Creditors Are Shifting Strategy: Soon, Less will be More

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.

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.