Will we see industry consolidation in collections?

Closing ranks don’t always need to be a bad thing. Indeed, if it wasn’t for the consolidation that took place when Disney bought Marvel and Star Wars, the last decade would have been far less interesting for millions of moviegoers.

When it comes to the financial sector, however, consolidation is often seen as a case of the big fish eating the little fish and removing all the intricate little bones that made that little fish special in the process.

What about collections though? The fact is, fewer collections agencies exist now than they did five years ago. Indeed, the number of third-party collection firms is expected to shrink by 15% to 6,699 companies this year. So, for the agencies that remain, efficiencies need to increase and they need to start getting very good at being masters of all trades, so to speak.

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The good news is that profit margins are already increasing for collectors, with 68% stating they have either received payments in full, settlements in full, or made partial payment arrangements. This is an increase from 58% in 2019 and can largely be attributed to a rise in modernization and technologies such as manual skip tracing, collections management systems (CMS), and online portals.

One of the most powerful trends shaping financial institutions in general over the last 12 months has been the accelerated shift from offline to online. Indeed, online has become a primary component of all collections models. But where does this take the industry as a whole? There is certainly an argument to be made for consolidation.

An argument for consolidation

Banks have been closing ranks for decades now, particularly in Europe, where mergers and acquisitions target synergies not only on the cost side but in revenues. In 2020, we saw several large-scale domestic banking deals taking place, including Intesa Sanpaolo acquiring its smaller rival UBI Banca in Italy, and CaixaBank merging with Bankia in Spain.

As regulatory and compliance costs continue to climb, the market share of the largest banks continues to do likewise but that’s not to say these big boys don’t face some significant competition from the big large tech platforms.

Consolidation is by no means something that has been lingering on the fringes of the collections industry, only to emerge from the woodwork thanks to COVID. Indeed, it’s been happening for years.

According to Glen Goldstein, executive vice president of diversified markets at TransUnion: “Consolidation in the collections industry has taken place for the better part of the last decade, and the COVID-19 pandemic helped accelerate that trend. Less credit activity, smaller balances, and a large number of accounts in accommodation status certainly slowed collections activity, but the pandemic brought on a whole new set of challenges. Most notably, work-from-home mandates that many collectors were not equipped to handle.”

It’s not a word that anyone working in finance likes to hear but given the effects of the pandemic, consolidation might be a necessary evil we all have to embrace. In banking and in collections, it means reducing the number of physical branches, expanding digital services, and cultivating the experience of a truly holistic collection for the customer.

Well-designed and well-executed consolidation can help address overcapacity and low profitability in any financial business. It’s a tough pill to swallow but swallow we must.

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Where does this take the industry as a whole?

There is a legitimate worry, going forward, that some employment sectors are simply not going to recover from the pandemic. This is going to dramatically impact how millions of people live and how they pay their debts.

There is also going to undoubtedly be a shift in how all of this egregious ‘pandemic debt’ is going to be viewed by the sector. While it might be quite empathetic now, there’s a real danger that the view could shift to a more toxic assets view akin to the financial crisis of 2008. This could lead to ‘bad debt’ going to ‘bad banks’.

Debt collections agencies are going to be better placed to step in here to offer the kind of services that can help solve the problem before it gets out of hand. These debts are going to be hanging around for a long time and while governments can certainly help, it might be a case of new types of credit having to emerge to pick up the slack. COVID debt could very well end up being its own entity.

Respect my authority

Could one central authority be useful in terms of centralizing the collections process and saving a lot of these problems? Having one central authority responsible for collecting all debts would greatly reduce duplication of effort for the banks and would be a much better experience for customers too.

Talks between some of the biggest banks in the UK to create a shared COVID loan debt collection service have stalled in recent months, but that’s not to say other regions and authorities can’t come to some sort of agreement. Right now, large UK lenders liken HSBC and Lloyds have soured on the idea, primarily because executives don’t want to be accused of making insufficient efforts to collect on the loans before resorting to essentially asking the government for help.

But the UK Finance lobby group continues to push for it and while smaller lenders that lack the capacity to hire more staff and invest in new systems are generally behind the idea, the bigger boys are almost exclusively not.

Getting banks to work together is not easy at the best of times though and these are most certainly not the best of times. PSD2 and the rise of open banking have proven that it can happen, given the right circumstances, but it’s a change that is going to take a lot of time and a lot of persuasions.

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Preparing to prepare

NPLs are rising and will only continue to rise when the government safety wheels come off in a few months. For smaller collections teams, if they want to avoid becoming swallowed up by a larger entity then they are going to have to start thinking on their feet and using their nimble size to their advantage.

These lenders are going to need to expand their ecosystems by consolidating their onshore, offshore and digital collections facilities into one cohesive operating model; a model that enhances customer experience and delivers serious returns.

Intelligent deployment of these holistic systems is going to be key and it needs to be pitched perfectly. But the shift from offline to online has already begun and unless they want to get left behind or swallowed up, collections teams of all shapes and sizes must start making use of the tools within their reach.

Because by blending advanced digital technologies with expert human judgment and revamped operational models, we’ll hopefully end up at a perfect middle ground that represents the future of debt collections in a post-COVID world.

Contact EXUS today if you have any questions regarding your debt collections operations