Creditor Survey Underscores Anxiety about Current Economic Conditions

InsideARM’s recent Confidence Survey of credit grantors reveals both an unassuaged grasp of the struggling U.S. economy’s potential to impact negatively consumer payment patterns and, at the same time, the entrenched belief that their partners in the ARM industry will rally to improved performance over the next year.

Last month, insideARM launched a series of Confidence Surveys directed at creditors, collection agencies, and vendors that support receivables management. After analyzing the results from hundreds of respondents, the findings from the contingency collections market were published June 17 on insideARM. The data that follows here represents the combined perspectives of professionals in two creditor industries—financial services and healthcare—with particular emphasis on the healthcare arena. Please note that all statistics expressed within this report are drawn from survey participants who identified themselves as “creditors.” Later this week, Inside Card & Creditor Receivables will follow a parallel tack, but with banks and card issuers at the forefront of the analysis.

In elementary terms, the creditor survey validated what most Americans already know about the troubled U.S. economy. The confluence of a mortgage crisis, rising unemployment, and upticks in the price of gasoline and foodstuffs that appear to surge ever higher on a weekly, if not daily, basis is weighing heavily on consumers’ minds and pocketbooks. While economists and government financial regulators continue to engage in semantic disputes over the veracity of claims that the U.S. economy is in recession, regular Americans are acutely aware that eggs and milk cost more today than they did last fall, that ten dollars barely buys them two gallons of gas, and that companies large and small across the country are trimming their payrolls with the apparent aid of a dull machete.

A recent Washington Post article that breaks down the incongruity between consumers’ impressions of economic circumstances and the actual state of the economy argues that however great the disparity between “reality” and confirmable “fact” in relation to the current financial crisis, public perception hurriedly alters consumer behavior. For example, following the monthly announcement of negative employment figures, or in the wake of an especially dismal week for the stock exchanges, consumers are apt to declare that the sky is falling, even if they possess adequate job security and do not invest in the financial markets. Pessimistic sentiments about the country’s monetary compass are likely to constrain consumer spending, further exacerbating an already bleak situation. For credit grantors and the ARM industry, reductions in spending not only herald fewer new purchases, they also lead many households to keep a tight rein on all cash outlays. The end results of this behavior translate to higher rates of delinquency and drastically lower recovery rates for creditors and collection agencies, respectively.

In light of the fact that American consumers are fending off concurrent assaults on their household finances from multiple directions, an examination of how creditors assess the relative impact of broad economic forces on consumers, and ultimately on recovery rates, was warranted.

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Impact of Broad Economic Forces on Recovery Performance [Combined Results]

Among all creditors surveyed, Consumer Debt Levels were cited by a majority of participants—60 percent—as having a “Major Effect” on their recoveries. Unemployment and Rising Food and Fuel Costs, at 56.5 percent and 50 percent, respectively, closely followed outstanding consumer credit as representing the second and third most likely sources of “Major Effects” on converting receivables to cash.

Interestingly, the numbers corresponding to “Some Effect” and “Major Effect” in each of the categories except Health Costs are more or less evenly distributed when responses from the healthcare industry and the financial services industry are aggregated.

Not surprisingly, those distributions shift markedly when healthcare credit grantors’ viewpoints are studied in isolation.

For healthcare creditors only, Health Costs garner the greatest percentage—62.5 percent—of “Major Effect” answers. The threat of Bankruptcy was also perceived by 62.5 percent of this group to influence recovery rates, but only to the extent of “Some Effect.”

Impact of Broad Economic Forces on Recovery Performance [Healthcare Results]

The one component indicated by an overwhelming majority of healthcare creditors, albeit restricted to the level of “Some Effect,” unexpectedly turned out to be the Housing Market. One might assume that increases in healthcare expenses would directly correlate to deteriorating recovery rates for hospitals and physicians, thereby rendering Health Costs (by percentage of responses and degree of influence) the most important factor for the healthcare industry. But it stands to reason that the widespread reach of the housing crisis, both in terms of geography and demographics, might be seen to circumscribe the impact of Health Costs, even when evaluated solely in the context of healthcare creditors. For Americans struggling to save their homes from foreclosure, credit card and hospital bills are apt to occupy a lower position on the totem pole of consumer priorities, at least in the minds of healthcare creditors.

With good reason, much has been made of late regarding the impact these factors have had on U.S. consumers and the economy at large. For creditors, these factors have only escalated the continued deterioration of collecting outstanding receivables as charge-offs and delinquencies across a broad spectrum of consumer credit products have continued upward, placing additional burdens on the recovery departments of these institutions.

Though the potential impact of rising bankruptcies, unemployment, and household debt levels remain a focus of concern for creditors, the results of the Confidence Survey show that the performance of internal recovery efforts have not been affected as adversely as presumed.

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Internal Recovery Performance [Combined Results]

Of creditors surveyed, none characterized their current internal recovery performance as “Poor,” while only 28.6 percent said that current performance was “Weak”. The majority of respondents, more than 44 percent, characterized their performance as “Average.” Surprisingly, among the same group, nearly 23 percent characterized performance as “Strong” in the face current economic conditions. Overall, 71.5 percent of creditors characterized current internal recoveries as “Average,” Strong,” or “Excellent,” a testament to increased emphasis placed on receivables management efforts by creditors.

The survey also revealed that the majority of respondents viewed future internal recovery performance in a more favorable light than the headlines would otherwise suggest.

Amid the doom and gloom of the credit crisis, nearly half (48.6 percent) of all respondents still expected average recovery performance six months hence, though more than 34 percent of creditors indicated they expected weak performance. This increase of nearly 20 percent in creditors expecting weak performance suggests that recovery efforts in the midterm may prove difficult for an increasing number of institutions.

Many more creditors seemed to view their long-term internal recovery performance in positive terms. More than half (54.3 percent) of respondents indicated recovery performance would remain average twelve months hence, up from 48.6 percent. While the number of creditors who expected performance to be poor declined from 34.3 percent to 18.6 percent. Those expecting strong recovery performance increased from 12.9 percent to 21.4 percent, showing that a strong majority (80 percent) of creditors expect recoveries to remain average or better by 2009.

Similar to their internal recovery performance, creditors who outsourced parts of their receivables management seemed more optimistic than current economic conditions would lead many to believe concerning the future recovery efforts of their service provider partners.

Service Provider Recovery Performance [Combined Results]

Of creditors surveyed, nearly 43 percent expected the recovery performance of their service providers to remain average six months hence, though signs of continued moderate weakness persist with more than 36 percent expecting performance to be weak. More than 18 percent expected service provider performance to be strong for that time period – indicating a segment of creditor respondents had already begun to modify recovery strategy – while the extreme ends of recovery performance, poor and excellent, both accounted for 1.5 percent of responses.

For the period twelve months hence, increased stability seems to prevail. Nearly 54 percent of creditors expected the performance by their service providers would be average, an increase of nearly 27 percent from the six months hence total. Additionally, creditors expecting the performance of their service providers to be weak decreased from 36.4 percent to 18.5, while creditors expecting the performance of their service providers to be strong increased from 18.2 percent to 23.1 percent. In total, for the period 12 months hence 78.4 percent of creditors expected service provider performance to be average or better.

A generally higher level of optimism about anticipated service provider performance emerged from the survey results contributed by healthcare creditors. While 25 percent of healthcare credit grantors predicted weak recovery performance from their service providers in the ARM industry both six and 12 months hence, another 25 percent of respondents who see average performance in the next six months expect that average performance to drop to 12.5 percent in 12 months.

Service Provider Recovery Performance [Healthcare Results]

And that 12.5 percent shift from six to 12 months hence is absorbed into a positive performance increase in the “Strong” category; where half of all respondents look forward to strong performance by the end of 2008, 62.5 percent of healthcare creditors believe that their ARM partners will achieve strong recovery performance by mid 2009.

Compared to the aggregated data from all credit grantors in the survey—where only 23.1 percent of respondents foresee strong performance from ARM service providers—healthcare creditors hold a much sunnier view that their receivables outsourcing partnerships will produce positive results in collecting delinquent patient accounts.

This data substantiates Kaulkin Ginsberg’s belief that successful receivables management strategies in the healthcare space will be best advanced through open dialogue and continued information sharing between healthcare providers and the collection agencies, debt buyers, and vendors in the ARM industry.