Encore Capital Group – getting into the mind of the distressed consumer

I spent 6 months working on a debt collection project. Contrary to what you may think, it’s a fascinating area! One of my rewards was an all-expense paid resort trip while attending a Collections and Credit Risk Conference in Scottsdale, AZ. The two days were a blur and, honestly, I don’t remember most of the companies I saw. All except for one – Encore Capital Group (“Encore”), which amazed me with the incredible research they conducted on subprime consumers.

A bit of background: Encore is a specialty finance company, whose subsidiaries purchase portfolios of delinquent consumer debt and then work with borrowers to repay their loans. The company is a pioneer in the industry in its use of academic research to understand distressed consumer behavior. In fact, a crown jewel of the company is its Consumer Credit Research Institute (CCRI), whose stated goal is to “enhance consumer intelligence”, “promote financial literary”, and “improve business practices”.

Value Creation and value capture

Encore creates value to loan originators and servicers. The company buys subprime loan portfolios and take on the risks that originators and servicers don’t want. Then, Encore will try to collect delinquent payments from consumers via traditional (e.g., telephone) and new media (e.g., online portals) channels. The goal is to collect more than where the portfolio is priced to generate a return for the company.

Operating Model and Competitive Advantage

Traditionally, collections agencies reach out to consumers via channels such as mail and call centers to chase delinquent payments. As consumers tend to have multiple loans and thus will need to choose which one to pay back first, the collections business is a fiercely competitive space. Further, while aggressive tactics and coercion were common in the past, increased regulatory scrutiny is forcing companies to identify new means to successfully reach out to consumers.

Enter Encore/CCRI’s core competency in research. CCRI is run by Chris Trepel, who holds a PhD in Experimental Psychology, has completed postdoctoral work in Neuroscience and Behavior Economics, and had worked at Wells Fargo and McKinsey.  The group is also filled with PhDs interested in rigorous research approach and analysis. This is a setup seldom seen in other collections agencies. Yet by having these special resources, Encore is able to better understand its consumers and leverage findings to improve business processes to realize better returns.

An example of how Encore uses research and data analytics

One area of interest for CCRI is financial literacy, as improved literacy will translate into higher recovery rate of delinquent debt. Not surprisingly, its research demonstrated that subprime consumers tend to have lower literacy and are more likely to wrongly estimate their credit scores.

Encore - 1

Further, CCRI found that subprime users are more likely to defer payments, thus Encore can retool its message to focus more on smaller payment-plans (as opposed to immediate settlement).

Encore - 2

In addition, CCRI also conducts testing on its online marketing effectiveness so determine the best way to generate exposure to consumers.

Encore - 3

At first, I thought a lot of this was “Duh”. But then I realized (1) the fact that Encore was probably the first one in the industry doing such research means that it has an incredible advantage over its peers, (2) the content CCRI publicizes is likely just the tip of the iceberg of all the findings they have on subprime customers, and thus they must hold a lot of proprietary information, and (3) they can continue to build on their knowledge base in the future, and any competitors hoping to build the same capabilities will have a lot to catch up on.

If you are interested in knowing more, I highly recommend these slides from CCRI:




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Student comments on Encore Capital Group – getting into the mind of the distressed consumer

  1. This is very interesting but it is also an analysis that could very easily deliver a wrong conclusion due to not taking into account the many cyclical factors that affect credit

    It would be interesting to see how far back the data goes and how many years (and cycles) of observations the conclusions are based off. The thing with credit (subprime and prime) is that it is very cyclical and we are currently in one of the best credit cycles in 100 years. Will the same conclusions be true if we looked at 1990s or pre-crisis 2000s data. Do the same conclusions hold, when the fed raises interest rates. How bout when unemployment is away from full employment? Do demographic considerations change the answer? Are the conclusions the same for Millenials and Baby boomers? How about the role of the regulator? Are recent consumer protection legislations reflected in the data?

    Very interesting but needs to be interpreted carefully

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