Consumers, businesses and banks were all affected by the
recession, but the financial crisis has recently been claiming some
unlikely victims: debt collection agencies. Ten percent of the
agencies went out of business in 2009, with many more suffering
cash-flow problems. John Hill reports.
The UK’s £700m ($1.08bn) debt
collection industry has become an unexpected victim of the
Despite the spike in credit losses
through 2009 and the early part of 2010, 10% of around 600 debt
collection agencies (DCAs) that operated in the UK in 2009 ceased
trading, up from 6% in 2008, according to a report by Experian,
Debt collection in lean times.
“In this environment you’d expect
it to be boom time for DCAs,” the report said. “However, the
industry has come under increasing cash-flow and other financial
Rising levels of unemployment and
declining real household incomes in 2009 had a major impact on the
ability of some consumers to service debt and pay their bills.
Consumer lending organisations experienced a substantial growth in
the volume and mix of accounts becoming delinquent and their
collections organisations had to cope with increasingly strained
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Despite facing strong demand for
their contingency-priced services to deal with the increase, DCAs
who buy debt are facing very real difficulties brought about by the
deteriorating economic climate. The industry has come under
increasing cash-flow and other financial pressures and the year
ahead is unlikely to be very different.
These are lean times for consumers, and the answer for DCAs,
according to Experian, is to act smarter, focusing on the best
short-term returns, while planning for the longer-term. DCAs that
are able to use data, software and analytics to maximise their
effectiveness and efficiency will be best placed to profit by
collecting more debt and reducing the cost to collect. Those that
cannot become more effective or reduce their operational costs
could face bleak times.
DCAs have widely differing levels
of capability in this area. While some are incredibly savvy, there
are many others that are far less sophisticated. Analysis of profit
margin data reveals that, despite the difficult economic times,
most DCAs are profitable.
At the micro and small business
end, there are a number of firms making between 20% and 30% pre-tax
profit each year. Naturally, such margins become more difficult to
achieve for the large-scale DCAs. Margins of between 5% and 15% are
more common for DCAs turning over between £1m and £10m.
The data indicates there are
slightly more firms growing their turnover than seeing it shrink.
Most of those that have seen a decline have reduced headcount
accordingly. The majority (64%) of firms that have grown turnover
are also expanding their employment.
A smaller proportion of firms (36%)
are successfully managing to grow turnover, but without an increase
in employment. Indeed, some of these have even managed to reduce
headcount. These organisations, which have succeeded in making
their existing collection operations increasingly productive, are
well placed to grow their margins.
Financing debt purchase has become
significantly more difficult. In the past, investors were happy to
lend money to DCAs, so they could buy debt, collect on it and
ultimately provide the financiers with a return on their
Now, after many years of expansive
debt-purchasing policies, debt-buying DCAs are facing significant
losses on their portfolios. Investor confidence is low and, with
capital constrained, there is less money available for DCAs to
borrow to purchase new debt, placing a premium on managing cash to
fund future activities.
This financial pressure comes at a
difficult time for debt collection agencies in the both the UK and
US. Regulators are placing additional pressure on the agencies who
perceive them to operate procedures that are unfair for consumers
and inefficient at a business level.
In the US, a Federal Trade Commission (FTC) report,
Repairing a broken system: Protecting consumers in debt
collection litigation and arbitration, concluded that in the
current environment, neither litigation nor arbitration provided
adequate protection for consumers.
“The system for resolving disputes
about consumer debts is broken,” the report said.
“To fix the system, the FTC
believes that federal and state governments, the debt collection
industry, and other stakeholders should make a variety of
significant reforms in litigation and arbitration so that the
system is both efficient and fair.”
The new reform most relevant to the
collection industry is the creation of the Bureau of Consumer
Financial Protection (BCFP) within the Federal Reserve, which will
have consumer financial protection responsibilities and rule-making
The industry aggressively pursued a
claw-back amendment whereby the FTC would retain jurisdiction over
consumer protection laws such as the FDCPA and the Fair Credit
The Association of Credit and
Collection Professionals (ACA International) CEO Rozanne Andersen
said she was “disheartened” by provisions in the financial
regulatory reform bill. She added they were all-inclusive without a
clear understanding by lawmakers of the impact of their
“The task now for our members is to
work closely with the BCFP as the industry’s chief federal
regulator,” she said.
“ACA needs to help the BCFP find an appropriate balance between
protection of the 4% of Americans who are not able or not choosing
to pay their bills and the 96% of Americans who are.”