New World Order? The Recession's Lasting Impact on the ARM Industry

While no one can know with absolute certainty when current recession will end, there is little question that for the majority of Americans, the world has indeed changed. While consumers are struggling under the weight of $2.6 trillion of consumer credit outstanding, a major paradigm shift is underway, influencing consumer behaviors and attitudes toward debt. ARM companies must understand and monitor these trends and act now to mitigate the risks to their future success.

ARM companies are not immune to the recession, and starting last year, they began to feel the effects in the form of increased placements, declining liquidation performance, and eventual staffing cuts. Then in January 2009, an unanticipated change in consumer behavior hinted at the possibility of an early recovery for collection agencies: the U.S. savings rate, which had hovered at or below one percent since the first quarter of 2005, suddenly spiked. By May 2009, the personal savings rate in the U.S. approached seven percent, up from 5.6 percent in April, according to the Commerce Department. The May 2009 rate was the highest level of savings by consumers in 16 years.

Typically, an up tick in the U.S. savings rate would indicate fiscal responsibility on the part of consumers as they attempt to buffer themselves from unexpected adverse events. Under ordinary economic conditions, ARM professionals might have justifiably interpreted the savings rate change as a positive sign. But the first half of 2009 has proved to be anything but conventional, and the collection industry’s expectation that increased consumer savings would lead to improved debtor payment patterns has been cast into doubt.

First, the sustainability of savings growth is questionable because at least a portion of the increase is the result of one-time disbursements to consumers under the Obama stimulus package. Second, consumer savings may be reactively earmarked as a means to merely tread water as opposed to future planning to meet financial obligations to creditors. Unemployment, or anxiety about potential job loss, has a commanding, negative influence on consumer spending. Third, while savings boost personal income, they retard consumer spending, the primary engine of economic growth. Ironically, that which on its face appears to be sensible consumer choices will likely delay an emergence from the economic crisis. Evidence of the recession’s magnitude is never more apparent than when good news is bad news.

Myriad macroeconomic forces, such as foreclosure, bankruptcy, and unemployment are acting on debtors in a way that will necessarily change successful collection strategies. For perhaps the first time in the history of the ARM industry, collection professionals may need to consider how to maintain profitability when a growing number of debtors cannot – rather than will not – pay.

Positive Signs for the ARM Industry to Look For
The future success of ARM companies is fundamentally dependant on broader U.S. economic recovery. Precisely how and when that recovery will be realized is the Gordian knot of all financial forecasting. That said; informed conclusions can be drawn about the requisite foundation for ARM industry growth in 2009 and beyond. These factors include:

• Material employment gains: the single greatest drag on collection industry recovery performance is assignable to debtors maintaining gainful employment. Real wage gains, however unlikely, would further bolster the impact of reduced unemployment.

• Resurgence of the U.S. housing market: because consumers’ largest assets are typically their houses, keeping existing mortgage-holders in their homes, reforming lending guidelines for first-time entrants to the market, and stabilizing prices of existing home inventories to stimulate new real estate investments is vital to rebuilding the equity in consumers’ homes and bolstering revenue in related industries such as manufacturing and construction.

• Renewed consumer confidence and spending: consumer spending drives approximately two-thirds of GDP and thus serves a crucial role as an engine of economic revitalization.

• Calculated ARM industry responses to legislative and regulatory reforms: the collection industry can do little to stem the impending tide of pro-consumer reforms. Its true capacity to affect change will be determined by the degree to which responses to new regulations are carefully considered and level-headed.

• Increased access to credit: consumers must be able to borrow and spend on the basis of open access to credit. Similarly, the ARM industry must be allowed to avail itself of new sources of open and patient capital to fund not only operating expenses, but product and service line development, capital expenditures, and M&A activity in order to effectively grow their businesses.

Complacency is the death knell of collection agencies in the wake of the current recession. In order to thrive, collection agencies must put aside antiquated notions of debtors as adversaries and re-imagine both creditors and debtors as clients. They must revisit one-track service offerings, filial allegiance to unprofitable clients, outmoded technology platforms, vulnerable security protocols, and obsolete accounting methodologies. Companies that evolve their businesses in real-time based on the new world born of this crisis will prosper; those that are content to idly weather the storm set the stage for their own demise.

Yesterday, Wednesday July 22, Kaulkin Ginsberg analysts took a detailed view of how converging economic forces are influencing consumer behavior in surprising ways, and why a fresh approach to working with debtors is more critical than ever.

“ARM Industry Mid-Year Update: Intelligence for Navigating a Turbulent Market” covered how these evolving trends will likely impact first-party & third-party collections, legal collections, and debt purchasing in the next 12 to 18 months. Visit http://www.insidearm.com/go/executive-conference-calls/arm-mid-year-update for more information.

Michael Klozotsky provides advisory services and conducts market analysis on the accounts receivable management industry. Contact Michael by email or at 240-499-3836.