The Looming Economic Recovery: Is ARM Ready?

The characterization of an economic recovery as “looming” may be somewhat off-putting to most. After all, we’re all in this economy thing together, and a recovery is needed in every sector.

But the accounts receivable management industry has been dealing with a depressed consumer economic environment for two years, while accounts forwarded and client demands have skyrocketed. As the U.S. consumer slowly becomes more liquid moving into 2011, many challenges face ARM organizations.

The Accounts

There was a consumer credit explosion following the recession preceded by the “dot com meltdown” and 9/11. Of course, a lot of that explosion was confined to the real estate credit market. But other consumer credit products also saw their outstanding balances soar.

After the dust settled on the mild recession of the early 2000s, consumers began borrowing heavily. From 2002 to 2005, credit card debt outstanding, called revolving debt by the Federal Reserve, expanded at an average annual rate of 3.8 percent. In 2006, the growth rate was 5 percent. In 2007, it leapt to an astounding 8.1 percent.

But as you can see in the graph below, beginning in late 2008 credit card debt fell even quicker than it increased; a trend that continues today.

The decline in total consumer credit card debt outstanding from September 2008 to April 2010 was driven almost entirely by bank charge-offs. It is estimated that banks have charged off some $125 billion in credit card debt in that timeframe. Once an account has been charged off, it enters the ARM process.

It is important to now revisit the credit card debt growth rate of 2006 and 2007. Both years saw historically high growth rates in total outstanding credit card balances. Therefore, it is reasonable to assume that a lot of the debt that was charged off since the bank crisis of Fall 2008 was originated in that timeframe. This is extremely relevant to ARM companies.

An account opened in early 2007 that was charged off in 2009 is a fairly fresh account, even today. A lot of bad things, economically speaking, happened in that timeframe. What if the consumer went delinquent because of job loss? Right now, that account would be fairly uncollectable. But what happens if the consumer finds a job later this year? The account becomes collectable.

ARM organizations have been dealing with significant placement volume increases for more than a year now. (And that will not change anytime soon; the Fed reported that the average charge off rate for credit card accounts was 9.95 percent in the first quarter of 2010, the second-highest rate ever.) But ARM companies, especially collection agencies, have been able to “cherry pick” accounts for resource allocation because so many were available. While this placement windfall will continue for the foreseeable future, ARM companies would be prudent to circle back on some accounts that did not initially look like cherries. Accounts from the 2006-2007 vintage will be steadily more collectable, and will require attention.

The People

Right-sizing collection staff has been a hot topic of debate in the ARM for a while now. There are a lot of extra accounts to work, necessitating extra people. But margins have been squeezed by a consumer that is genuinely not able to pay.

Even with the further impact on profit margins of taking on staff, there is plenty of anecdotal evidence to suggest that collection agencies are hiring. In insideARM.com’s latest Credit & Debt Collection Industry Confidence Survey, more than 42 percent of collection agencies reported that they added staff in the first quarter of 2010. Only 18.6 percent reported a reduction in staff size.

But overall, ARM staffing levels have been relatively flat for the past year and a half, which is quite a feat considering the broader employment market. As more and more work flows to collection agencies from creditors and debt buyers, and the accounts become more liquid, this trend will change quickly. Debt collection will become a true growth industry as companies will have no choice but to fill seats.

On-boarding is already an expensive proposition. Training alone in the ARM space can cost several thousand dollars per new hire. With new regulation being thrust upon the industry, and more sure to come, the costs of training a new collector will only grow. That makes hiring decisions all the more important. And since staffing in the ARM industry has been flat, as opposed to down, there will not be a ton of former collectors to scoop up in this wave of hiring.

ARM organizations need to use all available tools at their disposal, beyond the traditional screening, to make sure they are bringing on the right people: personality tests, input from collectors, and even one-day trial runs.

The Technology

Technology can help determine the correct size of your staff, in addition to helping with more tactical matters. Before making the investment in people, make sure you have the proper technology in place to help them be successful.

Account scoring is going to be critical with so many placements. How long has it been since your company looked at its account scoring process/solutions? Getting the right contacts will be important, especially for new collectors. Have you looked into your skip tracing solutions lately? Take this time to evaluate all of your technology; from your dialer to your workstations to your servers.

The economic recovery is coming, perhaps not as quickly as we were promised. And it’s a very good thing. But the ARM industry needs to make sure it is ready to hit the ground running when it finally arrives.

This article originally appeared in Know Your Debtor, a quarterly newsletter produced by insideARM.com in conjunction with LexisNexis®. You can read the latest issue at http://www.insidearm.com/newsletters/know-your-debtor.html