Is there a way to rapidly settle debt, maximizing the collections portfolio? How can agencies ensure regulatory requirements are never violated?
To address these challenges, some agencies and debt buyers are turning to online collection services. Designed as an alternative channel for debt resolution, online collection services provide collectors a highly efficient and scalable way to settle accounts using the Internet. These services also provide consumers a convenient and face-saving way to settle their past accounts.

This article will examine some of the challenges collection departments and agencies face when collecting debt and introduce the many advantages of online collection services.

Consumer Trends

Enormous consumer debt and the widespread adoption of the Internet are two key consumer trends causing collection departments and agencies to reexamine existing collection processes.

Americans owe more than ever before. With massive consumer debt comes greater delinquencies. As of January 2007, consumer debt was $2.4 trillion-a new high-according to the Federal Reserve. In the fourth quarter of 2004, nearly 13 million consumer credit card accounts were more than 30 days past due, according to the American Bankers Association.

Not only are consumers amassing more debt, they are also going online to make purchases and handle financial transactions. By 2006, 77 percent of Americans had access to the Internet, according to Harris Interactive. A Federal Reserve study indicated the majority of noncash payments made in the United States are now initiated electronically. The study showed an increase of 13.8 billion electronic payments between 2000 and 2003.

"Consumers today require a level of convenience and control inconceivable years ago," explained a PayStream Advisors report. "They want the freedom to select the channel and method of their payments, as well as the frequency and timing. Conventional paper checks cannot provide this level of flexibility, so consumers are turning to electronic payment options-credit card, debit card and ACH transactions initiated over the Internet."

Not only are consumers purchasing goods and services online, they are also receptive to resolving debt via the Internet. A study by FiSite Research noted, "Consumers find the concept of online collection services as highly attractive over a broad range of consumer lending products. Consumers see an opportunity to avoid emotional distress and embarrassment that come from traditional collection methods."

Challenges Facing Collection Agencies

Collection agencies face two primary challenges when collecting funds:
Difficulty Making Contact-With each passing day, the likelihood of recovering delinquent debt fades. As the number of delinquencies grows, collectors are challenged to operate efficiently.

Collectors are often plagued with wrong-party connections and answering machines, which slow the collections process. "Collecting on delinquent accounts generally requires tenacious call center operations to reach consumers actively trying to avoid issuer phone calls," explained a Mercator Advisory Group report.
For many agencies, the cost of recovery can be prohibitive. Another Mercator Advisory Group report stated, "The collections and recovery stage is still handled manually. The operations remain labor-intensive and are very much reliant on the efforts of highly trained collectors. This means that the collections function is not at all scalable."

With Mercator estimating the cost per agent call at $15, collection agencies must seek lower cost debt resolution methods.
Regulatory Constraints-State and federal regulations place major limitations on what a collector can say. Issues such as when a call can be placed, where contact can be made, who can be spoken to and what can be said are all regulated in many states.

For example, some states place limits on calls that can be made to a consumer's place of employment. Still other states prevent mentioning what the call is about to a spouse or which company an agent represents.

These regulations also place significant restraints on what can be said to a consumer. It is not unusual that a collection agent might unknowingly violate one of these regulatory requirements, placing the company at risk of significant fines or lawsuits. Additionally, communication must be carefully documented to remain compliant with the Fair Debt Collection Practices Act.

Fortunately, even small improvements in the collection process can have a major impact on the profitability of a portfolio. Key technological advancements have improved collection efficiency and profitability.

Brief History of Collection Innovations

A number of innovations have improved the collection process over the past 15 years. In the early 1990s, dialer technology helped agents improve efficiency by placing phone calls to consumers and connecting agents only when a person answered the phone.

By the mid-1990s, interactive voice response systems engaged consumers using voice recordings. The idea was to offload work from collection agents, only connecting them with consumers during the negotiation stage. However, these systems were only effective for the most basic collection efforts.
Around 2000, collection analytics systems were widely used. They helped agents work more intelligently by examining historical consumer data and identifying consumers most likely to pay. These systems also tailored settlement offers based on consumer behavior and other strategies.

Around the same time, online bill payment grew in popularity. Financial transactions, such as credit card, mortgage and auto loan applications, were being processed online. The success of online payment services such as PayPal attest to the consumer acceptance of Internet payments. For example, during 2006, nearly $38 billion in online transactions occurred using PayPal alone.
By 2004, online collection services began to emerge. They could respond to consumer contact, interact with consumers, negotiate settlements and collect payments.

Online Collection Services

Online collection services allow agencies to automate the entire collection process using the Internet. Designed to efficiently communicate with consumers and ensure consistent regulatory compliance, online collection services can interact with thousands of consumers and quickly resolve past-due accounts.

Allowing consumers to review and pay their debt in private, online collection services help alleviate the embarrassment consumers often feel while providing 24-hour access. Consumers can negotiate debt and securely process online payments in private. Agencies can quickly set payment options and collect funds without ever picking up the phone.

Some of the capabilities of online collection services include:
• Negotiation of debt online.
• Customized debt resolution options, including varied payment plans.
• Secure payment processing over the Internet.
• Contact preference updates.
• Fully-compliant user interfaces.

How It Works

A letter is typically sent to a consumer with an invitation to go online to settle his or her debt.
For early-stage delinquencies, the online service offers a quick and convenient way for customers to bring their accounts current.
For late-stage and charged-off accounts, specific payment programs can be offered or a blind bidding process can be presented. With the bidding process, the consumer is provided multiple chances to submit an offer and settle the account. The creditor establishes a minimum accepted offer that is unknown to the consumer. The offer is based on custom business rules that reflect the creditor's internal collection strategies.

Multiple payments can be set up for paying down debt. Payments are collected online using a variety of payment methods, including ACH, credit card, PayPal, MoneyGram and Western Union.

When the consumer makes a successful payment, funds are transferred via electronic payment gateways directly into creditor accounts.

Benefits of Online Collection Services

Research by Mercator Advisory Group suggests that resolving delinquent accounts online can reduce transaction costs by almost five times when compared to phone or traditional mail-based solutions.

Beyond major cost savings, online collection services provide a significant number of benefits for both agencies and consumers. Benefits to agencies:
• Allows agencies to efficiently interact with an unlimited number of consumers.
• Eliminates the need for added personnel to meet growing collections requirements.
• Reduces liability resulting from noncompliance with federal and state regulations by controlling and documenting consumer interactions.
• Improves the image of agencies with a consumer-friendly service.
• Increases profits for late-stage consumers with blind bidding.
• Reduces the overhead of collection processes.
• Bypasses answering machines, caller ID and cell phones.
• Easily captures consumer contact preferences.
Benefits to consumers:
• Avoids the embarrassment that often occurs when dealing with collectors.
• Empowers customers to settle accounts at their convenience.
• Allows consumers to quickly resolve debt.
• Provides access 24 hours a day, every day.

Features

When seeking an online collection service, agencies should ensure their changing needs can be accommodated by looking for features that allow for flexibility, such as:
• Automated debt negotiation: Seek a solution that automates later-stage debt negotiation by allowing consumers to bid against a blind settlement floor.
• Intelligent resolution offers: The ideal solution should intelligently present options to consumers based on debt or consumer characteristics. For example, early-stage debt should not be provided negotiation options.
• Compliance flexibility: Look for a solution that is flexible enough to meet external legal requirements and is in compliance with state and federal regulations.
• Business rules: Seek a service that offers a wide range of real-time business rule customization, such as settlement floors, payment intervals, payment methods and considerations such as how much must be paid up front and how quickly the debt must be paid down.
• Easy to implement: Seek a solution that seamlessly integrates with existing collection system investments without a major IT investment.
• Hosted model: Look for a solution that is securely hosted, eliminating the need to invest in hardware and software as well as freeing IT personnel.
• Easy to use: Look for a solution that is easy for consumers to use and collection managers to maintain. No technical knowledge should be needed.
• Customizable branding: The ideal solution should enable customized branding to help maintain a consistent look and feel for consumers.
• Multi-language support: Common languages, such as English, Spanish and Korean, should be supported to reach the broadest range of consumers.
• Solely focused on collections: Look for a company that exclusively specializes in collections and intimately understands all stages of the collection process.

Bottom Line

Online collections can be a strong tool for a collection agency. It can reach debtors that are avoiding the stress and embarrassment of talking to an agent and it can do so cost-effectively, any time of day and any day of the week. Even though for so many years, successful collections have been based on the power of direct persuasion, the Internet has already proven its ability to do the job.
Collection agents will always be needed. However, an online collection service can handle many accounts at a reduced cost-per-account in an environment where the interaction with the consumer can be controlled to meet compliance regulations and to maintain a full audit-trail of what was offered and what was accepted is available.

James D. Burchetta is co-chairman of the board and CEO for Debt Resolve Inc. He can be reached at jburchetta@debtresolve.com .