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 financial crisis.
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 pressures.”
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 operational capabilities.
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 investment.
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 authority.
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 Reporting Act.
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 actions.
“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.”