Debt Collection, Legal Collections, CFPB and Debt Buying
What does the future hold for the debt collection industry? Well, it’s not clear but there are many factors that seem to be providing insight into the future of the industry.
The first thing that will change is technology and how the industry uses the technology. As the industry slowly moves towards electronic communication, technology will be more important to the process. Many collection agencies have begun to invest in technology that allows them to use email and text messaging to help them collect bills, provide documentation and maintain payment schedules. I believe that the use of electronic messaging will become more prevalent over the next 2-5 years and will replace the phone call sooner than later.
Fewer Buyers…Bigger Buyers
One of the next things that will happen is the loss of the debt buying industry as we have known it. As debt issuers move to “No Resale restrictions” and some issuers move to insource their debt collection, debt buying as we know it will radically change or disappear altogether. Only a few major debt buyers will be left and their profit margins will be fair but low due to the compliance costs associated with the issuer and CFPB guidelines. This is evinced today by the expansion of debt buyers, like Encore Capital’s movement into other countries and the many statements to investors in the regulatory filings of publicly traded debt buyers about the changing industry.
Collection agencies will face many changes as those placing debt for collection will continue to add more and more onerous burdens on those collecting to ensure regulatory compliance up and down the vendor chain. Technology will be the way bills are collected in the future as text messages, emails and online payment sites become the norm. Staffing levels will continue to decrease and more and more debt will be collected though the use of technology. This will allow the agencies to reduce fees and stay compliant but it will reduce profit margins to single digits. This will also drive larger agencies to grow and smaller ones to decline in numbers.
On a side note; if you still don’t have a way to take and process payments from debtors on your website, you are at least a full decade behind the curve and leaving substantial revenues on the table. News Flash…This internet thing has finally caught on and it looks like it’s here to stay. Get on board!
Issuers are Moving to do More and More Internal Collections
Law firms will be especially challenged as issuers move to better control the collection process and tie their hands to pre-suit collections. Many issuers will be spending lots of internal resources to manage any outsourced debt and this will highly impact the legal collection market. As the issuers reduce the volume of placements by only placing pre-qualified accounts, the legal collection marketplace will be squeezed by a reduction in fees and this will result in single digit profit margins in the legal space.
The struggles created by the CFPB as evidenced by the Fred Hanna acquisitions will also make the legal space a difficult one, larger firms are needed to meet the large compliance requirements of issuers. Yet, the CFPB seems to be pushing for smaller firms. The smaller firms that have to meet the strict issuer requirements cannot make money due to the cost of the compliance department. Most law firms have a lawyer assigned full-time to meet compliance requirements. This department usually has one employee for every 20 staff as well. This leaves the small firm with 40 staff and 3 lawyers with a compliance department of one full-time attorney and two full-time staff or $200K annually in staffing costs alone.
Ok, so what will the CFPB do? Whatever they want to do, they are like the 500 pound gorilla; he can do whatever he wants to do. I believe they will embrace electronic communication in the next 3 years and they will continue to expand their focus and begin to drill down to more agencies and law firms starting in late 2015. As they investigate bigger entities they will follow the collections to the agencies and firms used by the same entities. So if your agency is small but has large clients, you are going to be in the line of fire.
So what does the future of collections look like? It is based on electronic communication and online payment sites resulting in single digit profits for several large companies and firms. My recommendation is for you to move toward better technology so when the times change, you are not struggling to learn new technology…you’re already a master of it.