The Subsector at the End of the Value Chain
For as long as there has been debt, there have been debt collectors. In their earliest days, five thousand years ago, they used bondage as a means of extracting payments from borrowers. In medieval times, they moved on to prisons. Now, they use call centers.
And how busy they are. According to a survey conducted by the US Consumer Financial Protection Bureau (CFPB), around a third of consumers with a credit bureau file report being contacted by at least one organization trying to collect on a debt per year. Unsurprisingly, not all calls go well. Debt collection remains the second highest source of complaints to the CFPB, with over 115,000 logged in 2022.
While not as harsh as debt slavery or debt prisons, chasing debts in this manner isn’t something banks necessarily want to do, so they outsource to third parties. Around 7,000 collection agencies operate in the US with plenty also active in Europe. Although the rules of engagement differ enormously between countries, new technologies such as automated call systems have led to greater economies of scale and so some larger ones have emerged.
Yet in spite of the volume of calls these firms put in, business is not going especially well. This week, the largest third-party collector in Europe, Intrum, announced a transaction with private equity investor Cerberus to reshape its balance sheet. It came alongside weak fourth quarter performance. “It is a more difficult time to collect,” its CEO told investors.
Intrum’s update follows a profit warning by one of the largest collection firms in the US, PRA Group, in May last year. “We do face near-term challenges in our US business due to a combination of the weaker environment, reduced consumer liquidity and the resulting impact on cash performance and margin,” said its CEO.
Smaller Nordic firm Axactor went as far as to call 2023 an annus horribilis for the industry. It pointed out elevated inflation and wages, which push the cost to collect up, and highlighted the negative impact of higher interest rates on those firms, like Intrum and PRA Group, that put other people’s bad debts on their own balance sheet. Axactor’s stock price is down 30% from its 52-week high; Intrum’s and PRA Group’s are down close to 50% on average.
Patrick McKenzie, whose newsletter Bits about Money I would recommend if you’re not already signed up, has a line: “One interesting lens for understanding how industries work is looking at their waste streams.” In the lending industry, debt collectors like Intrum and PRA Group feed off waste produced by originators, processing bad loans that have otherwise been written off. Analyzing why they are not performing so well might tell us something useful about the wider financial services industry…