Did you see the headline news last week on insideARM.com? Total credit card debt outstanding was down to $800 billion in October (“Consumer Credit Expands in October, But Credit Cards Fall Again,” Dec. 8). It hasn’t been this low since the end of 2004/beginning of 2005! Add this to the previous announcement that the average credit card charge-off rate declined 20% in Q3, and I’m ready to pack it in and take a holiday!

Despite these doom and gloom market trends, there has been some good news over the past year: we saw liquidation improvements in almost every stage of delinquency from 2009 to 2010 (see the chart below, which is from my ACA Fall Forum presentation – click here to see a PDF of the full presentation).

Average Credit Card Liquidation Decline*

Stage of Delinquency 2007 to 2008 2008 to 2009 2009 to 2010
Fresh 20% – 30% 30% – 40% -10% – 5%
Primary 20% – 30% 30% – 40% -10% – 5%
Secondary 25% – 30% 20% – 30% -5% – 10%
Tertiary 20% – 30% 20% – 30% -5% – 15%
Quads+ 15% – 25% 25% – 35% 0% – 20%

* The negative percentages in the 2009 to 2010 column represent an average liquidation improvement during this period.

The improvement in liquidation performance began in Q4 2009 and has continued throughout this year. Here are the primary reasons for the liquidation improvement:

  • More debtors were able to make payments on their outstanding debts as a result of tax rebates and other government stimulus programs
  • Credit issuers and debt buyers implemented more aggressive legal liquidation strategies and settlement policies
  • With credit issuers and debt buyers announcing vendor network consolidation plans, first and third party collection agencies increased their focus on maximizing liquidation results in order to maintain their competitive rankings
  • Unemployment rates stabilized and improved slightly in 2010 vs 2009

Over the next year, I expect the volume of delinquent and charged off credit card debt to decline further and eventually bottom out, most likely by mid to end of 2011. This will cause further consolidation among vendor networks, which will result in increased competition that will ultimately drive out underperforming collection agencies and debt collection law firms. For those companies that survive, they will reap the financial rewards of greater market share in a highly efficient and less competitive market environment.

I also anticipate liquidations to either stabilize or improve further over the next year as collection agencies and law firms continue to focus on maximizing their competitive performance and consumers continue to focus on cleaning up their financial situations. I also believe that future portfolios will most likely incorporate “better quality” debtors. By better quality, I mean more prime, less sub-prime, debtors who may have assets to pursue and wages to garnish, or at the very least will have a greater chance of becoming re-employed at some point in the future.

So what can collection agencies and debt collection law firms do to maximize their chances of survival in the credit card sector? Here are a few suggestions:

  1. Make your collection operations as efficient as possible – Reduce/eliminate excess capacity within your call centers, streamline your liquidation strategies by automating as much of the process as you can
  2. Focus on profitability – DO NOT take on loss leaders unless you know for sure that they will not destroy your business
  3. Prioritize your inventory and focus your resources on those client portfolios that maximize your profit potential – it’s better to lose some underperforming streams of business even if they are coming from a top 5 credit card issuer than allowing them to negatively impact your company’s financial performance
  4. Terminate underperforming staff – I realize it’s the holidays, but one of the worst things that ARM companies can do is retain underperforming collectors; not only does this impact your liquidation results, it drains your financial and business resources
  5. Diversify into other markets – I mentioned this in my last blog about the credit card sector and I will keep repeating it – THE BEST WAY TO SURVIVE IS TO DIVERSIFY
  6. Implement new strategies to maximize liquidation performance for clients – I will share some of my ideas in next week’s blog.

Thanks for reading and as always, feel free to call me with questions.

Mark Russell manages M&A transactions for Kaulkin Ginsberg. To confidentially discuss your business interests, please contact Mark Russell at 240-499-3804, or by email.

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