July/Aug. 2009

Credit Card Collections in Full Swing

By T. Steel Rose and Cindy Pickett

Credit cards started as privileges for only those consumers with high incomes and perfect pay records. Now they are commonplace and necessary for living and surviving in America.

Average bankcard borrower debt in the U.S. was $5,776 for the first quarter ended March 31, from $5,729 in the previous quarter, according to TransUnion’s quarterly credit card analysis. The ratio of bankcard borrowers nationwide who were at least 90 days delinquent on one or more of their bankcards increased to 1.32% in the first quarter, up from 1.21% the previous quarter and 13 basis points higher than the rate of 1.19% in the same quarter a year ago, according to the credit bureau’s analysis.

As the recession lingers, more and more consumers will be unable to pay back their unsecured debt, thus increasing the number of placements for agencies collecting credit card debt.

To investigate current trends in the industry, we spoke with Stewart Dauman, CEO of Vision Financial Corporation in White Plains, NY. Mr. Dauman entered the collection industry after a long and successful career on Wall Street. We also spoke with David Rae, president and CEO of Allied International Credit Corp, located in Newmarket, Ontario, Canada. Mr. Rae recruited the managers of a number of Allied's divisions around the globe to give us broader insight into the credit card collection industry. Contributing to the interview were Tom McCausland, executive vice president of global operations; Tim Rankin, executive vice president, Canada; Jamie Wallace, executive vice president, U.S.; and Kenny Johnston, managing director of the UK division.

Collection Advisor: Tell us about your company, your role in the company and how you got started in the collection industry.

Stewart Dauman: My path to starting Vision Financial Corp., was very different from that of most other collection CEOs. After a 20-year career on Wall Street, I resigned my position as head of commercial real estate at Credit Suisse First Boston to build a company in the financial services industry. I had two clear criteria when exploring businesses to purchase or start. First, it had to have high yield potential. Why be in the game for any other reason? Secondly, I wanted to use the financial and strategic savvy I gained on Wall Street to take a business to a completely new level. I evaluated dozens of different industries and realized that I had a lot of insights to bring to collections. I concluded that my best option was to start one from the ground up. I wanted to build something that would have my unique vision (that's the genesis of our company name), not try to change an existing company's old ways of thinking about this business.

David Rae: I have been the president and CEO of Allied International Credit Corp., (AIC) since 1990, when I purchased 20% of the company. Four partners purchased the balance in 1994. My father founded the business, so my first exposure to collections occurred through discussion at home, as I was interested in the business at a young age. I started in the industry when I was 15, working nights in the printing department. When I finished University, I started my full-time career in the collection industry. From 1983 until assuming my existing role in 1990, I worked in all areas to learn the business. I moved to the UK in 1983 and returned to Canada after three years. Today, our company employs 1,400 people in Canada, the UK and the U.S. I have two partners, Dave Gallagher and Tom McCausland, who have been with me since 1990. We are all active in the business. We also have an equity partner, HSBC Capital, that owns one-third of Allied, and 12% of our stock is allocated to our Employee Share Ownership Plan (ESOP).

Collection Advisor: What current trends do you see that impact credit card collections?

Stewart Dauman: Due to the current economic climate, we have seen a dramatic increase in placements, but the liquidation curves have been shrinking just as drastically. We are working with fewer avenues to assist the consumer in creating a money source for the debt. Average payment sizes have been in decline, and as a result, we have had to redefine our terms for "acceptable" payment arrangements. Many short-term solutions have vanished, so we must rely on longer-term arrangements to meet performance expectations.

Kenny Johnston: Five years ago, two of the top five UK credit card issuers sold debt in favor of placement. Two years ago, that changed to three, and on occasion, four, given the market increase in the debt purchase industry. In the past 12 months, that has reversed; only one or two now have debt purchase aligned into their overall external placement strategy. That reflects the change in price, but more significantly, the mood to recovery expectation being lower.

Tim Rankin: In Canada, we are seeing fewer payments-in-full (PIF), smaller average settlement-in-full (SIF) and many more partial payment arrangements (PPA). This is an obvious impact of the recession, and reasons for delinquency such as bankruptcy and unemployment are much more common now than six months ago.

Jamie Wallace: Credit card collection is getting tougher. We are experiencing lower liquidation rates across all portfolios. Contract rates are lower, and average payment size has decreased. Seasonality has continued to move forward. Most of our tax season benefit came in February this year; March was strong, but April had none of the traditional tax season benefit.

Collection Advisor: How does collecting credit card debt differ from collections for other industries such as healthcare, telecommunications or mortgages.

Stewart Dauman: Credit card debt ranks behind utilities, mortgage loans and auto loans when it comes to the user's urgency to pay. As delinquency levels rise in all consumer lending markets, the leverage of maintaining a good credit score is not as strong as it has been in the past. We must work harder in the credit card industry to develop the urgency to pay with the consumer while maintaining the importance of branding and consumer retention.

Kenny Johnston: The mood of the consumer within the current economic environment can have an effect on the differential. Recent UK legislation within consumer finance is becoming consumer-friendly, which will encourage consumers to take more liberal attitudes toward credit card debts and personal loan obligations. That will change our approach to collecting on consumer debt versus health or mortgage debt. We need to be even sharper and more acute to our debtors' financial situations and motivations.

Tim Rankin: A $1,500 average balance on a credit card is not a specialty type of collection like a secured loan. In a way, credit card collections are similar to telecommunication collections in that mobile accounts now average $1,000 and are more dispute-laden than credit cards. I'd say we do more trace on them than other types of debt such as telecom. I just think you need good negotiators who can get the debtor's attention.

Jamie Wallace: Credit card collectors need to sell the benefit of making a payment.  Credit cards tend to be at the bottom of the list for consumers in trouble. Many of our clients are providing incentives such as lower settlement parameters, decreased APR with payment, fee waivers, etc.

Collection Advisor: What kind of software does your company use? What is the most important technology tool for your business?

Stewart Dauman: The most important components of our system are networking (domain, VPN), SQL, FTP encryption, web and telephone. Software components consist of SQL programming, our collection software by Accelerated Data Systems, dialer, FTP client, Office and web tools. The most important technology tools we use are those related to our database.

Tom McCausland: I would not say that one specific technology is more important than another. A combination of important technology advancements working in conjunction with another make AIC successful in achieving outstanding results. AIC uses its own proprietary Collection Management Software for pre- and post-charged-off credit card debt. AIC will use a combination of auto/predictive dialing solutions along with our Interactive Virtual communication (IVC) technology to help collection desks increase the number of right-party connects on portfolios. In some cases, AIC will also work off of our clients' host systems and either use their dialer technology or integrate our predictive dialing and IVC solutions with their host system. AIC has also developed its own internal Strategy Summary Report model that aids our collection department in creating the right collection strategies for the different segments of debt. This, in conjunction with other internal metrics, such as Best Time to Call (BTTC), allow AIC's collection department to reach more right-party connects and gain the best possible outcome from each call. Upon listing, a number of automated data scrub processes and letter generation processes are completed to ensure each debt has the most up-to-date demographic information possible. Debts requiring skip tracing automatically go to our trace department, and accounts with valid telephone/address information are sent the appropriate letters and immediately turned over to our collection department for contact.  
We must also not forget the amount of security technology we have built into our facilities, networks and systems to ensure that sensitive information isn't compromised.

Tim Rankin: I don't like to narrow it down to a single technology. We could collect cards using paper and a rotary phone; a lot of the work is still manual. I think the biggest boost we get is from automated trace scrubs as they eliminate manual work and drive higher contact rates.

Collection Advisor: What collection innovations would you like to see?

Stewart Dauman: Innovations that improve our ability to contact the debtors. I would like to see better voice dialing technology for faster, more accurate call results; better skip tracing tools to help us locate debtors; and better integration of third-party tools and services into our existing software.

Kenny Johnston: From a UK standpoint, reversal of how we access individuals' information, i.e., access to all bureau data including contact telephone numbers and electoral register. If a consumer has accepted credit and honors such agreements, then privacy is accepted. When that contract is broken, however, lenders and agencies should be allowed full contact and verification access. This data can be easily coordinated between credit reference agencies and lenders.

Tim Rankin: From a technology standpoint, I would love to see much richer trace tools in Canada. We don't have anywhere near the tools that are available in the U.S.

Collection Advisor: Where do you see technology taking the credit card collection industry in 2009 and 2010?

Stewart Dauman: Everything is going digital these days, so we will further reduce the telephone as the primary means of contacting individuals. Greater emphasis will be placed on contacting debtors via email and SMS texting. The web will become a means for debtor self-service, reducing the burden on agents to be the only source of information debtors have about the nature of their debts. Telephony is going packet switched. Voice and data are merging, fueled by technologies such as VOIP and voice-based protocols.

Kenny Johnston: There will be a struggle between consumer legislation and the use of automated systems, such as dialer or IVC platforms, to gain better efficiencies and increased right-party connects. These technologies must be even more robust in compliance and more importantly, verification of compliance. Investment in technology and reporting will increase. Tom McCausland: Further advancements will be made in the areas of scoring and segmentation models that will allow the collection industry to fine-tune collection strategies to specific debt segments. Enhancements also will be made in IVR technology, which will enable more frequent and better-quality interaction with debtors and ultimately, more consumer payment options. Technology will be limited, however, by new federal and state laws regarding consumer contact.

Tim Rankin: Further segmentation at the customer level based on scoring models. This will apply across every part of the card life cycle from inception to debt sale.

Jamie Wallace: We will do more of our collections via the web and will struggle to contact consumers by phone. The number of homes without landlines will increase. Therefore, our industry must figure out how to use cell phones for contact.  We will need to build a system that allows the consumer to take an inbound call at no expense to them.

Collection Advisor: Do you have an interesting story about your experience in credit collections that you would like to share?

David Rae: I have many stories about the collection industry, and they all center around people. Often they relate to how people got into the collection industry. In the 80s, I was making a sales call to the credit manager of a large computer company. We began talking, and he told me his first job was as a collector with Allied in the early 70s in Hamilton, Ontario. After reading an employment ad for "Collector," he arranged an interview. In those days, employment ads were brief and provided no information about the company or the role. During the interview, the office manager asked him questions about work ethic, wanting to make money, etc. All the while, he assumed the job was collecting coins. At the end of the interview, the office manager asked him if he could ask people for money. He indicated that he would be happy to do that, so the office manager said he could start Monday morning. Over the weekend, he kept thinking that he hadn't seen any coins on the desks of the employees at this "collection" office. He came to the conclusion that the coins must be kept in drawers for security purposes. He went to work that Monday, and halfway through the morning realized that he was not hired as a coin collector, but a bill collector. That was the start of his career in collections.
 
Collection Advisor: What are you excited about beyond the collection business?

Stewart Dauman: The most fun I have outside of work is trying to keep up with my 13-year-old son! He has recently introduced me to scuba diving and skiing, both of which have taught me to test my limits. My family loves to travel, and we spend every moment we can exploring this country and the rest of the world. I'm an avid golfer and coach my son's baseball team. I'm obsessed with both sports as an enthusiastic spectator and a participant. I've always believed that you should work hard and play hard. That balance makes me most effective as a CEO, and a husband and a dad. Becoming a father has also made me more committed to protecting the environment, and the changes we all have to make to accomplish that goal. I am the proud owner of two hybrid cars, and my family tries to lead a greener life every day. There are so many business opportunities in this arena that have the ability to benefit our world and our bank accounts at the same time. I'm the kind of guy who likes to have my "finger in a lot of pies," and I anticipate that I will have a role in a green business someday.