Kaulkin Report 2022: The Birth of the Modern ARM Industry

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.

Consumer credit – defined as the aggregation of non-real estate-related forms of credit, such as credit cards, auto loans, and student loans – known today originated in the automotive industry a century ago. Initially, cars were luxury items that were out of the reach of most Americans.[1] In 1908, Ford Motor Company began mass-producing relatively cheap automobiles, vastly expanding the auto market as a result. However, many families and small businessmen still lacked the cash on-hand to outright purchase a car.

To solve this issue, General Motors (GM) – Ford’s competitor – began to loan money to cash-strapped consumers under installment plans; in 1919, GM founded the General Motors Acceptance Corporation to originate and service these installment loans.[2] At the time, other forms of lending were either underdeveloped or non-existent. By pioneering auto lending, GM may have contributed as much to the development of the consumer economy as Ford did with its implementation of the assembly line.

Household indebtedness boomed as a result. By 1929, total consumer nonmortgage debt had more than doubled from its 1919 amount to more than $7.6 million – 9.3% of overall income.[3] This debt load proved unsustainable, as households dramatically reduced consumption in the wake of the 1929 stock market crash to avoid default. The Great Depression dealt severe damage to the financial system. Many institutions ran out of cash and assets to liquidate and were forced to shut their doors.[4] In response, the Federal Government overhauled its financial regulatory regime and established depository and underwriting institutions like the Federal Deposit Insurance Corporation (FDIC) and the Federal Housing Administration (FHA). These actions restored consumer and investor confidence and strengthened the banking system overall, thereby preparing it for the massive surge in the demand for credit that followed World War II.

Small collection agencies proliferated throughout the U.S. during this period. When creditors failed to collect account balances on installment plans or retail accounts, they hired ARM specialists on a contingency basis. Typically, debt collectors worked with a few clients, employed a small staff, and used manual systems for servicing accounts. Many of the most familiar names in the modern ARM industry started during this period  including NCO Group (now Transworld Systems, Inc.) in 1926 and the American Collectors Association (now ACA International) – a trade group representing various stakeholders in the ARM industry, including collection agencies and debt buyers, among others – in 1939.

An average collector’s work was difficult and demanding. Collectors contacted debtors directly by phone and mail, keeping records of their communications on hand-written index cards. When these efforts failed, collectors went door-to-door, which resulted in their nickname “door knockers”. While this business model allowed ARM agency owners and high-performing collectors to have lucrative careers, there were drawbacks. For example, collection agencies based their success primarily on collectors’ discretion. Difficulties ensued; consumers began seeking legal actions against agency owners who were liable for their employees’ actions.

Meanwhile, consumer credit continued its ferocious expansion. In 1951, Franklin National Bank released the first charge card. This revolving line of credit attracted customers who could borrow and repay funds without obtaining approval for each purchase. Shortly afterward, bankcard associations, such as the predecessors of Visa, Inc. and MasterCard Incorporated (in 1959 and 1966, respectively) emerged, which allowed credit cards to be utilized regardless of the customer’s location, so long as participating banks could settle purchase transactions. Soon thereafter, a nation-wide system to process credit card transactions existed among banks, merchants, and customers. Creditors in other industries then trailed accordingly.

By 1970, the modern U.S. credit industry came into its own. In turn, the amount of outstanding consumer credit multiplied seven-fold during the prior two decades, increasing from $19.4 billion in 1950 to $127.2 billion by 1969.[5] This is illustrated in Figure 1 below, which captures credit extended to consumers (excluding real estate secured loans like mortgages). 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.

Figure 1. Consumer Credit in the United States

Source: Kaulkin Ginsberg & Federal Reserve Board

Works Cited

[1] “Buy Now, Pay Later: Cars on Time.” Harvard Business School, www.library.hbs.edu/hc/credit/credit4d.html.

[2] Gitlen, Jeff. “History of the Auto Lending Industry.” LendEDU, 3 Sept. 2021, https://lendedu.com/blog/history-of-auto-lending-industry.

[3] Olney, Martha L. “Avoiding Default: The Role of Credit in the Consumption Collapse of 1930.” The Quarterly Journal of Economics, vol. 114, no. 1, 1999, https://www.jstor.org/stable/2586955?seq=1#page_scan_tab_contents.

[4] “Great Depression History.” History.com, A&E Television Networks, 29 Oct. 2009, https://www.history.com/topics/great-depression/great-depression-history.

[5] Data retrieved from the Board of Governors of the Federal Reserve System.

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