding of Covid’s impact on debtors and build relationships so our clients would be at the top of the list for payment. Finding cell numbers for people working at home became a necessity as calling office numbers frequently yielded no results. Amazingly, our collection success rate didn’t decline that much, and we are still monitoring many companies who are just surviving until we get back to normalcy.
With the vaccine and a new administration, we are entering a new phase for both our economy and Covid-19. Whatever 2021 brings, please know that The Kaplan Group stands ready to assist you with your collections’ needs. Let us know how we can help.