Creditors Are Shifting Strategy: Soon, Less will be More
As a result of economic pressures, a shift in creditor strategy is taking place in the industry. This change in approach has the potential to reshape many collection agencies in the coming years -- in ways that are not at all obvious today.
Credit issuers seeking recoveries of charged-off debt have grown impressive networks of service providers in recent years. More collection agencies have been hired as volume has grown. Buyer lists for portfolio sales have lengthened, with credit issuers seeking to identify potentially capable buyers. More first party agencies, collection law firms, and even technology vendors have been added to recovery networks as credit issuers have sought to handle more charged-off paper.
Why? Collections and recoveries have always been mainly outsourced business functions. An issuer cannot effectively handle all of its charged-off accounts, so specialty service providers are hired to do so. No surprises here.
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Here’s the surprise: a shift is taking place in the industry that counters these basic strategies. This shift has the potential to reshape many collection agencies in the coming years, in ways that are not at all obvious today.
Rather than call on more service providers, credit issuers are beginning to reduce their number of collection agencies they work with, requiring the remaining companies to take on more accounts.
As the poorest performers are removed from these collection networks, certain collection agencies will lose their most important clients. Creditors will also have less reason to work with companies that pose reputational risks. The financial performance of these companies will suffer, and company value will fall as well, with some owners forced to sell their companies in distress.
At the same time, the best performers will see increased placements, less competition, greater leverage on contract terms, better revenues, and improved profitability. For obvious reasons, these companies will become the most attractive acquisition targets.
The same type of shift is also taking place within the debt buying market. Rather than call on more debt buyers, as credit issuers did in the boom years before the recession began, some credit issuers are reducing the number of companies they approach for portfolio sales, preferring to negotiate directly with a specific buyer rather than conduct a broader auction process.
Smaller, less capable debt buyers will see fewer purchase opportunities from these issuers. Here again, concentration within the primary debt sales market will increase. (This does not include the resales.)
As an example of why these shifts are taking place, look at the financial markets; after this year’s run-up in the market indexes, would you rather own an S&P 500 index fund, or would you like a portfolio of 10 equities with the greatest chance of outperforming the market? Value-oriented investors are looking at the market and choosing the second strategy.
Recovery executives within credit issuing companies will increasingly be making the same kind of choice, choosing concentration within their vendor networks over broader diversification. This shift will have important ripple effects throughout the industry as the economy continues to emerge from recession.
Paul Legrady provides management consulting services to creditors and receivables management companies. To confidentially discuss your interests, contact Paul at 240-499-3818, or by email.
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Comments
Comment from MJ on September 21, 2009 at 11:34AM EST
I am not seeing this. We collect for large creditors and are seeing agency networks growing across the board. The growth is proportional to increased delinquency...which creates challenges in and of itself (namely getting about the same volume of placements, but a significantly lower liq). Not sure what you're basing your assumptions on, but at least in my world you're off the mark.
Comment from nad3800 on September 21, 2009 at 2:45PM EST
I also think your theories are incorrect. I think if the pool of third party collectors shrink there will be no effect excet, perhaps greater bargaining power for the creditors. Also, I see DB trying to get closer in the chain of title to the o/c but I don't seea collapse in the market for retrades or flips. Sure there will continue to be champion challenger competition w/ more placements going to the better performer, which breeds competition which also drives down bargaining power. The point is you are making many general assumptions without any supporting data, without factoring a multitude of variables. I'm sorry but I don't think your article was well thought out.
Comment from JH on September 21, 2009 at 2:57PM EST
We have found that creditors, and/or debt owners are recovering discounted balances earlier by listening to and accepting debtor-offered settlement proposals where clear debtor hardship exists.
Businesses in debt, wanting to stay in business, seem to be a good source of funds where otherwise no payments would exist.
Creditors, Collection Agencies, Debt Buyers have much to gain and little to lose if discounted settlements result in early payment.
In essence, a Bird in the Hand is worth two in the Bush.
Comment from Paul Legrady on September 21, 2009 at 3:36PM EST
The composition and size of vendor networks do change. Bottom performers are always removed over time. Chargeoff rates will also decrease over time. Smaller vendor networks do increase bargaining power of creditors, but after all they are the clients, and the agencies are the vendors. Lesson to all agency owners: be on or near top of the batch tracks, or you'll lose more of your clients over time.
Comment from DONALD DALY on September 21, 2009 at 4:42PM EST
This article is right on the money, no pun intended, unless the creditor intended to accept less than what the debtor owes or is selling a service that offers that. I have found that for an collection agency to succeed it must have profitable clients! Get rid of the low/none performing clients!! Let the creditor clean up their policies at their own expense, not yours. If an agency is consuming too much time and effort trying to make something out of nothing for a client that is unprofitable,vs directing that time and effort to clients who are profitable, that agency is probably not going to make it. Networking and new technology can drive an agency upwards once the initial procedures are in place but each client should meet YOUR standard and create profit or you will not succeed. Settling debts for less than what is owed is a poor example of good business ethics. The message it sends, except in extreme situations, is either you are overcharging your customers or you will work for nothing. Once that message gets out you have postioned yourself between a rock and a hard place. Once you have demonstrated you will take less than your standard charge your existing customers will expect the same consideration, then what? If you step off that ledge you had better be equiped to survive the fall.
Comment from Christine on September 21, 2009 at 10:03PM EST
Your article IS right on the money, but it won't stay there. I have been in the collection industry for 40 years-as a collector, supervisor, assistant manager and manager, etc...(never an owner...BY CHOICE...had the chance, but didn't want or need the headaches!) The majority of my years were spent in Buffalo, NY...the collection "mecca" of the US. Fortunately, I was with superlative agencies during that time. I also have a few years in litigation collections...which is a huge, growing industry these days.
This trend we are seeing now is nothing new...it has taken place more than once in the years I have done this work. The collection industry is an economy-driven business and if you go back over the years, you would find that agency saturation is like the ocean tide-rising and falling-in conjunction with economic performance world-wide.
The end result is that the "cream-of-the-crop" agencies will always rise to the top, while the under-performers sink. In the financial pressure-cooker we are experiencing now, the client companies HAVE to revamp their policies to stay alive and profitable.
So, to limit their exposure to less-than-desirable agencies, ergo their possible exposure to lawsuits for FDPCA violations and seeing far too many below-balance settlements within those under-achievers, it is natural for them to be willing to stay with the top performers; those who not only produce on the bottom line, but who abide by the laws and keep their FDCPA complaints within reasonable limits.
Now, in say...7-10 years...we may very well see the market come back to what it has been...all kinds of "portfolios" for sale for pennies on the dollar and again these "little guys" will pop up...for a time. It is really all cyclical!
Comment from MJ on September 22, 2009 at 10:29AM EST
I still disagree. I, too, have been in agency management for several decades, but I've yet to see a reasonably-sized creditor (one with at least 4+ agencies at a primary level) reduce the number of agencies in their network. I've seen many poor performers REPLACED, which has always been the case with any on-the-ball creditor...but replaced with another agency. Most creditors I deal with have added additional agencies (had 4, now have 6, etc) over the last year or so.
I've yet to see a creditor actually reduce the number of agencies in their network...and I can't imagine how one could given today's high volumes.
Regardless, I think everyone agrees that if your agency performs and can still make a reasonable margin, it's a moot point.
Comment from petech on September 22, 2009 at 8:40PM EST
As a debt issuer 10 yrs ago we used 19 agencies and 2 buyers, now we use 22 and the same 2 buyers but we have also become a buyer and expanded our collection dept while holding on to the debt longer.
Comment from DABABE8@COX..NET on September 23, 2009 at 5:23PM EST
"Collections and Recoveries mainly outsourced functions"???? Where does this come from? Creditors have collected pre-charge off accounts for decades, albeit ill advised in my opinion, until 1980 when an in-house third party program was instituted on a T & E card product with a 360 day write-off policy. Recoveries I agree but collections, I must object.