In its search for cost reductions, the banking industry has turned to collections of delinquent accounts.

The focus is logical, but it wasn't always so.

When credit card providers were creating lots of wealth, as many of today's giants did in the 1980's, they could ladle out generous pay and benefits to collectors. But since the credit card market has become saturated, banks have been pressured into reducing interest rates, paying cash equivalents as incentives to customers, and, in general, running a tighter ship.

Looking outward into the marketplace for solutions, big credit card companies have whittled away collection department staffs, replacing them with outside firms specializing in specific tasks.

As banking moves away from vertical integration, the industry is developing learner, more flexible shops that outsource many functions and add temporary employees as needed. It all adds up to a profound change in the way the credit card industry collects from delinquent borrowers.

In essence, collections has evolved into a product of the marketplace rather than a core service that banks need to own. Outside collection firms typically charge less for servicing delinquent portfolios than the average per-account cost of a bank's internal collection department.

Credit card issuers estimate that their monthly per-account cost of collecting delinquent accounts aged five months or more ranges from $11 to $16, depending on the bank's size and efficiency. Compare this to outside providers, whose cost to the bank, measured by the same volume, ranges from $7 to $12 per delinquent account.

Fertile Climate for Change

The move toward leanness and flexibility, common to many U.S. industries, has combined with the still farther-reaching technological revolution to create an ideal environment for reengineering in-house collections areas.

With a computer-controlled process, for example, it is possible for a bank to control accounts anywhere, using resources from anywhere, by a company with offices anywhere.

The fact that substantial savings can accrue because of staffing reductions often drives these transactions.

In addition, when companies discover that productivity jumps and chargeoffs decrease as a result of the new partnerships they often accelerate the pace of the reengineering process beyond what they originally planned.

Opportunity for Gains

Most major banks selectively orchestrate various specialized outsiders into an efficient whole that suits their specific financial needs. Forming strategic partnerships allows banks to reengineer collection departments without having to make an investment in technology.

The upshot is that banks have an opportunity to stretch their collections goals beyond where collection managers think they can go. Savvy collection managers know that reengineering is really only a buzzword for cutting staff while demanding higher performance.

But don't miss the moment. You could be looking reality straight in the eye -- and an opportunity to rise the next performance level may not recur anytime soon.

Mr. Wallace and Mr. de Mayo are partners in Wallace & de Mayo, a management firm based in Atlanta.

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