ARM in the Credit Card Sector: A New Opportunity Unfolding

Mark Russell

Recently, I attended the DCS conference in Las Vegas, a conference I hadn’t been to in a few years. If you’ve never attended it but have a current focus in or desire to enter the consumer financial services market, I would recommend it. The conference attracts both vendors and credit issuers focused on various consumer financial services markets, particularly the credit card sector.

My absence had nothing to do with the conference itself, but rather was driven by the decline of activity and opportunity within the credit card sector. Over the past few years it has become increasingly difficult for vendors to generate an acceptable profit margin in this sector due to declining business volumes (see chart below) and stagnant liquidation results. Add to this dilemma a need to adhere to ever-changing government regulation and client compliance requirements, it’s no wonder many ARM companies who have historically focused in this sector have been trying to diversify away from it.

While placement volumes have reverted back to pre-recession volumes, liquidations have not and most likely will not for the foreseeable future. However, despite these trends the credit card sector continues to be one of the larger generators of accounts receivable management (ARM) revenues. So, if this is the case then where is the opportunity today for vendors to make money and grow in the credit card sector?

That has been a tough question to answer, but a new, unexpected opportunity seems to be unfolding as a result of the current market trends and the ARM companies taking advantage of it are not the type you would expect.

Is it debt buyers?

Back in 2010, debt buyers thought they were going to experience a rise in portfolio sales from credit issuers as a result of price increases, which had been driven predominantly by a decline in portfolio sale volumes.

However, credit issuers haven’t increased their portfolio sale volumes. In fact, sales have decreased due to overall placement volume declines, but also because issuers are concerned about legal backlash from state and federal regulatory authorities as well as negative publicity in the marketplace. Certain credit card issuers who have historically sold portfolios at the later stages of delinquency (tertiary and beyond), have postponed their sales at this time because of these concerns.

With the exception of 2011, when several prominent debt buyers sold large portfolios as they exited the market, sales in the secondary market (debt buyer to debt buyer) haven’t increased much either despite a growing interest in the marketplace – sellers’ pricing expectations aren’t being met in most cases.

Today, debt buyers are concerned that not only will the credit card portfolio sale market remain sluggish, but upcoming regulatory changes from the Consumer Financial Protection Bureau (CFPB) may ultimately make the debt purchasing industry extinct – not because debt buying will become illegal, but rather unprofitable for the acquirers and too risky for the sellers. So, no it’s not debt buyers.

Is it contingency collection agencies?

Contingency collection agencies were also excited about their growth potential in 2010 because placement volumes were still rising and liquidation results were improving. This changed in 2011 when volumes declined and liquidation results remained flat. Some agencies have experienced growth in the credit card sector over the past two years by generating superior liquidation performance while meeting or exceeding client compliance requirements, resulting in an increase in market share of existing business streams and access to new streams/clients. However, the majority of credit card agencies have experienced flat or declining revenue performance as credit issuers and debt buyers, have consolidated their vendor networks to those agencies that are the best at maximizing performance while maintaining regulatory and client compliance requirements.

Today, most collection agencies who historically specialized in credit cards are now seeking to diversify away from this market. So no, it’s not collection agencies.

Is it debt collection law firms?

One would assume that given the amount of emphasis credit issuers have placed on vendors adhering to regulatory and compliance requirements, a greater portion of their placement volumes would be forwarded to their legal networks. Originally this was the case, however, with “robo-signing” and documentation issues arising over the past few years, some credit issuers have become concerned about their legal solutions, which caused them to reduce or in some cases, eliminate their legal collection strategy.

So no, it’s not debt collection law firms.

As I was engaged in discussions during the DCS conference, I concluded that the biggest common concern facing collection agencies and issuers involves new regulations that the CFPB may implement, and how these new rules are going to impact their ability to conduct business. This is not surprising given that compliance seems to have become the most important criteria for credit issuers when determining which services they are willing to outsource, and which vendors they are willing to hire.

With that in mind, it would make sense that collection vendors that are capable of helping their clients manage their compliance risk would receive greater business opportunities. This is exactly what is starting to happen.

Some ARM companies have developed, or are in the process of developing, proprietary systems and processes that enable credit issuers to better manage their legal and non-legal collection strategies, helping them ensure that their vendors are adhering to government regulations as well as their own compliance requirements. These ARM companies are hybrid technology and service providers. They are being recognized as strategic partners by their credit issuer clients and receiving significant business opportunities as a result.

While it is too early to say that we are in the midst of an evolutionary change in terms of how ARM services will be provided to credit card issuers, it appears that a new opportunity is starting to unfold for those ARM vendors who can best protect their clients from compliance risk and generate strong liquidation results. These ARM companies will receive the lion’s share of available business going forward and experience the greatest growth potential in the credit card sector.