How Will the Collection Services Industry Survive this Recession?

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How Will the Collection Services Industry Survive this Recession?

Marketdata published the seventh edition of its regular report, U.S. Debt Collection Agencies: An Industry Analysis. This year, the document weighs in at 160 pages, and comes with a price sticker of $1,795.

Collection Agency Services Fighting to Survive

Sadly, fewer collection agencies will be able to afford to buy it in 2009, because, as the report discloses, the business is far from thriving.

Amongst the report's key findings one learns that the collection services industry is:

• A $12 billion business


• Made up of 6,500 companies, most of which are small or very small firms


• Undergoing a period of intense consolidation


• Now led by NCO Financial Systems, which accounts for 10 percent of all sales


• Facing unprecedented--indeed, exploding--levels of consumer complaints about harassment

But, perhaps the report's most telling finding comes in the form of a question. This asks: "Is this industry recession-proof, or even recession-resistant, anymore?"

And the implied answer is a resounding No.

Bill Collection Business Model Changing

Nobody likes a recession. But there was a time when the collections agencies industry was regarded as recession-proof. Back then, recessions generated an increase in the available case load, and thus an increase in the volume of debts liquidated.

But that economic relationship has collapsed. Today, the nation faces:

• Exceptionally high unemployment rates


• Unprecedentedly restricted lines of credit


• Unusually low income growth

All of which adds up to a high proportion of debtors who are struggling to put food on their families' tables, to pay their mortgages or rent, and to keep their utilities connected. Many of them are literally unable to pay down their debts.

A Perfect Storm

And that means that the collections agency industry is facing a perfect storm in which it has to meet the overheads of vastly expanded case loads while at the same time receiving the much-reduced revenues that result from low liquidation rates.

As the Marketdata report notes, collection agency services are laying off people during a period when they should be adding to their payrolls.

Collection Agency Services Face Worse Times Ahead

This is not a time when the industry should be faced with more bad news. But the second publication that was released this week offers precisely that.

Certainly, the Government Accountability Office's (GAO's) report, entitled Fair Debt Collection Practices Act [FDCPA] Could Better Reflect the Evolving Debt Collection Marketplace and Use of Technology, contained nothing positive for collection services.

Tougher Regulation Soon

Senator Carl Levin, D-Mich, who is chairman of the Permanent Subcommittee on Investigations was one of those who commissioned the GAO's report. In a statement, he complained about how poorly the FDCPA is enforced, and about 'ongoing abusive practices.'

He continued: "In today's complex financial world, consumers need a federal regulator that is looking out for their interests, rather than the interests of the financial industry... A Consumer Financial Protection Agency would have the authority to modernize consumer protections against unfair debt collection practices, monitor compliance, and take enforcement action to stop abusive debt collectors."

Collection Services Will Survive

Everyone knows that political pendulums swing. And no capitalist economy can survive without penalties for those who freely enter contracts, and later try to renege on them.

So it is clear that, when America comes out of this economic downturn, it will have both a greater commitment to collecting what is owed, and an expanded pool of debtors who are more able, ready, and willing to meet their obligations. When those things happen, the collection services industry will once again be able to climb to its feet.

But, until then, collection agencies will continue to struggle to survive.

Sources

• Government Accountability Office: Financial Markets and Community Investment, Fair Debt Collection Practices Act Could Better Reflect the Evolving Debt Collection Marketplace


• Inside A.R.M., Government Report Recommends Significant Changes to FDCPA


• Levin.senate.gov


• Marketdata, U.S. Debt Collection Agencies: An Industry Analysis

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