Mike Ginsberg

Mike Ginsberg

Those of us who are focused on the U.S. accounts receivable management industry (ARM) know there are sweeping regulatory changes underway that are having a profound effect on the way virtually all of the players involved are running their businesses. Credit grantors, debt buyers, collection agencies, collection law firms and vendors providing tech support and other resources are all directly feeling the impact and making dramatic operational changes. There is no segment of the food chain that’s immune to change.

With all of the changes we’re experiencing, one question that has been raised is whether a consolidation among collection law firms will result. Before I give my perspective on this important topic, let’s take a quick look back at what took place in recent years that set the stage for whether a consolidation among collection law firms could take place.

For more than a decade leading up to the Great Recession, substantial amounts of new business was flowing into the accounts receivable management industry in large part because of the proliferation of credit cards. Collection agencies, debt buyers and collection law firms expanded their operations to handle the substantial flow of new business being placed with them from large credit card issuers and from debt buyers outsourcing their accounts. While most ARM companies also service other market segments, and many provide additional service offerings, the collections and purchasing from banking clients provided the most explosive expansion opportunities for those who landed those clients. The result was significant increases in fee income and operating profits. One business risk that emerged at that time was significant client concentration because most of this growth was driven by a handful of large financial institutions. The rewards of growth were apparent and owners were not visibly concerned with the possibility that one day the music might stop playing and the business flowing into their operations might slow down.

Let’s fast forward to 2012. By this time, banks already dramatically reduced loan originations and delinquencies dropped significantly as consumers paid down debt burdens incurred prior to 2008, resulting in significantly less accounts receivable available for placement or sale. It was in 2012 that the CFPB initiated their first round of large bank audits and change started setting in. Over the next two years, collection agency vendor networks were slashed, some banks stopped selling debt and others stopped placing accounts with collection law firms for suit. Impact was felt across the spectrum of service providers within this asset class.

If that wasn’t enough, the CFPB started auditing non-bank financial institutions in 2013 which included debt collection agencies, debt buyers and collection law firms and the staggering cost of compliance started settling in. Evidence of the impact started emerging. Some prominent collection agencies focused on the banking sector merged to cut costs, while others sold out to larger players. Some debt buyers sold their accounts to, or merged into, larger debt buyers positioned to absorb the new costs of compliance. A few smaller collection law firms merged. Most players were forced to cut costs by closing call centers and reducing staff. Feasting quickly became famine and companies focused on the banking sector were forced to make quick decisions to survive.

Now back to the question that I asked earlier, will a consolidation among collection law firms result? My short term answer is no but long term my answer might change.

Most collection law firms that exist today are licensed to service clients in a particular state and as a result, provide forwarding services to handle accounts outside their jurisdiction. Some larger firms have expanded their operations to service multiple states but the vast majority of players exist within one state. I believe that some collection law firms operating within the same state will merge, such as the transaction that took place between law firms Fein, Such, Kahn & Shepard, P.C. and Levitan and Frieland, P.C. in New Jersey. Other expansion minded law firms will seek merger opportunities outside their state to enlarge their own footprint but this will be a slow process because very few players will invest the time and resources necessary for this to happen.

The few multi-state collection law firms that exist today possess significant client overlap with their competitors and some are licensed to service clients within the same states. Those factors will prevent mergers from taking place among the vast majority of regional firms that exist today. Of course exceptions will occur but those will be viewed as isolated events and not a consolidation within an industry.

Two other significant factors exist among collection law firms that prevent a consolidation from occurring. The first, which is not limited to collection law firms, is that clients prefer competition and will not place all of their accounts with a single service provider. They seek competition among multiple service providers to keep prices lower and drive improved results. The second factor, and one that exists among collection law firms exclusively, is that non-lawyers cannot own collection law firms. This means that private equity firms and other financial investors cannot currently make equity investments into law firms, requiring law firms to use their own capital or a debt instrument to capitalize acquisitions. The law firm of Jacoby & Meyers is trying to address this issue head on but nothing has changed to date.

Unless and until dramatic changes take place, I don’t think we will experience consolidation among collection law firms.

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