Research White Paper

The Changing Face of Debt

Management & Collections
How new business, regulatory & technology challenges will impact
collections practitioners.

A PAC White Paper Sponsored by

PAC 2015

www.pac-online.com

www.pac-online.com/blog

Contents
!

Management Summary

Page 3

The Technology Revolution

Page 4

Debt Management Today

Page 7

The New Role of Collections

Page 9

FICO An Independent Assessment

Page 11

ABOUT THE AUTHOR

Nick Mayes Principal Analyst. Nick joined PAC in 2007 and has been
working in the software and IT services industry since 1998. Nick is
responsible for PACs research on the UK IT services market, and is also
one of the lead analysts in PACs global coverage of areas including
application management, business process outsourcing and IT
outsourcing. Nick also leads many consultancy engagements in addition
to managing PACs Deal Tracker service.

Management Summary
Debt management has become one of the most challenging issues for businesses and
public sector organizations.
High and volatile delinquency rates coupled with the need to maximize revenue and
tax returns, and a fresh set of regulatory demands have created the perfect storm for
collections organizations, both internal and external.
At the same time, most collection teams have to tackle these issues while supporting
group-wide programs to reduce operating costs. There is little funding available to
invest in expanding or enhancing the collection organization, meaning there is an
ongoing dependence on outdated technology platforms and processes.
This makes it difficult for organizations to capitalize on the massive changes taking
place in the technology landscape, which have the potential to transform and improve
the efficiency and effectiveness of their debt management function.
Data analytics software tools provide a wealth of valuable information on the debtor
profiles and are enabling collection teams to work smarter by identifying and
prioritizing those with the strongest likelihood of short or medium-term payment
returns. Some collection organizations deploy analytics tools to help them understand
and improve agent performance.
Meanwhile, the explosion in the use of mobile devices has opened up an entirely new
channel through which collection teams can engage with a broad cross section of
debtors quickly and efficiently. Strongly linked to the rise of mobile is the growing use
of cloud computing delivery models, through which collection organizations can
access scalable software applications and tools across a range of devices on an ondemand, by-the-drink basis.
In this White Paper, industry analyst house PAC looks at the current and future
challenges in debt management, with a focus on both business and technology
dynamics. We also provide an independent analyst assessment of FICO, one of the
worlds highest-profile providers of debt management technology platforms.

The Changing Face of Debt Management & Collections

The Technology Revolution

Managing and recovering debt has moved towards the top of corporate and
government priorities during the last five years.
The economic downturn, and the ensuing pressure on income coupled with high
unemployment in most major markets have made it increasingly difficult to recover
outstanding debt (see fig 1).
At the same time, the collection industry is being transformed by major changes in the
technology at its disposal.
The explosion in data analytics tools, the widespread use of mobile devices and the
increasing maturity of cloud computing models are enabling major improvements in the
way collection organizations perform.
Fig 1. The Debt Management Challenge in Numbers (Source: Various)

$479bn

$385bn

The amount of bad debt

written off by European
businesses last year up
40% since 2007.

The U.S. tax gap the The amount of U.S.

difference between what student debt that was in
the IRS collects and what default as of early 2014.
they expect to collect.

$727m

5,000

25%

Amount Bank of America &

FIA were charged for
unfair credit card practices.

The number of front-line

enforcement agents cut by
the IRS between 2010 and
2012.

Percentage of European
businesses claiming that
late payments have forced
them to cut jobs.

The Changing Face of Debt Management & Collections

$1.1tr

Data is at the heart of the collections process, and how it is captured, managed and
processed is increasingly important to its effectiveness. Analytics software tools are
enabling more sophisticated modeling of this data and are driving business benefits in
three key areas: mapping and understanding debtor behavior; agent performance
optimization; and regulatory compliance.
By gaining a better understanding of the debtor landscape, collection teams can focus
agents on those groups most likely to deliver a short-term return, based on analysis of
their individual debt profile, past behavior and more. Different debtor groups behave in
different ways and require different approaches. For example, while overall mortgage
default rates in the U.S. have stabilized in recent years, the default rate on mortgages
held by senior citizens shot up from 0.85% to 4.96%. Analytics tools can also help to
identify the most effective channel through which to engage with different debtor
groups.
Data transparency is becoming a key issue in todays era of compliance. For example,
the U.S. Department of Education is being sued by the National Law Consumer Center
over its failure to disclose data on how the government works with organizations
collecting delinquent student loan debt. The ability to provide and share a view of
relevant performance data will become increasingly important as businesses execute
audits on their internal and outsourced collection functions, as well as facilitating
investigations from external regulators.
The contact center has historically been the major hub of the collection organization.
However, many are taking a more diverse approach to engaging with debtors, with
mobile devices playing a bigger role. Not only can text messages alert debtors of their
repayment requirements at an earlier stage in the lifecycle, but the majority of debtors
would prefer not to have a conversation with a collections agent. It is also a more cost
effective way of making early stage contact with debtors, and is becoming the primary
engagement channel for many businesses, particularly those that serve younger
audiences.
Many collection organizations have spikes in activity during the course of a trading
period, particularly in the run-up to the end of the quarter. As a result, there is a
growing interest in cloud computing delivery models, where software and hardware are
managed and hosted by an external provider, and are accessed by the client on an ondemand basis. As a result, collections organizations can add new workstations and
licenses as they need them, rather than paying for peak capacity across the year.
Cloud adoption is in its early stages of development within the collections industry, but
a handful of technology vendors have constructed mature propositions that are
delivering these benefits of scale and flexibility.
But for many organizations, finding the investment to take advantage of these
advances is difficult. Corporate IT budgets remain under great pressure, and the

The Changing Face of Debt Management & Collections

collections department has often struggled to get towards the front of the line in terms
of securing funding for new and essential technology.
The truth is that many collections teams remain highly dependent on legacy systems
that can be decades old. Some were built by internal development teams, and are
becoming increasingly difficult to support as senior skills retire from the organization.
These systems can also act as a barrier to taking advantage of new technology such
as data analytics or mobile technology, due to challenges around integration and
performance. Few were designed with the ability to provide a consolidated, real-time
view of data, which makes it challenging given the renewed focus on compliance.
As a result, there is a growing interest in replacing these homegrown systems with
standard off-the-shelf platforms developed to meet present-day requirements. Fewer
and fewer businesses are developing new collections software platforms as the
functionality, adaptability and affordability of third party products becomes more
attractive. PAC estimates the market for new debt management platforms is growing at
a faster rate than the overall business applications software market (see fig 2).
Cost remains a pressing concern when considering software platform upgrades, and
applications vendors are being asked to deliver a return on investment within an evertightening timeframe. Five-year investment plans have become two or one year
initiatives. This is also driving an interest in cloud computing delivery models, where
clients access software that is hosted, managed and updated remotely by the vendor.
Cloud removes the need for on-premise hardware investment, and the pay-as-you-go
pricing model means that the service can scale to meet peaks in collections activity.
Fig 2. Forecast WW Spending on Collections Software (Source: PAC)

$1.8bn
$1.4bn

6.0%
CAGR
2014

2018

Note: The figures are based on PACs SITSI market model, which is based on
annual end user surveys plus detailed analysis of vendor financial performance
The Changing Face of Debt Management & Collections

The Changing Debt Landscape

While economic conditions are slowly improving, the picture for debt levels and
delinquency rates is a very mixed one. U.S. banks reported their lowest levels of
mortgage delinquencies in over six years in 2014. On the other hand, the countrys
student loan debt stands at $1.3 trillion - its highest level since 1995, and has been
described in the media as the next sub-prime crisis.
In the U.K., total household debt currently stands at $2.6 trillion, and is forecast to rise
by 43% in the next five years, driven by housing price inflation, low interest rates and
stagnation in salary increases. In Asia, the South Korean Government has launched a
raft of initiatives designed to tackle the countrys household debt problem, while in
India, the cooling of the countrys economic growth is forcing some corporations to sell
assets in order to repay loans taken when interest rates were considerably lower.
Businesses are feeling the effects of these trends. Research from European credit
management services firm Instrum Justitia found the total bad debt loss for companies
in the region rose to 3.1% of revenue in 2013, equivalent to a total of 360bn. The
impact is being felt across the organization, with 40% of European companies stating
that late payments contribute to them not hiring, while one in four say it has forced
them to reduce headcount.
Debt management is also a major challenge for the public sector. Many national and
regional government organizations continue to push ahead with cost reduction
programs that began during the worst years of the economic downturn. And a slow
recovery in employment levels in most countries coupled with cuts in government
collection resources means that recouping unpaid tax bills is not getting easier. This
challenge is best illustrated by the latest figures from the U.S. Internal Revenue
Service, which has reported the revenue collected from tax enforcement fell by 13%
between 2010 and 2012. Over the same period, the IRS cut 8,000 positions, of which
around 5,000 were front-line enforcement agents.
But perhaps the biggest challenges facing collection organizations is compliance. The
regulatory landscape has been transformed by a wave of fresh government and
industry guidelines and requirements on how businesses engage with debtors
throughout the collections process. The highest-profile development in this area was
the establishment of the Consumer Financial Protection Bureau (CFPB), an
The Changing Face of Debt Management & Collections

independent U.S. government agency designed to police the behavior of banks, credit
unions, securities firms, payday lenders, mortgage-servicing operations, foreclosure
relief services and debt collectors.
The risk of not complying with the guidelines of the CFPB was brought into sharp
focus by the $727m in relief that Bank of America and FIA Card Services were ordered
to pay back to customers after the CFPB found they had illegally sold credit card
payment protection products in a misleading way. Bank of America was also hit with
an additional $20m civil penalty.
There is also local regulation to consider. The State of California introduced a new set
of stricter guidelines on debt collection under the Fair Debt Buying Practices Act.
Regulation is not exclusively a North American concern. In the U.K., the Financial
Conduct Authority is implementing the Treating Customers Fairly program.
Some organizations are struggling to come to terms with challenges specific to their
vertical industry sectors. For example, many utility companies are in the process of
deploying smart metering infrastructure, designed to provide more accurate service
charging to consumers based on real-time consumption information. However, early
generation projects in the U.S. have shown that customer disputes over outstanding
payments have sky-rocketed due to concerns over data accuracy. Meanwhile, mobile
telecom operators are faced with the challenge of attempting to recoup outstanding
debt from customers who are readily able to switch to a new supplier.
All these pressures mean collection organizations need to adapt and evolve in order to
meet new business requirements.
Fig 3. Key Market Dynamics in Debt Management (Source: PAC)
Growing and complex
regulatory pressure

Rising or volatile client debt

levels

Need to leverage
multiple channels of
contact
Dependence on ageing
systems, compounded
by budget constraints

Need to improve client

retention rates

Rising agent labor costs in

onshore/offshore locations

Need to support external as

well as internal agents

The Changing Face of Debt Management & Collections

Challenge in recruiting
and retaining the best
employees

The New Role of Collections

The role and focus of many debt collections organizations has changed dramatically
during the last five years.
Economic conditions, regulation and technology advances mean that many
organizations collecting debt have been forced into a balancing act. On the one hand,
they need to maximize their returns from delinquent accounts in order to boost cash
and revenue streams. On the other, they need to ensure they maintain their
relationships with clients, even while the collection process is in progress. This is
particularly the case in very competitive industry sectors such as utilities and telecoms.
The tactics board has been wiped clean. At the height of the economic downturn, the
focus of many collection groups was maximizing call volumes, through the use of a
global team of agents supported by auto-dialing technology. But todays collection
team is working a lot smarter, running analysis on its debtor landscape in order to
assign agents to those areas where they are likely to have the greatest impact.
Advanced collection organizations are also seeking to take a more proactive approach
to collections, by educating customers on the effects of their credit
Fig 4. The Changing Focus of Collections (Source: PAC)

Old World

New World

Reactive approach

Proactive approach

Maximize call volumes

Prioritize most attractive areas

Voice channel dominates

Multi-channel diversification

Business dictates best practice

Regulatory compliance

Persistent, confrontational
contact

Sympathetic, strategic
engagement

The Changing Face of Debt Management & Collections

agreement throughout the lifecycle. Regulation governing how agents can engage with
debtors has driven a change in approach in many areas, away from persistent,
confrontational contact towards a more strategic, sympathetic engagement, where the
retention of the client on a long-term basis is the long-term goal.
Outsourcing has become a hot topic in the collections industry. Many large businesses
already use external specialist collection agencies to help boost their recovery levels,
and this trend is spreading into the public sector. The IRS has considered using
private collection partners to target delinquent taxpayer accounts. Meanwhile, the U.K.
Department of Revenue & Customs is believed to have doubled its use of external
collections firms in the last two years as it gets more aggressive in pursuing unpaid
taxes.
A big challenge posed by the use of third party collection agencies is that of control.
While businesses and government departments can outsource their collections
functions, they cannot outsource their brand. A great deal of time and effort is being
invested in ensuring that selected agencies will conduct their operations in an effective
and compliant manner. Where possible, organizations want to monitor and track the
performance of their agency partners. Ageing technology can act as a barrier.
One of the impacts of the new regulation is that it can be more complicated and costly
to pursue debtors. This is particularly true in Europe, where even consumer credit
groups looking to repossess items bought on credit typically go to court. And this can
be a lengthy and costly process a World Bank report found that the time it typically
takes to resolve a legal dispute in Italy is over 1,200 days, compared to just 370 days
in the U.S.
These factors have led to a major focus on maximizing the efficiency of first and third
party collection organizations in recent years, in order to ensure profitability. This
started in the late 2000s with a wave of investment in offshore talent pools in countries
such as India, Central America and the Philippines, in order to take advantage of labor
arbitrage offered by the talented, low-cost skills bases. However, salary inflation in
some of the delivery hotspots, coupled with incentive schemes from Western
governments, has seen a focus on developing onshore delivery operations.
This trend is reflected in the strategy of Expert Global Solutions, the worlds largest
specialist collections firm. The company was created in 2012 by the merger between
U.S. players NCO and APAC Customer Services, with the latter having opened three
sites in the Philippines, plus one apiece in Uruguay and the Dominican Republic
between 2006 and 2010. But in 2011, the group unveiled a new 250-strong delivery
site in Green Bay, Wisc., and in 2012, announced an expansion of its military veteran
hiring program.

The Changing Face of Debt Management & Collections

10

FICO An Independent
Assessment
Selecting a new software platform to support debt management and collection
functions can be a daunting task.
PACs latest analysis of this sector found there are more than 250 software companies
currently selling debt management systems around the world, with many claiming the
ability to address organizations primary concerns of reduced delinquency, improved
remittance, and more efficient processes.
But in truth, only a few can claim to operate at a truly international level, have the scale
to meet the requirements of the largest collections organizations, and have the client
references to back this up.
One of these companies is FICO, which PAC ranks as one of the largest players in the
fragmented global debt management software market. FICO traces its roots back
almost 60 years, having been founded in 1956 by Bill Fair and Earl Isaac. In fiscal year
2014, the companys revenue reached $788.9m, and it supports more than 5,000
clients across 90 countries.
The companys first product was a credit scoring system, for which it continues to be
well known in North America. It first launched a debt management platform in the
1980s, when it released the first adaptive control system for managing card accounts,
and enhanced its proposition in 2012 with the milestone acquisition of CR Software,
which brought with it the Titanium ORE product.
Today, FICO supports more than 300 companies through the FICO Debt Management
collections and recovery solution across 40 countries. Clients range from those with
tens of users to tens of thousands of users, and incorporate banks, utilities, telcos,
government departments and collections agencies. For example, the main services
organization currently managing delinquent student loan accounts on behalf of the
U.S. Department of Education uses FICO Debt Manager to support up to 2,200
concurrent users.

The Changing Face of Debt Management & Collections

11

The core proposition of the solution is that it serves as an end-to-end collections and
recovery system, supporting the process from the moment the organization first
contacts the customer, through account history, automated notifications, client
reporting, and payment plan processing, right up to the point of resolution.
The core solution, FICO Debt Manager is built on a services-oriented architecture
(SOA) that substantially eases the upgrade process and enables the sharing of data
with other FICO and third party applications supporting other areas of the credit
lifecycle. This includes the companys Falcon fraud management tool, TRIAD
customer management product and Blaze Advisor business rules management
system.
While collections can broadly be considered a horizontal area, FICO Debt Manager
can be configured to meet those industries with specific process requirements. The
system has a single code base for both its government and commercial sector
products. However, there are different functionality sets for clients in areas such as
student loans, healthcare, and banking collections.
One of the main concerns of businesses that are considering modernizing their
existing systems is the potential disruption to the business as it makes the jump from
decades-old homegrown software to a standard 21st century platform. FICO Debt
Manager aims to address this by enabling the client to configure their existing business
processes into the system, rather than forcing them to completely overhaul their way of
working. By doing so, the client is able to retain the more innovative or unique aspects
of their collections processes.
As we discussed in the earlier section of this report, the future success of the
collections organization is going to increasingly depend on how they manage, process
and analyze their data. FICO has a long heritage in the analytics space and has made
several acquisitions to enhance its capabilities in this area, including InfoCentricity and
Karmaspheres big data analytics software business.
PAC believes that analytics is becoming FICOs biggest differentiator in the debt
management space. The company integrates its FICO Customer Communication
Services, formerly Adeptras Risk Intervention Manager, into FICO Debt Manager, to
provide enhanced customer segmentation based on data analysis. FICO can cite
examples where its analytics capabilities have driven an 18% increase in average
remittance, and a $20,000 increase in revenue per agent.
Clients are also looking to use analytics to measure and improve the performance of
their agents. FICOs Engagement Analyzer tool provides real-time analysis of an
agents conversation with a client and helps management understand the level of
performance and identify where improvements can be made. FICO states that this can
help to boost agent productivity by at least 20%, as well as ensuring compliance.

The Changing Face of Debt Management & Collections

12

Multi-channel communication is becoming increasingly important to collections

organizations, as they look to leverage the efficiency and effectiveness gains that can
come from digital channels. FICO supports this using its Customer Communication
Services platform, which enables intelligent, automated, two-way communications for
businesses to reach out to customers in real-time, through voice, SMS, mobile
applications and email.
One of the most interesting features of FICO Debt Manager is its delivery model, with
clients able to use either a cloud delivery model or install the system on-premise. The
majority of new clients have opted for the on-premise model, in line with PACs recent
research into cloud computing identifying ongoing concerns over data security and
control. In regions such as continental Europe, there is also a strong desire to ensure
that data stays within their domestic market. However, FICO believes adoption of the
cloud solution will become more prevalent.
This is something that FICO has responded to by building out a network of delivery
centers around the world, which enable it to provide locally hosted versions of FICO
Debt Manager in Asia, Europe, Latin America and North America. In addition to FICO
branded products, the FICO Analytic Cloud serves as a debt management hub
providing access to services, including third party data, tools and applications. To date,
FICO has more than 500 debt collection agencies and data providers utilizing its cloud
to serve 50 lenders. FICO also ensures that data is protected both in transit and at rest
by building in a layer of 256-bit encryption for added security.
In summary, PAC believes the FICO Debt Management solution is one of only a few
solutions that can address the end-to-end needs of large collections organizations in
both the public and commercial sector. The companys strong focus on analytics is in
tune with current and future market dynamics, and is a strong differentiator, as its
ability to integrate with and leverage other areas of the FICO portfolio. Collection
organizations tend to take a cautious approach to investing in new systems, due to
budget constraints and concerns over whether standard solutions can meet their
specific requirements. The configurability of the system to match existing business
processes, coupled with the hosted delivery model helps FICO avoid the lengthy and
costly implementation process that some other systems require.

The Changing Face of Debt Management & Collections

13

Contact
PAC:
Nick Mayes
Research Director
Pierre Audoin Consultants (PAC)
15 Bowling Green Lane
London EC1R 0BD
UK
Tel: +44 20 7251 2810
Email: n.mayes@pac-online.com
www.pac-online.com
FICO:
Name: Brad Rollin
Title: Senior Manager
Address: 200 Smith Ranch Road, CA 94903
Country: United States
Tel: 415-446-6644
E-mail: bradrollin@fico.com
www.fico.com

The Changing Face of Debt Management & Collections

14

ABOUT PIERRE AUDOIN CONSULTANTS

From strategy to execution, PAC delivers focused and objective responses to the growth challenges of
Information and Communication Technology (ICT) players.
PAC helps ICT vendors to optimize their strategies by providing quantitative and qualitative market
analysis as well as operational and strategic consulting. We advise CIOs and financial investors in
evaluating ICT vendors and solutions and support their investment decisions. Public institutions and
organizations also rely on our key analyses to develop and shape their ICT policies.
Founded in 1976 and headquartered in Paris, France, PAC is part of the CXP Group, the leading
European research & advisory firm in the field of software and IT services.
For more information, please visit: www.pac-online.com

Copyright & Legal Disclaimer

All information provided by Pierre Audoin Consultants (PAC), in any form, is proprietary to Pierre Audoin
Consultants (PAC) and is protected in each country by local and national laws governing intellectual
property. All information published by Pierre Audoin Consultants (PAC) or presented by its employees is
copyright protected, including hard-copy or electronic material, as well as material on our website. The
omission of any copyright notice does not invalidate copyright protection and does not indicate that Pierre
Audoin Consultants (PAC) authorizes the production of such proprietary material.
Violation of Pierre Audoin Consultants (PAC)'s copyright may permit Pierre Audoin Consultants (PAC) to
recover actual damages, statutory damages, punitive damages, and attorneys' fees through actions in
local, national, or international courts. Pierre Audoin Consultants (PAC) will prosecute violators of its
copyrights.
Additionally, Pierre Audoin Consultants (PAC) may be entitled to terminate the license contract in
consequence of any violation of Pierre Audoin Consultants (PAC)'s copyright.
No part of this publication may be reproduced or transmitted for external use for any commercial or noncommercial purpose in any form or by any means, electronic or mechanical, including photocopy,
recording, or storage in any information storage or retrieval system, without the express written consent of
Pierre Audoin Consultants (PAC).
Nothing contained herein shall create an implication that there has been no change in the information
since its original publication. While every effort has been made to ensure accuracy, Pierre Audoin
Consultants (PAC) cannot be held responsible for any errors or omissions. Additionally, Pierre Audoin
Consultants (PAC) cannot be held liable for misuse by any third party. In addition, Pierre Audoin
Consultants (PAC) may only be held liable for losses resulting from malice aforethought or gross
negligence of Pierre Audoin Consultants (PAC). For any other losses, Pierre Audoin Consultants (PAC)
can be held liable only to foreseeable damages. Pierre Audoin Consultants (PAC) cannot be held liable
for losses related to decisions made based on the contents of our research or any other materials or
opinions. Readers should independently verify any information before taking any action that could result in
financial loss.

Copyright Pierre Audoin Consultants (PAC), 2015. All rights reserved.

The Changing Face of Debt Management & Collections

15