MarketResearch reports that the U.S. debt collections industry is worth $15 billion. The U.S. debt collection industry has recorded 2.6% yearly growth since 2017. This growth shows that the demand for the debt collections industry is on the increase. And there are factors responsible for the growing demand. We’ll be throwing more light on five of these factors:
- The State of the Overall Economy and Employment Rate
There’s no denying that the world’s economy was adversely affected by the Covid-19 pandemic, which also caused major disruption in the collections industry. In research conducted by TransUnion and Aite Group, the group discovered the following things:
- Contraction of the industry
- Smaller debt collection firms experienced a decrease in profits
- Growth struggle
Let’s have a look at all three in a bit greater detail, and what these key findings mean.
Contraction of the Industry
Statistics show that the collections industry has been on a decline since 2016, especially third-party companies. Third-party collections companies were said to have declined by 15% to 6,699 from 2016 to 2020. It’s an indication that in four years, these third-party companies have drastically declined.
Small Collections Companies Experienced Profit Decreases
Economic shrinkage and decrease in profits go together. Smaller collections companies were the most affected. It was revealed that 42% of small collections companies reported a decrease in profits due to the pandemic.
Growth Struggle
Many businesses, but especially small companies, struggled with growth and retaining top talent.
- Consumer debt service level and availability of credit
It is reported that over 30 million people living in the United States have a minimum of one outstanding debt. This brings us to the question of how much each industry is owed. Let’s look at the breakdown of these debts:
- Credit card debt: With approximately $29.2 billion credit limit in 2018, credit card debt is one of the highest debts owed in the U.S. Also, the average American household owes $15,000 worth of credit card debt.
- Student loans: Student loads are worth approximately $15 billion from 900,000 students as of 2018.
- Medical bills: Unpaid medical bills are said to be the leading cause of bankruptcy in the United States. Even with some costs covered with health insurance, over 20% of households in the United States owe some sort of amount in medical bills. What’s more, 53% of people who are not insured are thrown into pennilessness after paying their medical bills.
- Mortgages: Mortgages are another main source of debt for American homeowners. It is reported that an average American household owes up to $150,000 in a mortgage. Mortgages account for over $200 billion in loans as of 2018.
- Auto loans: 2017 saw auto loans hit $49.7 billion.
- The number of personal bankruptcies
The number of personal bankruptcies directly affects the demand for the debt collections industry. When people don’t earn much, they tend to take out more loans, which increases the activity of these debt collection companies.
As of 2018, the Federal Reserve Bank of New York quarterly report stated that household debt and credit was $837 billion. The increase is visible in several types of loans, including:
Student loans 2.6%
Auto loans 2.2%
Credit cards 1.8%
Mortgages 1.6 %
Additionally, the St. Louis Federal Reserve reported that an average person living in America spends up to 9% of their monthly income offsetting debts.
- The use of new technology
Technology is imprinting its importance in the debt collections industry. Debt collection agencies of all sizes are relying on technology to improve the quality of their services.
Here are some specific areas where debt collection companies are investing:
- Computerized calling system
- Proprietary database
- Web-based reporting
- Data warehousing
- Debtor location database
- Scoring and segmentation
- Outsourcing collections to third-parties
The outsourcing market in the debt collections industry is growing rapidly. OSI reports that the market has an annual growth rate of 25%, and is worth $2.3 billion.
Collection companies are leaning more towards outsourcing to help them focus on crucial tasks as they project to scale, including outsourcing activities like accounts receivable management processes. This outsourcing will help them reduce the 90 – 180-day period before chasing debts.
Some of the activities outsourced by debt collection agencies:
- Call center
- First-party work
- Client service
- Skip tracing
- Billing, etc.
Some of the factors that influence outsourcing to third parties include quick recovery of debts, the complexities of managing accounts receivable, the impacts of focusing on core activities, and the use of sophisticated databases and call management systems.