The consumer credit bubble of the mid-2000s is most closely identified with mortgages. But credit card debt outstanding grew more than $200 billion from the beginning of 2005 to mid-2008. And after the financial crisis of fall 2008, banks began to charge off a lot of that debt. In a four quarter period from the third quarter of 2009 through the second quarter of 2010, the Federal Reserve estimates that nearly $100 billion in credit card debt was charged off by banks, credit unions, and other member institutions that granted revolving credit.
So the ARM industry had been flush with work. With accounts in plentiful supply in a familiar asset class, it would seem that an expansion in the third party debt collection industry would have been inevitable. But economic headwinds kept hiring flat (at a time when most industries were contracting).
As more accounts became available to work, collection managers had to shift strategies to properly allocate recovery resources. With more accounts to work, and relatively flat staffing levels, individual collectors had to work more debtors. From the top, executives attempted to offload this work into the legal collection channel, since a lot of the credit card accounts were young enough to pursue in courts. But then the credit card accounts dried up.
Banks clamped down on credit card lending as they were charging off bad accounts creating a two-front battle for credit card ARM firms. And the trend has not turned around. TransUnion recently reported that credit card delinquencies are at their lowest point since the firm began their tracking18 years ago.
ARM executives are now faced with a decision. The legal collection channel, while under a fairly dire public relations and regulatory threat, has proven to be profitable. So many credit card accounts are going straight into legal. There are still plenty of seasoned collectors, though, with much less work. Faced with the prospect of mass layoffs, new markets are being evaluated.
But just how big are the other market sectors of the ARM industry?
Student Loans
Student loan debt is now the largest single consumer debt class outside of mortgages. The Consumer Financial Protection Bureau (CFPB) recently estimated that at the end of 2011, there was a little more than $1 trillion in outstanding student loans in the U.S.: $864 billion in federally-backed and direct loans, and $150 billion in student loans from private lenders. This places current student loan debt at about the same level as credit card debt at its peak in mid-2008.
But the most staggering figures of student loan indebtedness aren’t necessarily tied to total market size. Instead, the astounding recent growth in outstanding education debt has given ARM executives plenty of reason to consider this market.
The Federal Reserve Bank of New York in May reported that since the peak in household debt in mid-2008, student loan debt has increased by $293 billion, while other forms of debt fell a combined $1.53 trillion. And that growth seems to be accelerating.
There are many factors driving the explosive growth in student loans. The simplest is standard population growth; more people are going to college today because there are more people. So there are more loans. But there are also more loans per student.
With the housing industry still experiencing a trough in home values, there are fewer options to leverage home equity than before. In other words: no more second mortgages to finance college. These gaps are being filled with student loans.
And the market’s growth is not only at the point of origination. The other stubbornly persistent macroeconomic drag on the recovery – unemployment – is preventing many borrowers from repaying their student loans. So their account balances grow. Student debtors that have been out of school for years, even decades, and weren’t lucky enough to pay off their student loans in better times have seen their balances expand, even in a low interest rate environment.
Education is an attractive sector for ARM because there are so many avenues to pursue for business development. There may be only 22 collection agencies on the main contract for the Department of Education, but all of those companies have subcontracting networks. There are also still plenty of private student lenders and for-profit academic institutions that do not operate under ED’s program. And individual colleges and universities need help collecting fees, fines, and other receivables that are not rolled into student loans.
Health Care
The medical debt sector is already one of the largest in the debt collection industry. In fact, according to a recent ACA International study, ACA members report that 51 percent of their gross revenues come from medical debt collection. But how much money, exactly, is going bad at healthcare providers?
The American Hospital Association said earlier this year that since 2000, hospitals have provided around $362 billion in uncompensated care to patients; in 2010 alone, uncompensated care was $39.3 billion, up from $39.1 billion in 2009.
But not all uncompensated care is considered to be bad debt that can be collected by third parties. A portion of this figure is classified as charity care: services provided to patients which the hospital expected no payment due to inability to pay. According to Aspen Publishing’s Hospital Accounts Receivables Analysis report, in 2010 bad debt and charity care accounted for roughly the same portion of total uncompensated care. This means that roughly $19.6 billion in bad debt was written off in 2010 by hospitals, clinics, and other medical offices operated by large health systems.
It should be noted that this does not include bad debt from independent and other small medical practices (like dentists and family practices, for example). So we can reasonably assume that more than $20 billion per year in medical debt is being set aside for further collection activity. These smaller practices also make for great business development opportunities on the local or regional level for small and mid-sized collection agencies.
Besides student loans and medical debt, the utility and telecom collection markets are thriving as energy prices rise and consumer communications packages become more complex (and expensive). ARM firms are also looking to expand the actual services they provide by becoming more full service BPO firms, as demonstrated by NCO Group’s recent acquisition of BPO giant APAC.
The credit card boom last decade provided the ARM industry with a standardized product that had many viable channels for collection. Now that it has come back to Earth, collection agencies should look elsewhere for work rather than downsizing before a real recovery kicks in.
This article originally appeared in the latest issue of Know Your Debtor, a free quarterly newsletter focused on the U.S. consumer environment. Make sure you’re registered to receive insideARM’s newsletters on your User Profile page.
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