Credit Collections and Services
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Industry Overview
In the US, about 1,600 credit reporting agencies and 5,000 credit collections agencies generate annual revenues of $14 billion. Large collection agencies include Outsourcing Solutions, Inc (OSI) and NCO Group; big reporting agencies include Dun & Bradstreet, TransUnion, Equifax, and Experian. The collections segment of the industry is fairly fragmented: the 50 largest companies hold less then 50 percent of the market. The credit reporting segment is highly concentrated: the 50 largest companies hold 90 percent of the market.
Competitive Landscape
Demand for credit reporting and for collections services are driven by the volume of financial transactions, and by the health of the economy. The profitability of individual companies depends largely on efficiency of operations. The profitability of collections companies that buy receivables portfolios depends on their ability to assess recovery potential. Large credit reporting companies have significant economies of scale in operations. Small companies can compete successfully in the collections segment because of the labor-intensive nature of the work.
Products, Operations & Technology
Credit reporting agencies help businesses decide whether to extend credit to customers, while collections agencies help businesses recover funds that had been loaned. Credit reports are used by businesses to determine the creditworthiness of individuals and businesses that want to buy goods and services on credit, including credit cards, auto and bank loans, mortgages, and business accounts. Collections agencies attempt to recover loans from individuals and businesses that are delinquent in making payments. Some large companies like Equifax do both credit reporting and collections, but most companies participate in only one segment.
The credit reporting side of the industry consists of Dun & Bradstreet (the main source of commercial credit information), three "national repositories" of consumer credit information (TransUnion, Equifax, and Experian, each of which maintains 190 million credit files), about 1,300 consumer reporting agencies, and 300 commercial reporting agencies. Dun & Bradstreet and the three national consumer credit companies collect credit information from sources like commercial companies, banks, credit card companies, mortgage bankers, and finance companies. Reporting agencies are affiliated with one or more of the national reporting companies. About 1 billion credit reports are generated every year. A typical consumer credit report shows current and historical status of credit card and auto loan accounts, bank loans, mortgages, public information about relevant court proceedings, and recent credit inquiries. In addition to listing information, reporting agencies use proprietary formulas to produce a credit "score" that allows customers to rate credit risks.
The collections side (also called "receivables management") deals mainly with the 2 percent of mortgage debt and 4.5 percent of credit card debt that is typically delinquent at any one time, as well as collections for child support, bounced checks, student loans, and uninsured healthcare costs. Collections consist largely of writing letters and making phone calls, and finding the addresses and phone numbers of debtors who have moved, called "skiptracing." Companies find debtors by using the US Post Office National Change of Address service, electronic phone directories, voter registration records, and motor vehicle registrations.
The three main types of collection services agencies offer are contingency fee collections, portfolio purchasing, and receivables outsourcing. Contingency fee collections, the mainstay of the industry, pay agencies a percentage of all funds recovered. The typical range is 15 to 35 percent but goes as high as 50 percent for old loans or those that have already been extensively serviced. The average fee for the healthcare industry is 15 percent. Some agencies have sufficient capital resources to engage in portfolio purchasing, which entails buying an entire portfolio of nonperforming loans and keeping all of the collected funds. Because collections agencies are in the receivables business already, many companies use them for complete receivables outsourcing, and pay a fee to have all their receivables functions handled.
Collection agencies are strictly limited in terms of the methods they can use to persuade debtors to pay on their loans. One of the most powerful tools is the threat of reporting the bad debt to the national credit bureaus, where it will remain for up to seven years. Quick response is important in debt collection. The probability of collecting a delinquent account drops with the length of delinquency. Experts estimate that after only three months, the probability of collection drops to around 75 percent; after six months, to only 45 percent; and after a year, to around 25 percent.
To track the large stream of credit information, reporting agencies rely heavily on computer technology. Consolidation in the industry has been driven by the large economies of scale allowed by the operation of efficient electronic systems for receiving, sorting, and reporting information. The collections segment is also becoming more computerized, as companies get access to databases of external information that allow them to find debtors.