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What does rising debt mean for consumers & collection servicers?

Monday July 22, 2019

Consumer debt is on the rise again. It’s been more than a decade since the last recession, but borrowing is back and above its peak in 2008. However, this isn’t necessarily a bad thing.  According to Deloitte, rising consumer debt can indicate general optimism about the future – consumers are confident enough to buy goods and services now and pay for them in the future. For debt collections agencies, rising debt merely means more opportunities to collect (and make a profit).
 
A corresponding rise in support services
 
With increased consumer debt, it makes sense that debt collection agencies would need to expand and employ more people. However, automation has actually reduced jobs in debt collection, according to the Bureau of Labor Statistics Handbook. This doesn’t mean less jobs in the industry – evidenced by the rise in support services such as credit counselling and debt consolidation – but that many occupations within debt collections have changed as the industry changes.As the industry evolves, debt collections agencies must keep up with regulatory changes to ensure compliance, resulting in even more employment opportunities within the compliance management landscape.
 
The relationship between credit default and debt collection
 
The debt collections industry plays a vital role in ensuring credit is more available to consumers by reducing the cost of collections and mitigating the risk of unrecoverable debt. Consumers utilize a range of credit options to purchase goods and services such as homes, cars, flights and education, or meet short-term needs such as unplanned medical expenses. Even though most consumers strive to manage their debt, often, financial changes such as a sudden job loss or unforeseen illness can leave them unable to meet their monthly obligations, causing them to default on a loan. If the consumer doesn’t pay their bills within a reasonable amount of time, the account is passed over to collections. Thus, it’s no surprise that a Research Report by IBIS World found that a high rate of credit defaults corresponds to rise in demand for debt collection agencies.
 
How effective debt collection improves access to credit
 
Thanks to effective debt collection (made possible through increased automation, scoring and analytics), higher recovery rates compensate for the borrower’s higher chance of default. As such, a rise in consumer debt and an effective debt collection industry as a whole allows greater access to credit, particularly to low-income consumers who would be unable to access traditional credit, such as those with low credit scores or high income volatility. This is evidenced by the rise of non-prime lending as improved debt collection and scoring makes consumer credit more available to unbanked or unscorable consumers. As the debt collection industry grows, it represents multiple industries and collects from a range of consumers with a variety of different income brackets and credit ratings. Thus, debt collection services, whether in-house or outsourced, are increasingly prevalent in modern society.
 
The benefits of the debt collection industry
 
The ACA International Report found that the debt collection industry provides lenders with the latitude to continue offering credit, helps businesses to remain solvent and prevents the passing of monetary loss and risk on to consumers (usually expressed thorough higher retail prices and increased interest rates on credit). If delinquent debt is not recovered, the overall supply of credit would decrease, adversely impacting lower income and high-risk consumers who bear the brunt of the increased costs, forcing them to use less traditional modes of credit such as payday loans, which are much more costly. In fact, without collection agencies, the economy would likely find itself in a deficit. Collections agents are able to recuperate some losses while increasing employment within a new and expanding sector. The collections industry plays a vital service in meeting the demands of a marketplace characterized by rising consumer debt, ultimately benefiting both consumers and creditors. 
 
If you’d like to find out how SCORE’s advanced analytics and modelling improve cash flows and maximise returns for better accounts receivables management, contact us today on 647.309.1803 to get the conversation started.
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