Kaulkin Report 2022: The ARM Industry Evolves – From the ’70s to Present

Kaulkin Ginsberg believes that every accounts receivable management (ARM) executive should be armed with an acute understanding of the industry in which they operate, from its long history to the latest trends and developments. To that end, we are putting together an aggregation of our most up-to-date collection agency research in the form of the Kaulkin Report, 2022 Edition. The following blog is an excerpt from the sub-report entitled, “Introduction to Accounts Receivable Management.” To request a copy of the full sub-report – or any of our other Kaulkin Sub-Reports – please contact us here or email hq@kaulkin.com.

By 1970, the modern U.S. credit industry came into its own. However, the trend toward a consumer credit economy led to the potentially unexpected consequences of higher delinquency rates among consumers. This resulted in a corresponding increase in demand for specialized debt collection services to address the issue, thereby driving ARM industry revenues.

As debt collectors’ revenues soared, so too did consumer complaints. In response, Congress passed the Fair Debt Collection Practices Act of 1977 (FDCPA), citing “abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors”.[1] The FDCPA would reshape the burgeoning ARM industry for the better and convey Federal Government recognition of the important role debt collection plays in the economy. Although the Federal Government could have outlawed the industry, lawmakers recognized this would result in both retracting consumer lending by creditors and, potentially, shifting debt collection to illegitimate operating models that lacked regulatory oversight.

The FDCPA forced collection agencies to transform their operations. Collectors curtailed what had largely been unmonitored techniques and began evaluating and enhancing processes supporting collections. More supervision on the collection floor, advances in telephone systems, and better collection technologies allowed managers to improve financial and operational results. Leaders managed their companies as systems instead of groups of collection agents, while simultaneously reducing the liabilities associated with FDCPA violations.

In the 1990s, the domestic consumer credit market grew rapidly as American consumers embraced credit cards. Between 1989 and 2001, credit card debt nearly tripled – from $238 billion to $692 billion, according to the non-profit think tank Demos – and the average household’s credit card balance increased by 53%, adjusted for inflation.[2] ARM companies profited as a result; in a 1995 report, M. Kaulkin & Associates (Kaulkin Ginsberg Company’s predecessor) estimated industry revenue to increase at a rate between 7 and 8% annually and expected growth to accelerate to 10% by the end of the decade.[3] The ARM industry continued its expansion at the turn of the new millennium as smaller firms consolidated and larger companies adopted emerging technologies and leveraged economies of scale.

This period of growth continued until the Great Recession in 2008. Despite soaring delinquency rates and record bad debt levels, ARM companies began struggling to collect from consumers who increasingly found themselves unable to pay due to severe financial stress. In addition, collectors that relied on financial services clients saw account placements dry up as financial lenders either went out of business or vastly scaled back their operations. Among the firms that did manage to increase recoveries, many experienced decreasing revenues as the compensation they received for each dollar collected fell dramatically. According to Ernst & Young and ACA International, the aggregate commission rate (i.e., the money collectors receive as payment for recovering debt – usually structured as a percentage of the amount collected) fell from 22.2% in 2007 to 18.8% in 2010.[4] ARM firms that tried to offset lost revenue by borrowing found it difficult to access credit, especially if they were small businesses.[5] As a result, many smaller agencies folded or were absorbed by larger organizations.

The ramifications of the Great Recession are still felt by the industry today. In particular, the regulatory apparatus that emerged in response to the collapse – primarily through the Dodd-Frank Wall Street Reform and Consumer Protection Act, which established the Consumer Financial Protection Bureau (CFPB) – continues to shape the activities of ARM companies. Today’s broad challenge for ARM companies is to apply the lessons learned in 2008, such as the importance of client diversification, while effectively expanding operations and growing revenue.

Works Cited

[1] “Fair Debt Collection Practices Act.” Federal Trade Commission, 21 July 2010, https://www.ftc.gov/enforcement/rules/rulemaking-regulatory-reform-proceedings/fair-debt-collection-practices-act-text.

[2] Draut, Tamara & Silva, Javier. “Borrowing to Make Ends Meet: The Growth of Credit Card Debt in the ‘90s”. Demos, September 2003, https://www.demos.org/research/borrowing-make-ends-meet-growth-credit-card-debt-90s.

[3] “The Debt Collection Industry.” M. Kaulkin & Associates, 1995.

[4] Lunsford, Patrick. “Study Shows Collection Agencies Recovering More Debt at Lower Pay with Fewer Collectors.” InsideARM.com, The IA Institute, 5 Aug. 2014, www.insidearm.com/news/00040333-study-shows-collection-agencies-recoverin/.

[5] Cole, Rebel A. “How Did the Financial Crisis Affect Small Business Lending in the United States?” Small Business Research Summary, no. 399, Nov. 2018, https://www.sba.gov/sites/default/files/files/rs399.pdf.

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