The U.S. accounts receivable management industry is highly fragmented, with approximately 6,500 companies generating $16.7 billion in revenues in 2006. Industry revenues are expected to reach $22.2 billion in 2011, indicating an expected five-year compound annual growth rate of about 6%, according to the 7th edition of The Kaulkin Report. Competitors include large, publicly-traded companies, small private equity-backed firms and divisions of Fortune 500 companies. There are four distinct markets within the industry: Debt Buying – 20% of the industry Contingency Collections – 63% of the industry First Party Collections – 12% of the industry Collection Law Firms – 5% of the industry
The term "consumer receivables" generally refers to debt obligations of individuals resulting from the purchase on credit of goods and services for personal consumption. This includes credit card transactions and bank, retail and other loans to purchase appliances, furniture, automobiles, boats and other consumer goods and services. Over the past few years, American consumers have incurred substantial consumer debt with increasing frequency and magnitude.
The collection of debt has existed as long as credit has been extended. The organized selling of non-performing consumer debt in packages or portfolios, however, is a more recent development. It was not until the late 80’s when the Federal Savings and Loan Insurance Corporation (FSLIC), Federal Deposit Insurance Corporation (FDIC) and Resolution Trust Corporation (RTC) began selling the assets of failed banks and thrifts that the secondary markets for distressed debt began to develop significantly. As these secondary markets grew and the sale of government assets dissipated, the distressed debt buyers began seeking out other markets, such as the credit card industry, for a new source of debt.
Consumers in the United States are highly leveraged, paying an increasing share of their incomes to cover their debts, according to the Federal Reserve. As economic growth slowed in the first half of 2007, more consumer debt became delinquent or went into default. The U.S. consumer is being stretched financially due to inflationary pressures on consumer non-durables such as food and energy, and to further accentuate the problem the current housing crisis has made it very difficult for struggling consumers to pay down revolving credit through a home equity loan.
These trends and other economic conditions will place more financial pressure on American consumers, particularly as credit quality continues to weaken and as the economy finally turns. As reported by the Nilson Report (Number 901, April 2008), over $68.2 billion of debt was purchased directly from card issuers in 2007. This is up from approximately $52.6 billion in 2006, an increase of nearly 30%. When including total purchases of all types of debt, including debt purchased directly from the originator and from other buyers, the growth is even more dramatic. Total industry purchases grew more than 50% from $59.1 billion in 2006 to $91.1 billion in 2007. Increasing Levels of Consumer Credit
According to the Federal Reserve Statistical Release (G.19 Release – Consumer Credit, August 7, 2008), the total amount of consumer credit outstanding in the United States at the end of June 2008 was about $2.59 trillion. This figure takes into account both revolving and non-revolving credit extended to individuals, primarily for purchasing goods and services for their personal use. Of this amount, about $968 billion is revolving debt, primarily credit card debt.
The Nilson Report (Number 902, May 2008) indicated that, at the end of the year 2007, there were about 288.9 million general purpose credit cardholders in the United States, holding about 708.6 million general purpose cards, or more than two cards per cardholder, on average. That same publication notes that the total outstanding balance at that time was about $848 billion or about $1,197 per card. Increasing Charge-Off Rates
According to the Federal Reserve, there has been an upward trend of credit card charge-offs from commercial banks over recent periods. The charge-off rate as of Q2 2008 was 5.47%. This is up from a low of 3.13% in Q1 2006, an increase of more than 230 basis points within a 10-quarter period in which total revolving credit outstanding increased by approximately 16.8%.
In general, the issuers attempt to collect delinquent debt prior to charging it off. In addition to attempting to collect the debt with the issuers’ internal collection departments, many accounts are placed with either collection companies or collection attorneys. Even after charging the debt off, the issuer may place the accounts with collection companies or attorneys for additional collection efforts. This debt may be placed with none, one, two, three or more outside collectors prior to being sold. Some debt issuers are willing to sell on a "forward flow" basis, meaning that they agree to sell a specified volume of debt with an agreed upon frequency for a pre-determined price. Forward flow prices are typically a bit less than the prices for single purchases because of the guaranteed nature of the transaction. Industry Regulation
The debt buying industry is regulated at the federal level through the Federal Fair Debt Collection Practices Act ("FDCPA"). As noted by the Debt Buying Association International, ("DBA"), The FDCPA prescribes strong consumer protections. The FDCPA does not reach creditors collecting their own debts, but does reach members of the debt buying industry. The FDCPA’s comprehensive privacy protections include:
- Restrictions on collectors from disclosing information about a consumer’s debt to third parties.
- Prohibitions on oppressive, harassing or abusive collection behavior.