Mike Ginsberg

Mike Ginsberg

For many ARM professionals, adjusting to a world of intense government oversight, mounting client pressures, increased operating costs, and an economy slow to recover has been challenging to say the least. For US debt buyers in particular, functioning in today’s environment has been extremely difficult. Amidst momentous market changes, many debt buyers, sellers, investors and vendors alike are asking the same question: Will a major consolidation among US debt buyers result?

My short answer is yes. Consolidation has already started and the pace will pick up steam in the next 12-24 month. Before I explain why I believe a major consolidation of debt buyers will result, let’s look back at what took place in recent years that set the table for whether a consolidation among debt buyers is inevitable.

The US debt buying segment of the ARM industry really began to form when the RTC (later the FDIC) sold non-performing loans created from the Savings and Loan Crisis of the 1980s and 1990s. That segment of the market picked up steam in the mid-1990s, and for the next decade leading up to the Great Recession, as major banks consistently sold non-performing, non-secured loans, resulting in the formation of two industry associations and hundreds of large and midsize buyers aggressively expanding their operations to handle the substantial flow of new business available in the market.

While most ARM companies also serviced other market segments, and many provided additional service offerings, the debt purchase market really feasted on portfolios made available for purchase from a handful of large credit card issuers. Financing was also readily available at attractive rates to finance debt purchases creating the perfect storm for US debt buyers. The rewards of significant profits were apparent and debt buyers 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.

In the late 1990s, I remember being asked if the US ARM industry, consisting mostly of third party collection agencies at that time, would consolidate. At that time, my answer was no way in spite of the fact that large agencies were merging at an astounding pace because of the influence of private equity capital and NCO Group’s aggressive acquisition strategy. Consider that during the decade from 1996 to 2006, nine of the ten largest US collection agencies went through at least one M&A transaction. In fact, GC Services was the only ARM company in the top 10 during that period that did not transact. The pace of mergers and acquisitions during that time period was staggering and anyone without industry knowledge might draw the same conclusion that the industry was in the midst of a major consolidation. However, that was not the case for three fundamental reasons:

  1. New ARM companies were being formed at an astounding rate as barriers-to-entry did not exist at that time.
  2. Credit grantor clients would not tolerate having a handful of vendors servicing their needs instead of a competitive marketplace. Grantors drove competition among their vendors, not consolidation.
  3. Government regulators were not severely impacting the performance of collection operations at that time.

Let’s fast forward to 2012. It was around 2012 that the CFPB initiated their first round of large bank audits and change started setting in. Over the next two years, some banks stopped selling debt altogether while others dramatically reduced the amount of portfolios available for purchase. Impact was felt immediately among large debt buyers who purchased direct and later on from secondary buyers. If that wasn’t enough, the CFPB started auditing non-bank financial institutions in 2013, which included debt buyers, and the staggering cost of compliance started settling in. Feasting quickly became famine and debt buyers focused on the banking sector were forced to make quick decisions to survive.

Today, debt buyers are marching to a new drummer. The large issuers and other credit grantors that sell portfolios are no longer calling the shots themselves. Government regulators including the CFPB and the FTC are driving market conditions today, demanding fewer vendors and more operational oversight than ever before.

Now that I laid out the playing field, I will list my reasons why I strongly believe that a major consolidation among US debt buyers will result:

  1. Large credit card issuers have dramatically reduced loan originations and delinquencies dropped significantly as consumers paid off debt incurred prior to 2008, resulting in significantly less debt available for debt buyers to purchase directly. Debt buyers will gobble up each other to feed their operations as evidenced by some recent moves made by Encore Capital.
  2. The secondary debt selling market, a pillar of success for most debt buyers, has been completely decimated, dramatically impacting the profitability of debt buyers that relied on resale to recoup costs of buying large portfolios through secondary sales. The removal of the secondary debt selling market has also severely crippled the small (zip code) and mid-size debt buyers, forcing them to look at other market segments for survival or selling their portfolios to larger debt buyers and shuttering operations.
  3. The significant and consistently escalating cost of operating a debt buying company has created a true barrier of entry for new participants to form, resulting in fewer players overall.
  4. Overbearing compliance requirements have made buying portfolios nearly impossible for most debt buyers who lack the stability and transparency demanded by the few issuers selling portfolios today. The few credit card issuers who are selling have dramatically cut the number of debt buyers they sell to in order to comply.
  5. Capital is not readily available to most debt buyers like it was leading up to the Great Recession.
  6. Emerging markets and other asset classes have not created a sustainable flow of new accounts to replace the shortfall in the market from large issuers not issuing new credit at levels realized prior to the Great Recession.

This topic, and other important topics, will be covered by Rozanne and me during our Leadership Series Webinar (click here to register) on September 24, 2014 at 2:00 P.M. EST.


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