Collections Industry May See More Activity in 2021 as Market Conditions Normalize
New report from TransUnion and Aite Group explores the impacts of COVID-19 and gives a glimpse into the future of collections
A new report by TransUnion (NYSE: TRU) and Aite Group found that collections balances declined by more than $8 billion from the end of 2019 to the midpoint of 2020. Third-party collections activity, though, is expected to increase in 2021 as the effects of the COVID-19 pandemic begin having a greater impact on the consumer credit market. The report, “A Year of Pivots, Challenges, and Opportunities: The Collections Industry in 2020,” explores how the COVID-19 pandemic has impacted the collections industry and what may be in store for 2021.
The pandemic has played a major role in disrupting the consumer credit landscape in 2020. From a collections standpoint, the industry has been particularly impacted by the decline in overall credit accounts as well as the first drop in household debt levels since 2014. Accommodation programs also have delayed some accounts that would have otherwise gone delinquent from defaulting. As a result, collections activity has been much more muted, evidenced by the substantial decline in overall balances.
“Consolidation in the collections industry has taken place for the better part of the last decade, and the COVID-19 pandemic helped accelerate that trend. Less credit activity, smaller balances and a large number of accounts in accommodation status certainly slowed collections activity, but the pandemic brought on a whole new set of challenges. Most notably, work-from-home mandates that many collectors were not equipped to handle,” said Glen Goldstein, executive vice president of diversified markets at TransUnion. “Collections is a major part of the consumer credit ecosystem, and our report highlights that we will see more normal conditions in 2021, which we believe will benefit the overall market.”
The report found that the number of firms that make up the third-party collections industry has steadily declined in recent years. In fact, between 2016 and 2020, the number of third-party collection firms is expected to shrink by 15% to 6,699 companies.
Even as fewer collections agencies now exist, their efficiencies are increasing. Profit margins are increasing for collectors as 68% say they have either received payments in full, settlements in full or made partial payment arrangements. This is an increase from 58% in 2019. Collectors say the tools they are using the most to secure payments include: manual skip tracing, collections management systems (CMS) and online portals.
More modernization may be in store for 2021
In addition to the evolving consumer credit market, new guidelines set by the CFPB will likely have the greatest impact on the collections industry in 2021. The request of the CFPB to have the industry modernize its practices will be of special importance. The report found that larger firms are most likely to embrace a varied and innovative toolset and utilize new forms of communication.
In 2020, over one in five collectors (22%) said they reached out to consumers via text – an example of a new form of communication within the industry. While this approach pales in comparison to traditional modes such as letter (93%), telephone (87%) and email (59%), the expectation is for texting to continue to rise.
The forms of communication cited most by collections executives when asked which they will consider adding in the next two years, included: Email (45%), Text/SMS message (45%) and Chatbot, Digital Assistant or other AI (22%).
However, efforts to modernize may be somewhat slow when considering only 11% of collections executives cited texting as the most effective way of communicating with consumers. Telephone manual dialing (44%), telephone auto dialers (31%) and letters (30%) were ranked as the best options.
“As the collections industry looks ahead to 2021, one of the few positives from 2020 is that modernization of collections practices may become the norm for more large and small agencies. Those collections agencies that make the effort to modernize will likely be the ones that can thrive in 2021,” concluded Goldstein.
About the report
Insights on the challenges, trends, and innovations occurring in the third-party collections industry are informed by a quantitative survey of third-party debt collection professionals conducted in Q3 2020. Survey results are representative of the market at a 95% confidence interval with a 7-point margin of error. Any differences noted between groups of survey respondents, such as breakouts by company size or types, are significant at a 90% confidence interval. This is the second annual survey of the third-party collections industry conducted by TransUnion and Aite Group.The full report is available here.
About Aite Group
Aite Group is a global research and advisory firm delivering comprehensive, actionable advice on business, technology, and regulatory issues and their impact on the financial services industry. With expertise in banking, payments, insurance, wealth management, and the capital markets, we guide financial institutions, technology providers, and consulting firms worldwide. We partner with our clients, revealing their blind spots and delivering insights to make their businesses smarter and stronger. Visit us on the web and connect with us on Twitter and LinkedIn.
About TransUnion (NYSE: TRU)
TransUnion is a global information and insights company that makes trust possible in the modern economy. We do this by providing a comprehensive picture of each person so they can be reliably and safely represented in the marketplace. As a result, businesses and consumers can transact with confidence and achieve great things. We call this Information for Good.®
A leading presence in more than 30 countries across five continents, TransUnion provides solutions that help create economic opportunity, great experiences and personal empowerment for hundreds of millions of people.