What is a debt management and collections system?

What casual observers may fail to appreciate is the impact of government intervention during the pandemic. As the report says: “Credit and collections operators generally benefit from difficult economic conditions and accompanying rises in unemployment, loan defaults and bankruptcies. Industry falls were largely due to declines in business bankruptcies in 2019-20 and 2020-21 as government assistance packages kept firms afloat during the COVID-19 pandemic.”¹

While research shows Australian collection firms made more than 104 million consumer contacts in FY2022², it would have been much more if not for the government easing the financial burden on individuals and organisations at the height of the pandemic.

That said, storm clouds are gathering in the form of several factors that are set to drive demand for collection services. Interest rates are on the rise, inflation continues to climb and key indicators such as the household debt to assets ratio and credit card debt to discretionary income ratio are forecasted to increase. The days of generous COVID assistance packages are also over, creating an environment where more people and businesses are likely to feel financial stress and more organisations will need to turn to companies that specialise in managing credit and mitigating costs.

As lenders brace for the challenging period that lies ahead, it has never been more important for them to have a solid understanding of the collections sector. This guide outlines what debt collection is, how it works and the top challenges facing the industry.

What is debt management and collections?

Debt collection unfolds when creditors and collectors seek payment from consumers or businesses that are legally bound to pay the money they owe. For time immortal, people have enjoyed the benefits of receiving products and services on credit after negotiating and agreeing to the terms under which the transaction can take place. While the vast majority of such deals play out as planned, there are occasions when businesses need to step up their debt collection efforts and fortunately there are expert agencies waiting to help.

How do debt management and collections work?

Befitting an industry that routinely deals with unique circumstances, there is no one-size-fits-all answer to that question. The approach used varies depending on the agency, with some focusing on specific forms of debt (eg: medical, student loan) and others well-versed across a broad range of collections. The age of the debt is another factor that governs how the operation unfolds.

One of the most important factors to note is the collections industry has evolved. The days of heavy-handed tactics and angry demands are in the past, with a more nuanced and strategic approach now in play. Every customer requires a different approach to negotiating their situation. Some are suffering financial hardship and need help to find a way through. Others may have the means but not the desire to balance their accounts. It is all about taking the time to understand them and ensure the right action is taken for each customer.

This is where the best collections agencies combine digital strategies and human intervention to maximise returns. Using the likes of artificial intelligence and machine learning tools allows them to gain personal insights into the people and businesses that owe money and, more importantly, customise solutions that are not only highly effective but customer-friendly. This includes identifying their preferred modes of communication and how best to deal with them.

Most of the initial ‘heavy lifting’ is performed by digital technologies, with the likes of intelligent automation, asynchronous messaging and click-to-play nurturing an environment that makes it easier for individuals and businesses to meet their commitments. Rather than treating every customer the same, it is all about profiling them to find their preferred modes of communication (eg: SMS, email, video messaging) and how best to encourage debt resolution.

Of course, there are occasions when human intervention is required but the emphasis is once again on working with people to manage credit collection. When phone calls need to be made or doors need to be knocked on, it is not meant to be confronting. Rather, it’s about negotiating a solution for the customer to meet their financial obligations in the most appropriate way for them.

Customers can also be assured that quality collections agencies will treat their personal data with the respect and care it deserves. The likes of Information Security Assurance (InfoSec) and PCI DSS (Payment Card Industry Data Security Standard) are industry standards that guarantee the security of privileged information and adhering to them demonstrates to people in financial distress that an agency applies best practice security, risk management and internal controls to protect their interests. 

The best collections agencies also provide education for customers about legal and support options for managing both their debt and emotional wellbeing. In what is often a complex and highly stressful environment, there is no doubt the combination of digital strategies and empathetic agents is making for an increasingly seamless and productive collections journey.

What is skip tracing?

While many collections processes unfold due to reasons such as genuine oversights and financial hardship, there are occasions when debtors do all they can to avoid being located by a creditor or agency. In such circumstances, collections agents use the process of skip tracing to track down a debtor who has ‘skipped town’ – hence the name.

This is especially useful when debtors repeatedly fail to answer or return calls or it is found the physical address on their records is no longer occupied by them. The US Postal Service says³ almost 30% of all ‘undelivered’ mail is due to people moving without leaving a forwarding address, which may be accidental or a deliberate tactic to ‘leave behind’ unpaid debts. Regardless of the reasons why, skip tracing is a valuable tool that collections agencies use to find debtors and may include studying public databases, social media accounts, courthouse records and even speaking with people such as neighbours, family members, landlords and colleagues about their whereabouts.

What challenges do collections teams face?

The collections process is a constant balancing act, all the more so when societal issues such as inflation and rising interest rates increase financial pressure on debtors. It is essential that creditors and their agencies not only identify challenges but develop strategies to mitigate their effect. As we enter 2023, here are three issues impacting the collections world.

Lack of current contact information

There has never been more access to information about an individual, both in terms of volume and ease of locating it. The internet era sees many people even lay a digital trail on their doorsteps but the concern for collections staff is working out the most up-to-date and accurate information. Between people moving, not being listed on tenant agreements or simply making errors on databases, it is easy for debtors to drop off the grid – either inadvertently or deliberately. That is why it is crucial for creditors and their credit and collections partners to enhance their methods of information authentication, such as ensuring data is updated in real-time and their sources are transparent.

Rise in B2B collections

Where consumer debt was traditionally a primary focus for many collections agencies, recent years have seen an increase in the number of businesses seeking assistance to recover monies owed to them by fellow businesses. Also known as accounts receivable services, business-to-business (B2B) collections can be more difficult to navigate than the business-to-consumer (B2C) variety and weigh more heavily on organisations given they often involve larger sums of money. Fortunately, digital strategies that involve the likes of machine learning and artificial intelligence are once again optimising outcomes for forward-thinking agencies.

Identifying vulnerable customers

Life would be a lot simpler if a collections agent could look at a person and immediately know that they have missed a payment due to short-term concerns or are genuinely financially distressed and in need of long-term assistance. As governments showed during the height of the pandemic, people need support during times of economic upheaval and doing the same in the collections space leads to better debt management and collection systems. Agents need to work tirelessly to get a complete understanding of a debtor’s current circumstances and if they are at risk of long-term pain, deliver more education or support so they know their options for getting back on track.

Managing an increase in cases

When economic pressure increases, it goes without saying that the same applies to the number of debt collection cases that need to be managed. Where things get tricky is when internal resources are not subsequently increased to help agencies and their teams tackle rising operational demands. One of the keys to successful debt recovery is to launch action as soon as possible and continue to tick off tasks in a timely fashion.

Along with employing enough people to manage such loads, technology can play a valuable role in saving time and mitigating costs by replacing previously manual processes. Automation and artificial intelligence are changing the game for countless industries and that extends to the credit and collections space where the speed at scale is so vital. Solutions such as chatbots and self-service technology are also helping agents reach out to debtors via channels where they are more open to conversation.

Summary

At 30 June 2022, the Australian Collectors and Debt Buyers Association (ACDBA) reported that collection firms in Australia were handling nearly $21 billion in debt represented by 7.9 million files under management³. That is a huge responsibility and we know that is likely to grow over the next five years. There will be challenges for the industry but there will also be chances to shine.

Automation and other technologies are destined to ease pressure on collections teams and enhance customer experience, while a need to create bespoke support for vulnerable people and businesses has the potential to deliver financially prudent results and inspire increased brand loyalty. It is all about working smarter, not harder, and forming and nurturing credit-collector partnerships that result in long-term sustainability for both parties.

Between interest rate rises and inflation fears, an increasing number of companies are looking at taking the red pen to their budgets in readiness for tough times ahead. Before you do the same, explore the concept of good costs, the dangers of bad costs and how to ensure the best cost-cutting strategy for your business.