Kaulkin Ginsberg’s State of the Industry 2016

January 27th, 2016

Change is upon the U.S. accounts receivable management industry. Under the marching order “compliance is king,” a barrier-to-entry has formed that’s never existed before. The roll-up strategy era of the mid-90s is at an end, eliminating some of the largest players from the game. Ownership changes are occurring among leading ARM companies, and a strong wave of consolidation is impacting small and mid-sized companies across the industry. With all of these new developments, it can be difficult to stay on top of growth and expansion opportunities. But executives who have taken the time to wade through all of these changes and keep up with new policies are poised to reap the benefits.

As we begin our twenty-fifth year serving ARM, Kaulkin Ginsberg provides our state of the industry for 2016.

Market Segment Analysis

Student Loans

90+Student loans are historically one of the most profitable segments for ARM companies; as of Q2 2015, student loan debt totaled $1.19 trillion, and the student loan 90+ day delinquency rate grew more quickly than that of all other market segments combined.

ARM companies looking to get involved with this area have to ask themselves whether they can deal with all of the uncertainty surrounding the Department of Education’s contracts. Since its unprecedented decision to end relationships with five ARM firms in March 2015, no one has known what to expect. However, after months of no news, ED canceled an existing request for proposal in mid-December 2015 and issued a new one. Some industry experts are considering this a positive development for ARM as it eliminates uncertainty about how ED will collect on its accounts in the new year.

Federal Government

In late 2015, President Obama signed a law requiring the Internal Revenue Service to use private debt collection agencies to recover unpaid tax debt. According to the ACA Government Affairs division, the IRS will work with these agencies to recover more than $300 billion in consumer tax debt.

This contract has greater potential than the Department of Education’s, and is overall very good news for the collection industry. It’s possible that this program will become the biggest growth client in 2016, but the contract still runs the same risk as ED’s and it won’t be easy for agencies looking to reap its benefits. Any debt collector involved will be heavily scrutinized by the IRS and closely monitored throughout the duration of their relationship, not to mention it will take considerable time and financial resources for any collection agency to obtain this contract.

Healthcare

Healthcare RFPsUnder Obamacare, hospital and physician services are expected to maintain a growth rate of at least 4% until 2019, and then exceed that rate between 2019 and 2023, creating ample opportunities for ARM within healthcare collections.

Kaulkin Ginsberg examined healthcare requests for proposal through our information service, KG Prime. We determined these RFPs follow a distinct seasonal pattern and they’re growing as a whole year after year. The total number of RFPs will continue to increase as more healthcare providers use them to select outsourced service providers. This is not limited to collections and revenue cycle management, and extends to other services like billing and facilities management.

Medical Debt Collection ComplaintsIt is important to read between the lines and anticipate increased scrutiny from the CFPB. As our good friend and regulatory authority Rozanne Andersen observed, since the CFPB’s launch in 2011, consumer complaints regarding medical debt have increased from less than 8% of all consumer complaints to as high as 16.10% in May 2015.

For the savvy business owner looking for diversification options, the healthcare industry should not be overlooked. Although it has caught the CFPB’s attention and more regulation is on the horizon, healthcare presents a host of opportunities as the U.S. population continues to age.

Utilities

UtilitiesThe utilities industry is a highly-regulated market with a tremendous level of regional fragmentation, but it presents excellent prospects for ARM companies. Market fragmentation combined with the sheer volume of customers makes this a great market for first- and third-party collections, collection litigation, and client relationship management services.

In 2015, the utilities industry was expected to generate approximately $526 billion in revenue and nearly $620 billion by 2020; that’s an almost $100 billion increase or an annual growth rate of 3.32% for the next five years. Kaulkin Ginsberg projects bad debt reached $2.12 billion in 2015 and will grow to more than $2.25 billion by 2020. Electric power transmission, coal and natural gas, and nuclear power segments are driving this growth and they account for approximately 98% of all revenue in 2015.

ARM companies considering entry into this market should be wary of how regulations vary from state to state. On the one hand, this will present challenges to collection and compliance departments; on the other hand, ARM companies can choose which states they want to compete in based on state-specific regulations.

Semi-Annual M&A Deal Tracking

2015 marked a modest slowdown in the number of completed M&A transactions for the ARM industry. This is not because buyers and sellers lack interest in completing transactions – there is plenty of interest. Instead, three major motives are driving this trend:

  1. Some of the larger players are ingesting the companies they purchased, making sure they integrate operations fully to maximize cost savings. This takes considerable time and resources away from additional transactions.
  2. The due diligence process is taking longer than it has in years past as buyers fixate on compliance requirements. Once a 60- to 90-day process for most buyers, many currently take 120 days or longer to complete.
  3. Some sellers are still not willing to share the risks associated with a transaction. They refuse to lower the purchase price or increase the deal terms to reflect uncertainty or erratic financial performance.

We are confident this drop-off is short-lived and not a reflection of the level of overall interest in mergers and acquisitions in the ARM industry.

What’s Next?

  1. The intense regulatory climate, escalating operating costs, and overbearing client onboarding requirements have created a barrier-to-entry in the U.S. ARM industry.
  2. Larger Market Participants will grow even larger while smaller ARM companies will continue to lose ground.
  3. Consolidation will occur among small and mid-sized collection agencies over the next 12 to 18 months.
  4. Debt buying portfolios will continue to be difficult to acquire and service because of compliance requirements.
  5. TCPA and its brother, EFTA, will take the lead as drivers of consumer-initiated litigation against ARM companies.
  6. There will be greater levels of investment in technology vendors, supporting the shift toward compliance in the ARM industry.
  7. The growth markets in the U.S. ARM industry, including healthcare and government, will attract private equity firms and BPO entities.
  8. More third-party agencies will adapt a first-party business model to effectively serve clients.
  9. All eyes will be on the 2016 presidential election with the hope of a reevaluation of Dodd-Frank’s enforcement.

This is truly a dynamic time to be involved in the ARM industry. Leaders who invest the time and resources required to evaluate market fluctuations and determine the impact on their own businesses will be positioned for long-term and profitable growth.


About Kaulkin Ginsberg

Kaulkin Ginsberg is the leading consultancy and M&A advisory firm serving the accounts receivable management industry. For 25 years, owners, executives, and professionals have relied on Kaulkin Ginsberg for the insight, access, and information needed to make critical decisions. In keeping with our mission to be the most knowledgeable and trusted advisors to the ARM community, Kaulkin Ginsberg and the University of Maryland’s Department of Economics launched the Research Fellows Program to gather data and provide executives with the most relevant and timely market intelligence. We also created KG Prime, a proprietary service designed to reengineer the way ARM firms access data. For more information about Kaulkin Ginsberg, please visit our website.

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