Figuring out where to invest technology dollars isn’t easy, even in good economic times. While collection agencies and lenders still don’t have the financial resources to spend on technology that they had before 2008, the good news is they have more money available than in the past several years.
Overall budgets for risk management technology are expected to increase 7% in 2012, according to Framingham, Mass.-based research firm IDC Financial Insights. While that’s a large increase, it’s still not enough for collection agencies and lenders to implement all the technology upgrades on their wish list.
Instead, they are apt to focus on applications that enhance productivity and compliance and more sophisticated, real-time analytics to better manage their risk.
“There has not been a whole lot of investment in technology the past few years, especially on the agency side, and that’s led to an approach of investing in technology that can streamline operating processes, improve compliance and boost recoveries on delinquent accounts without increasing costs,” says Rob Fite, vice president of receivables management at New York-based LexisNexis.
For collection managers, that means further automating the recovery process.
Whereas automated phone systems allowed debtors to arrange predetermined payment plans, they have often been impersonal, rigid, rules-based applications. Debtors interacting with these systems would enter their account information and be presented with a predetermined payment plan based on their risk level.
While the opportunity to set up repayment through an interactive voice response unit spared debtor’s the awkwardness of talking to a live agent, the system allowed little, if any, room for negotiation as it followed a simple set of rules for determining payments.
How times have changed. In February, LexisNexis introduced Collect Point, a hosted IVR unit built on a real-time rules engine. Once the debtor enters the system they engage a virtual agent that begins asking questions, such as current employment status or are they contemplating bankruptcy, before offering a weekly or monthly payment amount.
If the debtor considers the suggested amount too high he can provide a counter offer, which the virtual agent accepts or declines. If the counter offer is declined, the IVR gathers more information about the debtor’s financial situation, which is scored in real time to help determine another payment plan.
The negotiation process continues until the debtor and the virtual agent agree on a payment plan. Before closing the session, the IVR will gather information about how the debtor prefers to be contacted in the future, such as by cell phone or e-mail, and the information needed to initiate that contact.
“The system behaves like a live agent, allowing for a negotiation to take place that makes the debtor feel empowered and gathers information that can be scored in real-time to come up with a better treatment plan,” says Fite. “This is a more flexible system that can improve recoveries.”
During the pilot stage, collectors using the system saw dollars recovered per individual session jump 50% and kept promises to pay rise 90%.
“One of the other advantages of the system is that it is programmed what to say, so there is no risk of a slip of the tongue that can lead to a consumer complaint,” says Fite. “Compliance is becoming a bigger issue for collectors, because consumer complaints against them were up 20% in 2011.”
Technology spending to ensure better compliance is taking on greater importance for lenders, too.
While collectors are looking to avoid consumer complaints, lenders are more concerned about meeting stringent risk management compliance set forth by the federal government in the wake of the banking crisis.
“Technology to perform portfolio stress testing and determine proper allocation of loan loss reserves is drawing a lot more attention from lenders, because of the unknown of what examiners will look for in evaluating the financial health of their portfolio,” says Mark Forbis, vice president and chief technology officer at Jack Henry & Associates, a Monet, Mo.-based provider technology and payment solutions to financial institutions.
Jack Henry has integrated into its platform a module developed by Gardendale, Ala.-based Redi Enterprise Development, Inc., that runs a variety of ‘what if’ scenarios to evaluate the financial strength and weaknesses of a financial institution’s portfolio.
“A lot of tool sets developed to manage ongoing portfolio risk are no longer effective, because they are manual processes prone to human error,” says Rodney Fuller chief operating officer at Redi Enterprise. “Increased use of technology is needed to proactively manage portfolio performance and risk levels in real time to better meet the risk management expectations of bank examiners.”
A key reason why lenders are looking to automate stress testing processes is that when bank examiners find errors during a stress test, they may be inclined to assume there is flaw in the methodology the financial institution used to determine its loan loss reserves. “That could lead to a restatement of earnings,” adds Fuller.
Redi Enterprise has developed a suite of applications that automate processes for loan loss reserve management, risk management and portfolio stress testing to eliminate the potential of human error.
Redi’s i-Forecast application enables lenders to stress test loan portfolios by such criteria as loan-to-value, debt service coverage, net operating income, debt service amount and cap rate. Lenders can run multiple stress scenarios over different segments of their portfolio and drill down to results for individual loans.
“Testing at this granular a level is tough without a dedicated, full time staff, because it is so labor intensive,” says Forbis. “By automating the process, information can be viewed in real-time at the dashboard level, enabling managers to spot and address red flags sooner.”
Better reporting in general is high on the list of priorities for risk managers.
“Real-time data that can be shared across departments is becoming a necessity to help managers better evaluate operational and portfolio performance,” says Michael Versace, global risk director at IDC. “The better data integration is across the enterprise, the fewer data silos there are that can prevent real-time access to risk and performance metrics.”
Finally, cloud computing is expected to appear on the radar of more lenders and the largest collection agencies.
The appeal of cloud computing is that it provides infinite scalability, automatic software updates and full-time customer support at a cost far lower than a new platform. Because end users are freed from performing data and system back-ups and implementing platform updates, they can apply the resources allocated to those tasks to their core business.
“By 2020, we expect more cloud and hybrid cloud environments,” says Versace. “The one big issue with cloud computing right now is making sure the cloud vendor meets all regulatory and security compliance, but those issues are getting worked out."
With intent to purchase new technology among collection and risk manager up from six months, it is expected they will finally implement many of the tech tools that have been shelved the past few years. “Changes in the market have made it time for financial institutions to start modernizing a lot their technology to improve portfolio management and performance,” says Versace.