Changes in the debt collections market

Economic conditions are accelerating the rate of change in the debt collection market.

In the November 2008 issue of Credit Today current developments in the debt collection market are described. It is clear that economic conditions are accelerating the rate of change in this market. ‘While more work may be coming in, most debt collection operations are struggling to get settlement of debt in the same way, particularly of large sums’ says Ken Maynard, chief executive of debt buyer Cabot Financial.

A recent study analysed 383 debt collection agencies (DCA’s) and found 113 were losing money and 97 were running a dangerously high risk failure. ‘This is a direct consequence of the abrupt halt of refinancing options for defaulting customers’ according to Ken Maynard, ‘Life is very difficult for DCA’s who work on a commission basis because the larger the sums they would typically collect aren’t coming through.’ Debt collection agencies also have to contend with the costs of increasingly stringent regulation and, more importantly, of raising capital during the credit-scarce times. Maynard believes that the difference between winners and losers will be their ability to adapt to the current climate. ‘Diverse businesses that can adapt readily and aren’t working on a hand-to-mouth cash flow basis will clearly have a better time of it. Business that can’t adapt readily because of their structure or are limited in their customer base by relying on one or two clients, or start to falter in their cash flow will be the ones that struggle most’ he says. Size is an issue. With clients looking to increase the amount of debt they place with larger agencies, smaller agencies may struggle to service increased volumes of debt.

‘We expect that the DCA’s who maintain a traditional, generic basis to their business will come under the most pressure, as creditors become more sophisticated in their approach, expanding their panels, using their own data resources more intelligently and improving their ability to segment customers accurately at the front end and effectively apply score cards’ says John Telford, director of recoveries management at TDX Group.

Shaun McName, partner of transaction services at PricewaterhouseCoopers believes there will be a gradual segmentation of the market: ‘There’s going to be increasing competition and the only way around that, particularly at the commodity end of the market, is to make sure you have a specialism that you are particularly good at.’ However, Mike Purvis, managing director at Transcom’s UK operations argues that broader capabilities will be crucial: ‘Clients are increasingly looking for strategic suppliers that can do everything from early stage collections through to legal rather than have a panel of say 20 agencies’ he says, DCA’s will need economies of scale to compete and having a European or even global footprint is becoming more of a requirement.’

To read the complete article go to page 3 of: http://www.credittoday.co.uk/filestore/homePDF/ct_nov08_supp.pdf