ARM Industry Opportunities, Challenges and Technology ...ARM Industry Opportunities, Challenges and...

June 2013

ARM Industry Opportunities, Challenges and Technology Solutions Collection Agency Business Strategy and Technology Survey

Collection Agency Business Strategy and Technology Survey P a g e | 2 BillingTree | insideARM © June 2013

Table of Contents

IMPACT POINTS .................................................................................................................................3

INTRODUCTION .................................................................................................................................5

METHODOLOGY .............................................................................................................................6

COLLECTIONS DEMOGRAPHICS AND GROWTH TRENDS .......................................................................6

SOURCE OF COLLECTIONS WORK ....................................................................................................7

IMPORTANCE OF DIFFERENT INDUSTRY SECTORS ............................................................................8

PROJECTED INDUSTRY SECTOR GROWTH TRENDS ...........................................................................9

BUSINESS STRATEGY: OPPORTUNITIES AND RISKS ............................................................................ 10

IMPACT ON GROWTH/PROFITABILITY ........................................................................................... 10

TOP CONCERNS ............................................................................................................................ 11

PAYMENT TECHNOLOGY TRENDS ..................................................................................................... 12

PAYMENT TECHNOLOGY USAGE AND ADOPTION TRENDS ............................................................. 12

PAYMENT TECHNOLOGY USAGE BY AGENCY SIZE .......................................................................... 16

1-9 SEATS ................................................................................................................................. 16

10-25 SEATS.............................................................................................................................. 17

26-99 SEATS.............................................................................................................................. 17

100+ SEATS ............................................................................................................................... 18

TRENDS IN FORMS OF PAYMENT ...................................................................................................... 19

CONVENIENCE FEE ADOPTION .......................................................................................................... 20

PAYMENT PROCESSING PRIORITIES .................................................................................................. 21

SERVICE AND TECHNOLOGY NEEDS ................................................................................................... 22

CONCLUSION ................................................................................................................................... 23

ABOUT BILLINGTREE ........................................................................................................................ 24

ABOUT INSIDEARM .......................................................................................................................... 24


Collection Agency Operations and Technology Survey 2013 ARM Industry Opportunities, Challenges and Technology Solutions

In February 2013, insideARM.com, partnered with BillingTree, to conduct a survey of collection agency operations professionals. In this Benchmark Survey Report, BillingTree first examines targeted industry segments and related growth trends according to the size of the agency. Secondly, we explore agencies’ specific strategies to achieving growth within these segments and to overcoming the challenges they cited as the most threatening to achieving those goals. Finally, we examine agency attitudes toward payment technology and automation, and discuss how automation poses a solution to the dual challenge of driving operational efficiency and innovation while protecting the organization from compliance risk.

IMPACT POINTS • Methodology: This benchmark report is based on a survey of nearly 200 U.S. accounts

receivable management companies collected over a two-week period. The survey focused on agencies involved in consumer debt and did not include business-to-business collections.

• Demographics: In terms of agency size, respondents were evenly split among four categories; 29.4 percent of collection agency respondents were from organizations with more than 100 seats, 22.2 percent with 26-99 seats, 28.4 percent with 10-26 seats, and 20.1 percent with between one and nine collectors.

• Source of collections work: Over half of an agency’s collections work came from external business development and sales efforts, with an additional twenty percent coming from client referrals or direct inbound leads. In a competitive marketplace, customer satisfaction and the company’s reputation are key to ongoing growth through means other than internally purchased debt (representing just over 17% of work). The risks associated with litigation or regulatory scrutiny, therefore, present a threat to these ongoing sources of work. As we will see later in our findings, this potential threat is highlighted as one of top concerns of agencies.

• Importance of industry sectors: Larger collection agencies cited bank card/credit card debt as their major source of work, with telecommunications and student loans factoring prominently. Smaller agencies (1-99 seats) cited healthcare as their most important sector, with utilities weighing in more heavily. These variations are likely attributed to the differences between large agencies with national coverage and those smaller agencies focused on regional clientele.

• Sector growth: Survey respondents expressed broad-based optimism in terms of growth across industry segments. Healthcare was cited as an area where most expected increased business. Credit/bank card debt, in contrast, presented mixed results with an even split between those anticipating growth and those expecting a decrease or no change.

• Business growth: strategies and critical factors: Cutting costs and mitigating compliance risks were the two top priorities of agencies, and technology is regarded as having a key role to play. Respondents regarded tools to increase collections effectiveness, and strategies to increase operational efficiency/cut costs as the two most critical actions they could take to meet their business objectives. Not surprisingly, increased operating costs were seen as one of the biggest obstacles to growth and profitability. CFPB compliance and legal action were the other major


looming threats cited, suggesting that debt collectors are torn between focusing on their core business operations while mitigating compliance risks. The prioritization of technology and operational efficiency suggests that companies see automation as key to addressing these competing priorities.

• Payment Technology Adoption: Based on responses to the kinds of payment methods and technologies in use today by collection agencies, there is room for further automation and optimization-particularly with regard to smaller agencies. Live agent-assisted payments still dominate as the most common forms of collection, with online payment processing barely outranking paper checks and money orders. Phone-based IVR-based payments, surprisingly, ranked much lower than expected, both in terms of current and planned adoption. The future of payment technology, in terms of how respondents described their 2013 plans, lies in alternative digital forms of payment like PayPal and eCash, and the adoption of virtual debt negotiation tied to online payment processing. Other forms of payment processing like text- and social media lagged behind, suggesting that these payment methods are still the domain of early adopters.

• Forms of Payment: Paper payments have not gone away, but more convenient methods of payment now dominate. Electronic payments represent approximately 60% of the collections processed by agencies. Credit/debit cards represent two thirds of electronic payments, with ACH transactions representing the remainder. Thirty percent of transactions today are still handled via paper checks, according to respondents.

• Convenience fees: Taking into account expressed concerns over CFPB compliance and litigation, agencies seem to be weighing the obvious benefits in terms of revenue from convenience fees against the potential risks of litigation or compliance audits. Over half of respondents charge a fee to offset processing costs for electronic payments. A significant number (nearly 40%), however, have no plans to charge a convenience fee for electronic payments.

• Payment processing priorities: In the competition between cost cutting and compliance, respondents overwhelmingly chose “compliance” over “cost” when it came to selecting a payment processor. Surprisingly, customer service and PCI compliance ranked highest in priority for agencies selecting a payment processor, with per-transaction pricing ranking last, behind reporting capabilities and integration with a core payment system. The importance of reporting and integration above transaction pricing further emphasizes the importance and value of automation and efficiency for agencies today.

• Service and technology needs: When asked an open-ended question about services or technologies that they wish were available, one respondent summarized the needs as expressed by the majority of survey participants; “I do not think it is the technology that is missing, but the legal capacity to use them: text, email, etc.” As reflected in a variety of responses to questions throughout the survey, collection agencies of all sizes have clear goals and well defined strategies to achieve them. They acknowledge that technology and automation is available to assist them in achieving their goals. Where they see ambiguity and uncertainty is in how the tools and methodologies at their disposal align with a dynamic and multi-faceted compliance environment. In light of this challenge, respondents value technology partners that provide a higher level of service and expertise, offer data security and assurance of compliance and provide integration to existing automated systems.


INTRODUCTION

The following benchmark survey of accounts receivable management companies depicts an industry on the verge of abundant opportunity and tremendous change. As the U.S. economy continues to make its way out of recession, collection agencies may lead the way back to a state of robust growth for the service sector. According to the Bureau of Labor Statistics, between now and 2016, the debt collection industry will grow at a rate of 23%, outpacing its service industry peers.

The obstacles for collection agencies to capitalize on this growth, on the other hand, are many. As exhibited in responses to this benchmark survey, financial and operation risks resulting from a complex and dynamic regulatory environment represent the greatest challenges faced by collection agencies today. Addressing those challenges threatens to divert time, money and resources from the core objective of efficiently and effectively collecting payments on behalf of clients.

The ascendance of the Consumer Financial Protection Bureau (CFPB) and the Fair Debt Collections Practices Act (FDCPA) has led to a fundamental reexamination of collections business operations and a complete reevaluation of best practices related to collections authorization, validation and reporting. This reevaluation has spilled over and influenced the perspectives and policies of other industry stakeholders, including state and local government regulatory agencies as well as credit card companies and their standards and policies.

In this report, we will first present findings based on survey questions related to targeted industry segments and growth trends, presented by agency size. Next, survey results specific to agencies strategies for achieving growth, and related challenges, will be presented and discussed. Finally, survey results related to agency attitudes toward payment technology and automation will be examined in the context of how automation may pose a solution to driving operational efficiency while protecting the organization from compliance risk.


METHODOLOGY

Nearly 200 debt collection operations professionals took the survey over a two week period. In an effort to better understand the segmentation of the respondents we wanted to determine the various sizes of the organizations responding to the survey. To do so we asked how many seats or collection agents were employed. Respondents were given 4 categories to choose from: 1-9 seats, 10-25 seats, 26-99 seats, and 100+ seats. The results indicated the respondent pool was fairly evenly split amongst the four possible choices; 29.4 percent of collection agency respondents were from organizations with more than 100 seats, 22.2 percent with 26-99 seats, 28.4 percent with 10-26 seats, and 20.1 percent with between one and nine collectors.

How many agents/seats does your collection agency employ?

(n=194)

COLLECTIONS DEMOGRAPHICS AND GROWTH TRENDS

With the constant challenge of growing a business in a competitive market that includes an ever changing regulatory landscape we wanted to learn more about how various companies work to drive growth. The feedback was consistent regardless of company size.


SOURCE OF COLLECTIONS WORK

When asked to identify the source of collection work from a list of possible choices, we found a small majority of collection work, by number of accounts, was acquired through traditional business development and sales efforts while nearly 20 percent came from client or industry referrals. As seen in Table 1 below, internally-purchased debt ranked third in percentage of collections work, followed by offshoots from first party/early-out services. “Other” sources of collections work cited included Google/Web search, requests for proposals, Department of Education, advertising, legal networks and employee referrals.

What percentage (%) of your company's debt collection work, by number of accounts, comes from the following sources?

(n=194)

With nearly seventy percent of business coming from active sales/marketing efforts and related referrals, any threat to a collection agency’s reputation will have a significant impact on its business. While defending against litigation may be costly, an agency’s reputation may be put at risk simply because of the threat of legal action.

After a brief dip in 2012, litigation against collection agencies is on the rise again in 2013. According to data from WebRecon and the 2013 CFPB Annual Report, the total number of lawsuits filed by consumers claiming violations of the Fair Debt Collection Practices Act (FDCPA) increased in January on a year-over-year basis, after an overall decline in 2012. Litigation related to the Telephone Consumer Protection Act (TCPA), in contrast, rose sharply in 2012 and have continued to rise in 2013.

As discussed later in this survey, these potential challenges rank high among the concerns of collection agencies today.


IMPORTANCE OF DIFFERENT INDUSTRY SECTORS

When asked to rate the importance of different industry sectors to a company’s overall collection portfolio, we found that companies in the three smaller categories were similar. But the larger collection agencies (100+ collection agents) reported an emphasis on different asset classes.

How important are the following sectors to your collection portfolio? On a scale of 1-10, 10 being most important, 1 being least important

(n=158)

The most important sector to larger collection agencies is bank card/credit card, while the smaller agencies (1-99 seats) cite healthcare as their most important sector. We also found there were vast differences in the importance of certain sectors (utility/telecom and student loan) between large and smaller agencies.

The difference in the importance of industry sectors is most likely due to the prominence of very large, and thus very important, clients in the utility/telecom, student loan, and credit card space. While there are many local and regional utilities, major telecom accounts tend to be national.

As discussed previously, threats to an agency’s reputation from legal action may loom larger for those small- and medium-sized agencies that focus on regional markets. Within a given regional market and within a particular sector, legal threats or regulatory infractions may be more widely known or reach a higher profile within a single community.


PROJECTED INDUSTRY SECTOR GROWTH TRENDS

The majority of survey respondents were optimistic about business growth across industry segments. Healthcare was cited as an area where most expected increased business. Credit/bank card debt, in contrast, presented mixed results with an even split between those anticipating growth and those expecting a decrease or no change.

How do you forecast the importance of the following sectors changing for your agency in 2013?

(n=158)

Broad-based collections business growth reflects recent consumer debt trends. According to the Federal Reserve Bank of New York, in Q1 2013, 14.64 percent of Americans had at least one account on their credit reports furnished by third party debt collection agencies, an all-time high. The figure was up slightly from the fourth quarter of 2012, which set a then-record 14.63 percent.

Mixed results from this BillingTree/insideARM study with regard to credit cards reflect the FBNY’s survey findings. According to the report, credit card balances decreased $19 billion to $660 billion. In the notes for the report, the FRBNY said that “only a small proportion of collections are related to credit accounts with the majority of collection actions being associated with medical bills and utility bills.”

The anticipated growth in healthcare reflects the broader consumer trends related to healthcare spending and debt. According to the Commonwealth Fund 2012 Biennial Health Insurance Survey, 41 percent of working-age adults, or 75 million people, had problems paying their medical bills or were paying off medical bills over time, up from 58 million in 2005.

Regardless of agency size, debt trends all speak to continued opportunity for business growth in terms of new revenue from new and existing clients.


BUSINESS STRATEGY: OPPORTUNITIES AND RISKS

IMPACT ON GROWTH/PROFITABILITY

While the prospects for business growth are good, collection agencies face a variety of challenges in 2013. When asked to rate the importance of a variety of factors to achieving business growth/profitability in 2013, agencies cited client expansion as an obvious first choice, with cost reduction strategies and new technologies enhancing collections as close second/third choices. These priorities reflect the kinds of challenges that agencies expressed in a follow-up survey question with regard to their biggest concerns.

The close ranking between cost reduction and new technologies enhancing collection suggests that agencies are looking to automate their operations to achieve greater efficiency. The need for greater efficiency and collections effectiveness is in part born out by concerns over increased operating expenses and over regulation and lawsuits

Please rate the importance of each area below as it relates to your agency’s projected growth plan/profitability in 2013.

On a scale of 1-10, 10 being most important, 1 being least important

(n=154)


TOP CONCERNS

The following graph highlights the driving concerns for agencies in 2013, which center primarily around increased operating expenses and the cost and risk associated with regulation and litigation. In fact, compliance, or the consequences of non-compliance, factored into three of the top four responses to this survey question, with operating expenses tied for the top ranking.

How concerned are you with the following in 2013? On a scale of 1-10, 10 being most important, 1 being least important

(n=154) “Other” responses to this question included:

• Bankruptcy filings • Huge delay in information from original creditors to debt buyers • Maintaining or expanding client base

Once again, correlating the question of top concerns back to factors impacting growth/profitability, we can see that agencies are being forced to focus time, money and effort on compliance and risk mitigation, while at the same time reduce operating expenses. Technology and automation is one approach identified by survey respondents that can help them to achieve both by providing greater process transparency and allowing better access to the data needed to demonstrate compliance.


PAYMENT TECHNOLOGY TRENDS PAYMENT TECHNOLOGY USAGE AND ADOPTION TRENDS

Based on responses to the kinds of payment methods and technologies in use today by collection agencies, there is room for further automation and optimization-particularly with regard to smaller agencies. Live agent-assisted payments still dominate as the most common forms of collection, with online payment processing barely outranking paper checks and money orders. Phone-based IVR-based payments, surprisingly, ranked much lower than expected, both in terms of current and planned adoption. Our interpretation of this data, relative to concerns expressed in other sections of the survey, suggest that IVR adoption may have lagged as a result of compliance concerns.

The following seven graphs illustrate current usage of payment technology by agencies in aggregate, along with break-out details of usage by agency size.

(Please note the changes in the graph’s axis labels versus the actual survey answer below)

GRAPH AXIS LABEL ACTUAL SURVEY ANSWER

LIVE AGENT = LIVE AGENT ASSISTED PAYMENT

ONLINE = ONLINE WITH OR WITHOUT BALANCE INFORMATION

DEBT NEGOTIATION = ONLINE WITH VIRTUAL DEBT NEGOTIATION

IVR = IVR (TELEPHONE INTERACTIVE VOICE RESPONSE)

LOCKBOX = LOCKBOX (PAPER CHECKS/MONEY ORDERS, ETC.)

REMOTE DEPOSIT = REMOTE DEPOSIT (EMAILED CHECK IMAGES)

TEXT = TEXT PAYMENT AUTHORIZATION

SOCIAL MEDIA = USING SOCIAL MEDIA TO COMMUNICATE WITH DEBTORS

ALTERNATIVE = ALTERNATIVE PAYMENTS FORMS (PAYPAL,ECASH,ETC.)


Describe your utilization of the following technologies during 2013 - Already in Use

(n=154)


While the future of payment technology lies online, live assisted payments and paper checks/money orders have not gone away. Based on their responses regarding future technology plans, agencies shared that they envision more online payment processing with virtual debt negotiation, and expressed great interest in alternative payments like PayPal and e-Cash.

Describe your utilization of the following technologies during 2013 – Plan to Use

(n=154)


It’s interesting to compare and contrast those technologies that respondents said they planned to adopt and those they indicated they would NOT adopt. While some firms reported interested in adopting IVR, for example, nearly a third indicated that they would not implement an IVR system. At the same time, a majority of agencies were not interested in adopting mobile or social media technologies. Nearly 80% of agencies indicated they would not use social media to communicate with debtors, while 76% indicated an aversion to text-based authorization. Similarly, remote deposit, or emailed check images, ranked third in technologies that agencies chose not to adopt (57%).

Describe your utilization of the following technologies during 2013 – Will Not Use

(n=154)


PAYMENT TECHNOLOGY USAGE BY AGENCY SIZE

When the results were sorted by company size, a significant difference appeared in the online payment choice. The smallest agencies (1-9 seats) reported far lower use of the online payment channel to collect money (78% including online and online with virtual debt negotiation), while virtually 100% of larger companies used web payment.

Taken on its own, online payments with virtual debt negotiation technology proved to be similarly skewed toward larger agencies. While only 14.1 percent of all participants in the survey said they used virtual negotiations, more than 23 percent of companies with 100+ seats use the technology, with another 31 percent saying they plan to use virtual negotiations in the near future.

Describe your utilization of the following technologies during 2013

1-9 SEATS

(n=32)



10-25 SEATS

(n=43)


26-99 SEATS

(n=38)



100+ SEATS

(n=35)


TRENDS IN FORMS OF PAYMENT Paper payments are still prevalent (30% of transactions are still handled via paper checks, according to respondents) however, more convenient methods of payment now dominate. Electronic payments represent approximately 60% of the collections processed by agencies. Credit/debit cards represent two thirds of electronic payments, with ACH transactions representing the remainder.

From a compliance standpoint, each form of payment has its own standards and guidelines with regard to security and authorization, adding to the compliance burden for agencies. Those relying heavily on paper transactions likely have not automated their processes, resulting in higher operational.

When survey results were broken out by agency size for forms of payment, the data showed that larger agencies were evenly distributed across payment types, while smaller agencies have not yet adopted accepting ACH payments to the same degree as their larger counterparts. Only 13% of agencies with 1-9 seats accepted ACH transactions. In contrast, agencies with 100 or more seats processed 30% of their transactions via ACH.

What percentage (%) of your collections do you receive using these types of payments?

What percentage (%) of your collections do you receive using these types of payments?

(n=154)

(n=177)


CONVENIENCE FEE ADOPTION

Taking into account expressed concerns over CFPB compliance and litigation, agencies seem to be weighing the obvious benefits in terms of revenue from convenience fees against the potential risks of litigation or compliance audits. Over half of respondents charge a fee to offset processing costs for electronic payments. A significant number (nearly 40%), however, have no plans to charge a convenience fee for electronic payments.

Does your agency charge a convenience, surcharge or service fee to debtors for certain payments?

(n=177)

For debt collectors, convenience fees represent an opportunity to lower operating costs and maximize revenues for themselves as well as their clients. The practice of collecting a convenience fee has been considered a common practice in the ARM industry. In some cases, agencies have collected fees from the consumer to help cover operating costs associated with alternative forms of payments, in exchange for the convenience of a simple, effective payment method.


PAYMENT PROCESSING PRIORITIES

In the competition between cost cutting and compliance, respondents overwhelmingly chose “compliance” over “cost” when it came to selecting a payment processor. Surprisingly, customer service and PCI compliance ranked highest in priority for agencies selecting a payment processor, with per-transaction pricing ranking last, behind reporting capabilities and integration with a core payment system. The importance of reporting and integration above transaction pricing further emphasizes the importance and value of automation and efficiency to agencies today.

How important are the following aspects of your payment processing? On a scale of 1-10, 10 being most important, 1 being least important

(n=158)

The payment card industry (PCI) data security standard (DSS) was created to increase controls around cardholder data to reduce credit card fraud via its exposure. With payment card fraud increasing fivefold in the past five years, and debit and credit card fraud losses are expected to reach $10B by 2015, data security is clearly a growing concern.

PCI DSS defines “control objectives” for payment card data, including:

• Maintaining network security • Protecting card holder data • Maintaining a “vulnerability management program” • Implementing strong access control measures • Monitoring and testing networks • Maintaining an information security policy


SERVICE AND TECHNOLOGY NEEDS

When asked an open-ended question about services or technologies that they wish were available, one respondent summarized the needs as expressed by the majority of survey participants; “I do not think it is the technology that is missing, but the legal capacity to use them: text, email, etc.” As reflected in a variety of responses to questions throughout the survey, collection agencies of all sizes have clear goals and well defined strategies to achieve them. They acknowledge that technology and automation is available to assist them in achieving their goals. Where they see ambiguity and uncertainty is in how the tools and methodologies at their disposal align with a dynamic and multi-faceted compliance environment. In light of this challenge, respondents value technology partners that provide a higher level of service and expertise, offer data security and assurance of compliance and provide integration to existing automated systems.

Service and technology needs expressed by respondents are categorized and summarized in the table below:

(n=47)


CONCLUSION

As this survey illustrates, agencies of all sizes today fundamentally agree on the prospect for growth in client acquisition and revenues in 2013, but foresee significant challenges to their margins and profitability in the form of changes to payment guidelines and regulations in light of the CFPB. Agencies agreed on their priorities to achieve growth, where cutting costs and mitigating compliance risks were at the top of the list. The prioritization of technology and operational efficiency suggests that agencies see automation as key to addressing these challenges.

When it comes to technology adoption, agencies told us that there remains room for further optimization. Payment methods and technologies in use today by collection agencies varied by agency size, with smaller agencies having more room to further automate, particularly with regard to Web payments in general and virtual debt negotiation in particular. Agencies expressed some reluctance to adopt technologies and payment methods whose guidelines and regulations were ambiguous from a compliance standpoint. Survey data suggested that convenience fees, mobile payments and social media collections were all met with some skepticism.

The prioritization of low-risk strategies was further reflected in how agencies ranked deciding factors in selecting a payment processor. While agencies agreed that cost reduction was a primary goal of 2013, PCI compliance and customer service overwhelmingly beat out per-transaction pricing as the deciding factor.

Ultimately, what agencies told InsideARM and BillingTree is they prioritize quality service and expertise from their vendors, and that data security and compliance are highly valued, along with integration to existing automated systems. Cutting costs, as expressed by the results of this survey, did not equal cutting corners. Rather, agencies described a clear vision for their path to greater efficiency and greater process transparency through automation and integration.


ABOUT

Headquartered in Phoenix, Arizona, BillingTree is developing ways to make it easier for businesses to get paid for their products and services. BillingTree has become the trusted, competitively priced, and proven solution provider to a variety of industries looking to increase efficiency and process payments quickly. BillingTree has led the way with innovative, compliant, user friendly solutions that address the diverse needs and challenges surrounding the payment process.

The BillingTree mission has always centered on simplifying the often-confusing world of electronic payments, thereby allowing clients to focus on their core competencies. BillingTree combines state-of-the-art technology with decades of customer-service experience to give clients the latest payment solutions available to succeed in a highly competitive marketplace. BillingTree continually strives for excellence through superior technology and industry expertise. Driven by a need to create solutions that provide customers with strategic advantages in their marketplaces, BillingTree has become the industry expert in payment technology.

ABOUT

The mission of insideARM.com (ARM stands for Accounts Receivable Management – also known as “debt collection”) is to shift the public conversation about the ARM industry in order to help creditors and collection professionals reduce risk, lawsuits, and bad press; we’d like to change consumer perception that speaking with collectors should be avoided.

With over 75,000 subscribers our website and newsletters reach collection agencies and law firms, debt buyers, creditors, suppliers of technology and services to these groups, regulators, industry investors, and many other interested parties.

insideARM.com provides the most credible platform for service providers to reach potential clients, and is also uniquely qualified to help ARM businesses with their own websites, social media programs, and overall marketing strategies.

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