Balance Sheet Impact of Offshore Post Charge Off Collections

According to the Nilson Report, the 2010 Consumer Debt Obligations is projected to be $ 2.8 Trillion with a "T". This is up from $ 2.2 Trillion in 2002 (U.S Federal Reserve figures). What about the receivables charge off rate? Nilson Report predicts this at $ 87 Billion in 2010 - this number was at $ 51 Billion in 2002. Thus receivables charge off rate is likely to jump by 70% when the consumer debt is likely to increase by 27%.

Leading Consumer Finance Companies are aware of this growing risk and are taking action. Focus on Cost per Dollar Collected, Investment in Skip Tracing Tools, Focus on Business Metrics such as Total Delinquency Collected per month in addition to Contact Rate, Promise Rate and Kept Rate are some of the strategies that leading Consumer Finance Companies have been employing for a long time.

Offshoring of Charge Off Collections to 3rd party BPO service providers is among the latest strategies that these companies have employed. What are the concerns that these companies have when they contract with offshore BPO service providers? Customer Confidentiality is one of them - skip tracing tools for example provide access to consumers credit history. Operational Risk is another - would consumer finance companies want offshore service providers to call on behalf of the client (1st Party) or would they want offshore providers to call as themselves (3rd party)? Let us take a closer look at the strategies mentioned above and the concerns.

1. Focus on Delinquent Dollars Collected: Productivity Metrics such as $ collected per hour may look good on paper but may not impact the balance sheet. You could have a situation where the collection team working with the offshore BPO service provider is performing well on $ collected per hour without any impact on the overall delinquent pool. Therefore it would make sense to focus on the lowering of total delinquency (in the primary,secondary and tertiary buckets) - this would impact the bottom line positively.
2. Focus on Cost of $ Collected : Consumer finance companies typically sell the debt to "Outside Collection Agencies" once it becomes cost prohibitive. This means that the offshore BPO service provider must be well within 50 cents of cost to collect a dollar if the consumer finance client is to keep it offshore. This means quite a lot of challenges to the offshore BPO service providers - retaining the team is of paramount importance - this would mean more agents with vintage, persuasion and negotiation skills would be working for the client. Ensuring the osmosis of best practices across the collection team is also important - this would mean much more than stack ranking - the best agents need to be leveraged for best practice sharing across the team to move the bottom quartile agents up the conversion curve.
3. Investment in Skip Tracing Tools: Charge Off Collections is typically a "Voice Mail Avalanche", where you are speaking with the "Privacy Manager" of the defaulting customer more often than not. Many of the delinquents would have moved addresses, added telephone numbers, changed jobs. Therefore there is a huge need to trace them based on very recent economic activity. The offshore BPO service provider needs to have access to these state of art skip tracing tools.
4. Partnership with the offshore BPO service provider: Measurement, Monitoring and Motivation (3M) are the cornerstones of a charge off collection operation - even more so than customer service or technical support. Transparent measurement systems which call out up to date performance reports of agents, teams and delivery sites go a long way. Clients who involve themselves in all the "3M" programs will have much to benefit.
5. Ensuring Customer Confidentiality: Once a customer moves into the charge off category, it is fairly certain that he/she is no longer a customer of the client(e.g: Auto Finance Company). However, clients are very concerned about the security of customer information. The implementation of information security practices such as ISO 27001(BS 7799) and drug and criminal verification of all employees hired for the Consumer Finance client are some of the measures that offshore BPO service providers take to ensure the security of customer credit information.
6. 3rd party collection certification by offshore BPO service providers: This is the domain of Outside Collection Agencies in the U.S. However, the higher degree of operational freedom such a status provides to offshore BPO service providers would increase the effectiveness and efficiencies of the offshore player.
   
   Typically offshore BPO is not associated with balance sheet impact. Charge Off Collections is among the few processes that offshore BPO providers manage that has balance sheet impact. Fortunately, this is an offering that a few mature players have in the Offshore market place. For the Consumer Finance Companies in the U.S who are walking towards the $ 87 Billion receivables charge off rate in the year 2010, it is certainly a comforting thought.

Cheers

Paul Simon Arakkal