Given how antiquated the collections software is at most banks, some companies that sell more modern systems say it is time for banks to spend less on online banking and more on their products.
Banks could collect more money earlier from delinquent and charged-off customers if they upgraded, these companies say. Creditors habitually ignore technological developments in the collections industry and are therefore missing opportunities to boost profits, they say.
Many banks have made an art out of stretching the lives of their legacy systems, according to Steven J. Martin, a business consulting manager for American Management Systems Inc. in Fairfax, Va., which released the latest version of its widely used collections software, CACS 8.0, this summer.
Plenty of banks use platforms that are 10 years old or older, Mr. Martin said in an interview Tuesday. "A collections manager is far more adept at making use of old technology" than, for example, an executive in an online banking division, he said. Older software still works but is much less efficient, he said, and in some cases is no longer supported by vendors.
A TowerGroup analyst said financial companies "do not focus their strongest resources" on collections.
"Most of your technology dollars are really spent either on setting up online operations or improving your servicing capabilities," said Christine Pratt, a senior analyst of consumer credit at the Needham, Mass., consulting firm. "This is really an area underserved both by attention and technology."
She spoke during a Sept. 10 webcast on collections technology. TowerGroup's agenda was to tout the benefits of CACS 8.0, which has a new interface and a post-collections system that tracks recovery of charged-off dollars. AMS is a TowerGroup client.
Asked why a platform unifying the collections and recovery processes had not been developed sooner, Mr. Martin said AMS gives the market what it wants, when it wants it. Banks tend to put collections improvement on the back burner unless delinquencies or chargeoffs start to spike, he said, and most are slow to upgrade systems that still work.
AMS is the dominant vendor in collections information technology. Its nearest rival, the U.K. company London Bridge Software Holdings PLC, has the leading share of the recovery IT market.
London Bridge says a unified platform is nothing new. A spokesman said it has been selling a product similar to CACS 8.0 for five years and has signed up several large banks.
Mr. Martin said many large companies have to deal with convoluted - and therefore hard-to-replace - systems. Acquisitions have meant inheriting a hodgepodge of applications, so big companies have "more of a spaghetti back-end" than smaller ones do. Migration to a single platform, though it would probably take months, could pay for itself within one year, Mr. Martin said.
According to AMS, an overhaul of an entire collections system - strategies as well as technology - could reduce the costs of the operation by around 20% on average, lift dollars collected by 5% or 10%, and accelerate payments by one to three days. Creditors could also trim 3% to 5% of their chargeoffs by better rehabilitation during the delinquency stage, the company says.
An annual survey conducted by the Consumer Bankers Association measures the effectiveness of its members' collections efforts by looking at how many delinquencies were saved from being charged off. According to its 2003 survey, for every $100 of consumer loans delinquent by at least 30 days, $4.70 was charged off. (For credit card loans only, that number was $13.70.) Ten of every 100 delinquent accounts were charged off.
Mr. Martin said any collections overhaul would first have to junk the long-used "age" criterion - accounts being attended to according to how long they have been delinquent or charged off. A more flexible assessment of risk, based on the customer's overall profile, is vastly more efficient, he said.
Ms. Pratt of TowerGroup said that apart from a few experiments, no financial institution has emerged as an innovator in collections. For example, little effort has been made to use the Internet for collecting overdue dollars, she said.
Banks have generally been keener to set up build Web sites that can generate consumer "hits" fast, she said in an interview after the webcast. Collections "has always been very labor intensive," she said. "A lot depends on how you manage your people and your time."
Several new vendors have targeted Web-based collections. One, Debt Resolve, is marketing to banks a system over which the delinquent debtor barters online with the lender to reach a suitable repayment plan. The same people who set up Debt Resolve founded an older company, cybersettle.com, that helps settle insurance claims through double-blind auctions. An unrelated company, SplitTheDifference, offers a similar system for insurers.
Mr. Martin said one counterintuitive innovation could be to convert select collection calls into a customer service pitches. "In the old days, when folks ended up in any stage of delinquency," he said, creditors "may have treated them all the same." But customers who call in are likely "self-cures" - people who want to pay and will do so on their own. A representative should use the opportunity to activate such customers' automated clearing house payment service, upgrade their accounts, or even pitch a new product, Mr. Martin said.
Columbia Ultimate Corp., a vendor that this month announced a contract with J.P. Morgan Chase & Co.'s credit card division, says its collections software enables creditors to adjust their strategies quickly. For example, depending on their short-term financial needs, creditors can vary which customer segments get picked on.
"Let's say collections are a bit low for the month," said Tim Hickey, a vice president in charge of marketing for the Vancouver company. "Although you're doing the right thing for the long term, you may have to pull in more dollars this month."
In that case, a creditor can ramp up collections activity on the segment that generates the highest immediate return, Mr. Hickey said. If the data show that "the biggest short-term return comes when we really work hard on those people who drive Cadillacs and Mercedes," he said, the creditor can decide to "just pound on them for a week."
Most collections operations are "highly inefficient," Mr. Hickey said. Protocols directing the flow of a delinquent or charged-off account across stages (calling the customer, sending a letter, freezing the account) tend to work well enough, he said, but supporting technology is fragmented and cumbersome.
"Most banks have a huge number of software packages," Mr. Hickey said. "It's quite common to have two, four, or 12 software packages for handling different parts" of the collections effort." The operation should be more like a unified core processing system, where there is "one system of record," he said.
The Columbia Ultimate product for which Chase signed up, the Collector System, tracks all collections and litigation activity in one format. The software will be used at six of Chase's card centers. Most of Columbia Ultimate's customers are third-party collection agencies.
